-----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, BvOvM/owLON902TY3I8zHVQU5/RmvQR/6/a6ASO7At40IHyrKiccDRUi+h5QtLxl J6FxdOdp8D97JOFT3+kIhQ== 0000950137-03-005966.txt : 20031114 0000950137-03-005966.hdr.sgml : 20031114 20031114142806 ACCESSION NUMBER: 0000950137-03-005966 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARLINGTON HOSPITALITY INC CENTRAL INDEX KEY: 0000778423 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 363312434 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15291 FILM NUMBER: 031003224 BUSINESS ADDRESS: STREET 1: 2355 SOUTH ARLINGTON HEIGHTS ROAD STREET 2: SUITE 400 CITY: ARLINGTON HEIGHTS STATE: IL ZIP: 60005 BUSINESS PHONE: 8472285400 MAIL ADDRESS: STREET 1: 2355 SOUTH ARLINGTON HEIGHTS ROAD STREET 2: SUITE 400 CITY: ARLINGTON HEIGHTS STATE: IL ZIP: 60005 FORMER COMPANY: FORMER CONFORMED NAME: AMERIHOST PROPERTIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AMERICA POP INC DATE OF NAME CHANGE: 19871111 10-Q 1 c81028e10vq.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2003 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to ____________________ COMMISSION FILE NO. 0-15291 ARLINGTON HOSPITALITY, INC. (Exact name of Registrant as specified in its charter) DELAWARE 36-3312434 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2355 S. ARLINGTON HEIGHTS ROAD, SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005 - ------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (847) 228-5400 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X ----- ----- As of November 13, 2003, 5,019,788 shares of the registrant's common stock were outstanding. ================================================================================ ARLINGTON HOSPITALITY, INC. FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 INDEX Page ---- PART I: Financial Information Item 1 - Financial Statements Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 4 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 7 Notes to Consolidated Financial Statements 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 36 Item 4 - Controls and Procedures 36 PART II: Other Information Item 6 - Exhibits and Reports on Form 8-K 37 Signatures 37 Page 2 Part I: Financial Information Item 1: Financial Statements Page 3 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2003 2002 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 4,079,236 $ 3,969,515 Accounts receivable, less allowance of $150,000 at September 30, 2003 and December 31, 2002 (including approximately $273,000 and $166,000 from related parties) 2,390,547 2,064,463 Notes receivable, current portion -- 100,000 Prepaid expenses and other current assets 475,852 975,432 Refundable income taxes 1,009,480 1,574,776 Costs and estimated earnings in excess of billings on uncompleted contracts 898,367 1,479,101 Assets held for sale - non-AmeriHost Inn hotels 11,921,652 -- Assets held for sale - AmeriHost Inn hotels 23,832,212 -- ------------ ------------ Total current assets 44,607,346 10,163,287 ------------ ------------ Investments in and advances to unconsolidated hotel joint ventures 3,335,741 4,291,504 ------------ ------------ Property and equipment: Land 7,002,362 13,418,378 Buildings 39,277,983 76,849,071 Furniture, fixtures and equipment 15,232,786 26,553,701 Construction in progress 320,246 6,447,039 Leasehold improvements 2,396,309 2,760,906 ------------ ------------ 64,229,686 126,029,095 Less accumulated depreciation and amortization 16,313,014 26,417,755 ------------ ------------ 47,916,672 99,611,340 ------------ ------------ Notes receivable, less current portion 1,017,875 782,083 Deferred income taxes 5,088,000 2,427,000 Other assets, net of accumulated amortization of approximately $928,000 and $1,259,000 2,776,863 2,658,500 8,882,738 5,867,583 ------------ ------------ $104,742,497 $119,933,714 ============ ============
(continued) Page 4 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2003 2002 ------------- ------------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,295,234 $ 3,965,028 Bank line-of-credit 2,250,000 6,384,287 Accrued payroll and related expenses 497,942 827,353 Accrued real estate and other taxes 2,363,238 1,969,297 Other accrued expenses and current liabilities 1,174,735 1,974,350 Current portion of long-term debt 2,997,471 4,038,301 Liabilities of assets held for sale - non-AmeriHost Inn hotels 10,974,939 -- Long-term debt of assets held for sale - AmeriHost Inn hotels 23,105,654 -- ------------- ------------- Total current liabilities 45,659,213 19,158,616 ------------- ------------- Long-term debt, net of current portion 33,657,471 72,203,688 ------------- ------------- Deferred income 11,407,184 10,867,418 ------------- ------------- Commitments and contingencies Minority interests 296,449 333,888 ------------- ------------- Shareholders' equity: Preferred stock, no par value; authorized 100,000 shares; none issued -- -- Common stock, $.005 par value; authorized 25,000,000 shares; issued and outstanding 5,012,788 shares at September 30, 2003, and 4,962,817 shares at December 31, 2002 25,064 24,814 Additional paid-in capital 13,294,458 13,184,564 Retained earnings (deficit) 839,533 4,597,601 ------------- ------------- 14,159,055 17,806,979 Less: Stock subscriptions receivable (436,875) (436,875) ------------- ------------- 13,722,180 17,370,104 ------------- ------------- $ 104,742,497 $ 119,933,714 ============= =============
See notes to consolidated financial statements. Page 5 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------ 2003 2002 2003 2002 ------------- ------------- ------------ ------------ Revenue: Hotel operations: AmeriHost Inn hotels $ 11,718,099 $ 12,737,246 $ 31,254,120 $ 33,582,408 Other hotels 489,724 753,804 1,335,904 1,759,114 Development and construction 380,834 929,983 2,478,095 5,740,954 Hotel sales and commissions 10,040,670 -- 19,074,417 4,900,317 Management services 124,542 266,931 352,997 763,640 Employee leasing 605,993 929,164 1,664,675 2,649,339 Incentive and royalty sharing 264,945 130,623 694,594 386,992 Office building rental 180,941 153,254 537,164 471,242 ------------ ------------ ------------ ------------ 23,805,748 15,901,005 57,391,966 50,254,006 ------------ ------------ ------------ ------------ Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 8,027,206 8,271,494 23,424,628 23,675,045 Other hotels 644,396 521,634 1,531,884 1,606,078 Development and construction 591,467 944,824 2,727,944 5,568,717 Hotel sales and commissions 8,444,575 -- 15,779,006 3,528,680 Management services 65,918 165,628 205,677 504,455 Employee leasing 585,582 916,318 1,612,296 2,593,120 Office building rental 45,966 71,297 142,383 116,918 ------------ ------------ ------------ ------------ 18,405,110 10,891,195 45,423,818 37,593,013 ------------ ------------ ------------ ------------ 5,400,638 5,009,810 11,968,148 12,660,993 Depreciation and amortization 701,352 1,088,454 2,767,485 3,221,828 Leasehold rents - hotels 1,262,727 1,240,536 3,802,981 3,860,025 Corporate general and administrative 526,848 755,036 1,489,686 1,528,630 Impairment provision (Note 13) 143,496 -- 4,808,008 -- ------------ ------------ ------------ ------------ Operating income (loss) 2,766,215 1,925,784 (900,012) 4,050,510 Other income (expense): Interest expense (1,026,406) (1,234,343) (3,266,509) (3,761,282) Interest income 109,565 151,538 350,446 409,760 Other income (170,171) 53,107 (128,150) 92,344 Gain on sale of assets (Notes 9, 16) 400,000 400,000 400,000 727,076 Equity in net income and (losses) of affiliates (138,020) 61,697 (412,282) (59,886) ------------ ------------ ------------ ------------ Income (loss) before minority interests and income taxes 1,941,183 1,357,783 (3,956,507) 1,458,522 Minority interests in (income) loss of consolidated partnerships (47,241) (44,383) (128,933) (90,984) ------------ ------------ ------------ ------------ Income (loss) before income taxes 1,893,942 1,313,400 (4,085,440) 1,367,538 Income tax expense (benefit) 777,000 539,000 (1,615,000) 564,000 ------------ ------------ ------------ ------------ Net income (loss) from continuing Operations 1,116,942 774,400 (2,470,440) 803,538 Discontinued operations, net of tax (Note 14) (34,704) (28,713) (1,287,628) (581,535) ------------ ------------ ------------ ------------ Net income (loss) $ 1,082,238 $ 745,687 $ (3,758,068) $ 222,003 ============ ============ ============ ============ Net income (loss) per share (Note 4) Basic $ 0.22 $ 0.15 $ (0.74) $ 0.04 Diluted $ 0.22 $ 0.14 $ (0.74) $ 0.04
See notes to consolidated financial statements. Page 6 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
2003 2002 ------------ ------------ Cash flows from operating activities: Cash received from customers $ 59,342,885 $ 58,211,613 Cash paid to suppliers and employees (38,346,052) (44,903,006) Interest received 352,049 446,142 Interest paid (3,844,774) (4,339,151) Income taxes received (paid) 377,296 (232,152) ------------ ------------ Net cash provided by operating activities 17,881,404 9,183,446 ------------ ------------ Cash flows from investing activities: Distributions, and collections on advances, from affiliates 555,782 954,088 Purchase of property and equipment (6,311,457) (14,054,498) Purchase of investments in, and advances to, minority owned affiliates (1,126,506) (1,418,212) Acquisitions of partnership interests, net of cash acquired (Note 7) (777,237) (796,786) Net issuance of notes receivable (135,792) (18,279) Proceeds from sale of assets 1,362,541 (6,700) ------------ ------------ Net cash used in investing activities (6,432,669) (15,340,387) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt 6,888,098 9,660,858 Principal payments on long-term debt (14,104,039) (4,856,883) Net repayments on line of credit (4,134,287) (812,415) Distributions to minority interest (90,255) (203,074) Issuance of common stock 223,908 (311) Purchase of common stock (122,439) -- ------------ ------------ Net cash (used in) provided by financing activities (11,339,014) 3,788,175 ------------ ------------ Net increase (decrease) in cash 109,721 (2,368,766) Cash and cash equivalents, beginning of year 3,969,515 4,748,156 ------------ ------------ Cash and cash equivalents, end of period $ 4,079,236 $ 2,379,390 ============ ============
(continued) Page 7 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) - --------------------------------------------------------------------------------
2003 2002 ------------ ------------ Reconciliation of net income (loss) to net cash provided by operating activities: Net income (loss) $ (3,758,068) $ 222,003 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,537,092 4,054,003 Equity in net (income) loss of affiliates and amortization of deferred income 412,282 59,886 Interest from unconsolidated joint ventures (126,525) (62,910) Minority interests in net income of subsidiaries 52,816 92,707 Amortization of deferred gain (989,033) (801,320) Deferred income taxes (2,661,000) 1,143,000 Issuance of common stock and stock options 8,675 190 Gain on sale of property and equipment (331,083) (327,076) Proceeds from sale of hotels 19,074,417 4,830,870 Income from sale of hotels (3,278,094) (927,401) Provision from impairment 5,701,445 -- Changes in assets and liabilities, net of effects of acquisition: (Increase) decrease in accounts receivable (442,189) 46,573 Decrease in prepaid expenses and other current assets 474,614 579,255 Decrease (increase) in refundable income taxes 565,296 (1,201,152) Decrease (increase) in costs and estimated earnings in excess of billings 580,734 (108,684) Increase in other assets (812,591) (177,903) (Decrease) increase in accounts payable (1,500,185) 35,048 (Decrease) increase in accrued payroll and other accrued expenses and current liabilities (433,800) 441,752 Decrease in accrued interest (5,773) (18,268) Increase in deferred income 1,812,374 1,302,873 ------------ ------------ Net cash provided by operating activities $ 17,881,404 $ 9,183,446 ============ ============
See notes to consolidated financial statements. Page 8 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 1. BASIS OF PREPARATION: The September 30, 2003 financial statements included herein have been prepared by the Company, without audit. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments, which consist only of adjustments necessary to present fairly the financial position of Arlington Hospitality, Inc. and subsidiaries as of September 30, 2003 and December 31, 2002, and the results of its operations for the three and nine months ended September 30, 2003 and 2002, and cash flows for the nine months ended September 30, 2003 and 2002. The results of operations for the three and nine months ended September 30, 2003, are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's 2002 Annual Report on Form 10-K. Certain reclassifications have been made to the 2002 financial statements in order to conform with the 2003 presentation. 2. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and entities in which the Company has a controlling ownership interest. Significant intercompany accounts and transactions have been eliminated. 3. CRITICAL ACCOUNTING POLICIES: The Company's critical accounting policies are described in its 2002 Form 10-K. 4. EARNINGS (LOSS) PER SHARE: Basic earnings per share is calculated by dividing the income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period, without consideration of common stock equivalents. Diluted earnings per share gives effect to all dilutive common stock equivalents outstanding for the period. The Company excluded the dilutive effect of stock options, and the impact of convertible partnership interests for the nine-month period ending September 30, 2003, since they had an anti-dilutive effect on the earnings per share computations. The calculations of basic and diluted earnings (loss) per share are presented below. The hotel impairment charges during 2003 relate to the implementation of a plan for the disposition of certain hotels (Note 13). Page 9 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 4. EARNINGS (LOSS) PER SHARE (CONTINUED):
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------- ------------------------------ 2003 2002 2003 2002 ------------ ------------ ----------- ------------ Net income (loss) from continuing operations, before impairment $ 1,201,438 $ 774,400 $ 412,568 $ 803,538 Impairment provision, net of tax (84,496) -- (2,883,008) -- ----------- ----------- ----------- ----------- Net income (loss) from continuing operations $ 1,116,942 $ 774,400 $(2,470,440) $ 803,538 Discontinued operations (a) (34,704) (28,713) (1,287,628) (581,535) ----------- ----------- ----------- ----------- Net income (loss) $ 1,082,238 $ 745,687 $(3,758,068) $ 222,003 =========== =========== =========== =========== Net income (loss) $ 1,082,238 $ 745,687 $(3,758,068) $ 222,003 Impact of convertible partnership interests 11,543 9,248 -- (6,695) ----------- ----------- ----------- ----------- Net income available to common shareholders - diluted $ 1,093,781 $ 754,935 $(3,758,068) $ 215,308 =========== =========== =========== =========== Weighted average common shares outstanding 5,013,413 4,958,056 5,011,441 4,958,072 Dilutive effect of: Common stock equivalents 44,053 199,974 -- 69,847 Convertible partnership interests 56,650 84,975 -- 84,975 ----------- ----------- ----------- ----------- Dilutive common shares outstanding 5,114,116 5,243,005 5,011,441 5,112,894 =========== =========== =========== =========== Net income (loss) per share - Basic: From continuing operations $ 0.23 $ 0.16 $ (0.48) $ 0.16 From discontinued operations (0.01) (0.01) (0.26) (0.12) ----------- ----------- ----------- ----------- $ 0.22 $ 0.15 $ (0.74) $ 0.04 =========== =========== =========== =========== Net income (loss) per share - Diluted: From continuing operations $ 0.23 $ 0.15 $ (0.48) $ 0.15 From discontinued operations (0.01) (0.01) (0.26) (0.11) ----------- ----------- ----------- ----------- $ 0.22 $ 0.14 $ (0.74) $ 0.04 =========== =========== ============ ===========
(a) Includes hotel impairment provisions related to non-AmeriHost Inn hotels to be sold of approximately $18,000 and $535,000, net of tax, during the three and nine months ended September 30, 2003, respectively (Notes 13 and 14). 5. INCOME TAXES: Deferred income taxes are provided on the differences in the bases of the Company's assets and liabilities determined for tax and financial reporting purposes and relate principally to depreciation of property and equipment and deferred income. A valuation allowance has not been recorded to reduce the deferred tax assets, as the Company expects to realize all components of the deferred tax asset in future periods. The income tax benefit for the three and nine months ended September 30, 2003 and 2002 was based on the Company's estimate of the effective tax rate expected to be applicable for the full year. The Company expects the effective tax rate to approximate the Federal and state statutory rates. Page 10 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 6. HOTEL LEASES: The Company leases 21 AmeriHost Inn hotels from a REIT (Note 9), the operations of which are included in the Company's consolidated financial statements. All of these leases are triple net and provide for monthly base rent payments ranging from $14,000 to $27,000. The leases expire through March 2014. In September 2003, the Company purchased an AmeriHost Inn hotel from the REIT pursuant to an amendment to the master lease agreement (Note 9). A joint venture in which the Company has a controlling ownership interest leases one non-AmeriHost Inn hotel, the operations of which are included in the Company's consolidated financial statements. This lease is triple net, providing for rent payments of $20,000 per month, and expires May 31, 2010. This lease provides for a purchase option price of $4,000,000, which approximated the fair value at the lease commencement, subject to increases in the consumer price index. The Company operated another non-AmeriHost Inn hotel under a triple net lease, which was terminated on August 31, 2003 and was not renewed by the Company. The Company has accrued approximately $127,000 at September 30, 2003 in related lease termination fees. 7. LIMITED PARTNERSHIP BUYOUT AND GUARANTEED DISTRIBUTIONS: On September 18, 2000, in connection with obtaining the approval of all of our joint venture partners to sell the AmeriHost Inn brand and franchising rights to Cendant Corporation, the Company entered into an agreement to purchase the interests owned by the joint venture partners in the three existing joint ventures at specified prices and to issue options to purchase a total of 125,000 shares of the Company's common stock to the partners of these ventures, canceling existing options to purchase 60,000 shares of the Company's common stock held by these partners. A director of the Company, and parties related to him, were partners in each of these three joint ventures. The first acquisition of these interests was completed in 2001 at a cost to the Company of approximately $800,000. The second was completed during the second quarter of 2002 at a cost to the Company of approximately $800,000. The final acquisition, with a specified purchase price of approximately $830,000, was completed as of August 31, 2003. As a result of this last transaction, the assets, liabilities, and results of operations of the hotel owned by this joint venture were consolidated in the Company's financial statements, including the subsequent sale of the hotel in September 2003. The Company was the general partner in these three joint ventures and had guaranteed minimum annual distributions to the limited partners, including the director of the Company, and parties related to him. Upon the consummation of the final joint venture acquisition, the Company no longer has any joint ventures in which it has guaranteed a minimum return to its limited partners. In addition, the Company no longer has any joint ventures in which a director of the Company, or parties related to him, is a partner. The following is a summary of the acquisitions during the nine months ended September 30, 2003 and 2002:
2003 2002 ------------- ------------- Property and equipment acquired $ 2,006,246 2,279,309 Other assets acquired 15,358 38,400 Long-term debt assumed (1,142,941) (1,466,510) Other liabilities assumed (101,426) (54,413) ------------- ------------- Cash paid, net of cash acquired $ 777,237 $ 796,786 ============= =============
8. INVESTMENTS: The Company, through wholly-owned subsidiaries, is a general partner or managing member in 14 joint ventures as of September 30, 2003. The Company's subsidiaries are secondarily liable for the obligations and liabilities of these joint ventures. As of September 30, 2003, these joint ventures had $27.9 million outstanding under mortgage loan agreements. Approximately $6.3 million of this amount has been included in the Company's consolidated financial statements as of September 30, 2003, because it relates to joint ventures in which the Company has a majority or controlling ownership interest, leaving approximately $21.6 million in Page 11 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- off-balance sheet mortgage debt with unconsolidated joint ventures. If the Company subsequently obtains a majority or controlling ownership interest in a joint venture, the joint venture's debt will be included in the Company's consolidated financial statements. Of this $21.6 million of financing, the Company also has provided approximately $17.0 million in guarantees to the lenders. Other partners have also guaranteed $10.8 million of these financings. One unconsolidated joint venture mortgage loan in the amount of approximately $1.7 million at September 30, 2003, which is one of the loans guaranteed by the Company, matured on November 1, 2003, however the lender has extended the maturity date of the loan to November 1, 2004. Unless the properties collateralizing the debt are sold, the remaining joint venture mortgage loans mature after 2004. The Company applies the provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," with respect to mortgage loan guarantees for joint ventures in which the Company is a partner. This interpretation elaborates on the disclosures required by the guarantor and requires the guarantor to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. During the third quarter of 2003, the Company provided a guarantee related to the mortgage debt of a joint venture in which it shares the responsibility of the guarantee on a joint and several basis with its joint venture partners. The guarantee is effective for the 20-year term of the mortgage loan. The Company has recorded as an additional investment in this joint venture, and a liability for its share of this guarantee, of approximately $40,000, its estimated fair value, as of September 30, 2003. Page 12 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 8. INVESTMENTS (CONTINUED): In January 2003, Interpretation No. 46, "Consolidation of Variable Interest Entities", was issued. The Company is required to adopt the requirements of this Interpretation for interim periods beginning after December 15, 2003. This Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and requires that the Company present any variable interest entities in which it has a majority variable interest on a consolidated basis in its financial statements. The Company is continuing to assess the provisions of this Interpretation and the impact to the Company of adopting this Interpretation. Therefore the following amounts may change based upon additional analysis. Due to the adoption of this Interpretation, the Company expects that it will begin to present its investments in three joint ventures in which it has a majority variable interest, as determined in accordance with the provisions of this Interpretation, on a consolidated basis in its financial statements beginning with the consolidated financial statements issued for the quarterly period ended December 31, 2003. The consolidation of these joint ventures is expected to add approximately $6.8 million in assets and $6.1 million in liabilities to the Company's consolidated balance sheet. As of September 30, 2003, the Company had investments in, and advances to, these joint ventures of approximately $608,000, which was presented as such under the equity method of accounting in the accompanying consolidated financial statements. The Company expects that it will continue to present all of its other unconsolidated investments under the equity method. 9. SALE/LEASEBACK OF HOTELS: In 1998 and 1999, the Company sold and leased back 30 AmeriHost Inn hotels to a Real Estate Investment Trust ("REIT") for $73 million. The leases had an initial term of ten years, with two five-year renewal options. The lease payments were 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 deferred the gain on the sale of these hotels pursuant to sale/leaseback accounting. The deferred gain is being recognized on a straight-line basis over the term of the lease, including the five year extension discussed below, as a reduction of leasehold rent expense. As of September 30, 2003, the aggregate remaining unamortized deferred gain was approximately $6.6 million. In January 2001, the Company amended the master lease with the REIT to provide for the sale of eight hotels by the lessor under specified terms, and to extend the initial lease term by five years. The amendment provides for four increases in rent payments of 0.25% each, if these eight hotels are not sold to an unrelated third party or to the Company by the dates specified. As of September 30, 2003, the first three scheduled rent increases were not effective due to the sale of hotels by the REIT to the Company. The third scheduled increase was avoided in September 2003, when the Company purchased a hotel from the REIT, using cash of approximately $556,000 and mortgage financing provided by the REIT of approximately $1.7 million. The unamortized deferred gain related to the initial sale of this hotel to the REIT was recorded as a basis reduction to the hotel asset. Upon its purchase, this hotel was classified as held for sale (Note 13), and the difference in the total purchase price, net of the unamortized deferred gain, and its fair market value was recorded as a leasehold interest to be amortized over the remaining term of the remaining REIT leases. If the Company does not either facilitate the sale to a third party, or purchase from the REIT, one hotel at a price of approximately $2.6 million prior to June 5, 2004, the fourth 0.25% rent increase becomes effective. If the Company decides to purchase this hotel prior to June 4, 2004, it intends to fund the $2.6 million purchase price with a combination of mortgage debt to be obtained and cash from operations or working capital. The REIT sold one of its hotels to an unrelated third party during the nine months ended September 30, 2002. Consequently, the Company terminated the lease with the REIT for this hotel and recognized a commission from the sale of this hotel, which is classified as hotel sales and commissions in the accompanying consolidated financial statements. The unamortized deferred gain related to the initial sale of this hotel of approximately $327,000 was recognized upon termination of the applicable lease. Page 13 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 10. BUSINESS SEGMENTS: The Company's business is primarily involved in seven segments: (1) hotel operations, consisting of the operations of all hotels in which the Company has a 100% or controlling ownership or leasehold interest, (2) hotel development, consisting of development, construction and renovation of hotels for unconsolidated joint ventures and unrelated third parties, (3) hotel sales and commissions, resulting from the sale of AmeriHost Inn hotels, (4) hotel management, consisting of hotel management activities, (5) employee leasing, consisting of the leasing of employees to various hotels, (6) incentive and royalty sharing fees due from Cendant Corporation, the owner of the AmeriHost Inn brand, and (7) office building rental activities. Results of operations of the Company's business segments are reported in the consolidated statements of operations. The following represents revenues, operating costs and expenses, operating income, identifiable assets, capital expenditures and depreciation and amortization for each business segment, as of and for the nine months ended September 30, 2003 and 2002, which is the information utilized by the Company's decision makers in managing the business:
Revenues 2003 2002 ----------- ----------- Hotel operations $32,590,024 $35,341,522 Hotel development and construction 2,478,095 5,740,954 Hotel sales and commissions 19,074,417 4,900,317 Hotel management 352,997 763,640 Employee leasing 1,664,675 2,649,339 Incentive and royalty sharing 694,594 386,992 Office building rental 537,164 471,242 ----------- ----------- $57,391,966 $50,254,006 =========== ===========
Operating costs and expenses Hotel operations $24,956,512 $25,281,123 Hotel development and construction 2,727,944 5,568,717 Hotel sales and commissions 15,779,006 3,528,680 Hotel management 205,677 504,455 Employee leasing 1,612,296 2,593,120 Office building rental 142,383 116,918 ----------- ----------- $45,423,818 $37,593,013 =========== ===========
Operating income Hotel operations: AmeriHost Inn hotels $ 1,836,236 $ 3,546,330 Other hotels (559,413) (288,134) Impairment provision (4,808,008) -- Hotel development and construction (252,543) 167,890 Hotel sales and commissions 3,295,411 1,371,638 Hotel management 113,137 219,576 Employee leasing 50,679 54,467 Incentive and royalty sharing 694,594 386,991 Office building rental 273,110 236,253 Corporate (1,543,215) (1,644,501) ----------- ----------- $ (900,012) $ 4,050,510 =========== ===========
Page 14 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 10. BUSINESS SEGMENTS (CONTINUED):
Identifiable assets 2003 2002 ------------- ------------ Hotel operations $ 88,564,733 $105,445,693 Hotel development and construction 2,119,425 2,034,119 Hotel management 648,770 241,122 Employee leasing 158,739 (228,958) Office building rental 6,435,439 6,752,250 Corporate 6,835,391 6,569,114 ------------- ------------ $ 104,742,497 $120,713,340 ============= ============
Capital expenditures Hotel operations, including new construction of company owned hotels $ 6,246,432 $13,754,704 Hotel development and construction 503 -- Hotel management 14,292 9,811 Employee leasing -- -- Office building rental 48,373 273,605 Corporate 1,857 16,378 ----------- ----------- $ 6,311,457 $14,054,498 =========== ===========
Depreciation/Amortization Hotel operations $2,553,708 $2,942,179 Hotel development and construction 2,694 4,346 Hotel management 34,183 39,609 Employee leasing 1,700 1,752 Office building rental 121,671 118,071 Corporate 53,529 115,871 ---------- ---------- $2,767,485 $3,221,828 ========== ==========
11. BANK LINE OF CREDIT: The Company had $2,250,000 and $6,384,287 outstanding on its bank operating line-of-credit at September 30, 2003 and December 31, 2002, respectively. The operating line of credit provides for a maximum amount available of $6.0 million and is collateralized by substantially all the assets of the Company, subject to first mortgages from other lenders on hotel assets, bears interest at the rate of prime plus 2.5% per annum, with a minimum rate of 6.75% per annum (effective rate as of September 30, 2003), and matures April 30, 2004. The maximum commitment under the line-of-credit was reduced from $6.5 million to $6.0 million on September 29, 2003, and will be reduced to $5.5 million on February 27, 2004. The Company is also required to maintain certain financial covenants, including minimum net income, minimum tangible net worth, a maximum leverage ratio and a minimum debt service coverage ratio. The line-of-credit agreement was amended to eliminate the non-cash financial impact of the plan for disposition of hotels on the covenant calculations (Note 13). Page 15 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 12. LONG-TERM DEBT: The Company's plan to sell certain AmeriHost Inn hotel assets (Note 13) is expected to result in the payoff of the related mortgage debt in the amount of approximately $23.1 million, which has been classified in current liabilities in the accompanying consolidated balance sheet as of September 30, 2003. This amount includes approximately $800,000 which is contractually due within the next twelve months regardless of the plan for hotel disposition. The Company's plan to sell certain non-AmeriHost Inn hotel assets is expected to result in the payoff of the related mortgage debt in the amount of approximately $10.4 million, which has been classified in current liabilities in the accompanying consolidated balance sheet as of September 30, 2003 (Note 14). This amount includes approximately $1.4 million which is contractually due within the next twelve months regardless of the plan for hotel disposition. Approximately $3.0 million is classified as the Company's current portion of long-term debt which is the principal amount due within the next twelve months on mortgages which are not related to the assets held for sale, including one hotel mortgage in the amount of approximately $1.6 million. The Company expects this loan to be repaid through the sale of the hotel, or refinanced prior to maturity. If refinanced or extended, the Company believes that it can obtain substantially similar terms. The Company also has a mortgage loan on the office building in which its headquarters is located, and on October 1, 2003, the lender extended the maturity date to January 1, 2006. The hotel mortgage loans bear interest at the floating rates of prime minus 0.25% to prime plus 2.5% per annum, and the office building loan bears interest at the floating rate of either prime minus 0.25% or LIBOR plus 2.25%, as chosen by the Company. The Company has secured a $20 million construction line of credit facility, which provides for both construction financing as well as long-term mortgage financing. The Company utilizes this facility primarily for the construction of wholly-owned AmeriHost Inn properties, as approved by the lender on a project-by-project basis. The loans under this facility bear interest at the floating rate of LIBOR plus 2.25%. As of September 30, 2003, approximately $8.2 million has been drawn to finance three hotel projects. These amounts have been, or will be, automatically converted to long-term financing. The lender's commitment to utilize this facility for new construction projects expired October 31, 2003, however the Company is currently negotiating with this lender for an extended and enhanced construction line of credit facility. Certain of the Company's hotel mortgage notes and the Company's office building mortgage note contain financial covenants, principally minimum net worth requirements, debt to equity ratios, and minimum debt service coverage ratios. These financial covenants are typically measured annually, based upon the Company's fiscal year end. The Company is not aware of any covenant violations as of September 30, 2003. 13. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS: The Company sold six wholly-owned AmeriHost Inn hotels during the nine months ended September 30, 2003. Net sale proceeds from these hotels was approximately $19.1 million, which has been included in hotel sales and commission revenue in the accompanying consolidated financial statements. The net book value of these hotels at the time of their sales was approximately $15.8 million, resulting in operating income from the sale of these hotels of approximately $3.3 million. In addition, approximately $11.3 million in mortgage debt was paid off with proceeds from the sale of these hotels. Also, during the second quarter of 2003, a joint venture in which the Company had a controlling ownership interest, and was therefore consolidated in the Company's financial statements, sold its non-AmeriHost Inn hotel. This sale resulted in the reduction of the joint venture's mortgage debt of approximately $925,000, which was paid off with the proceeds from the sale, and a pretax loss of approximately $86,000. An impairment provision of $450,000 had been recorded for this hotel in 2002. The bank that provided the mortgage debt to this joint venture, which was paid off as a result of this sale, is owned by a director of the Company. In addition, a joint venture in which the Company had a minority ownership interest sold its hotel asset during the first quarter of 2003. The Company accounts for this joint venture by the equity method and has included its share of the gain from this sale in equity in net income and (losses) of unconsolidated joint ventures in the accompanying consolidated financial statements. Page 16 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 13. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS (CONTINUED): Effective July 10, 2003, the Company implemented a plan to sell approximately 25 - 30 hotel properties over the next two years. The properties to be sold included 20-25 AmeriHost Inns and six non-AmeriHost hotels that are wholly owned or in which the Company has an ownership interest. The Company hired a national hotel brokerage firm to market most of the properties and manage the sales process. These hotels were in addition to five AmeriHost Inn properties under contract for sale at the time, of which three were sold through September 30, 2003. The Company expects this plan to reduce debt (Notes 11 and 12) and generate cash to pursue development and other strategic objectives as well as accelerate the economic benefits of the Company's transaction with Cendant Corporation, the owner of the AmeriHost Inn franchise system. However, there can be no assurances under the plan as to timing, terms of sale, or that any additional sales will be consummated. In connection with the implementation of the plan to sell hotels, and in accordance with Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for Long-Lived Assets," the Company recorded a $5.4 million pre-tax, non-cash impairment charge as of June 30, 2003, related to 17 of the hotels targeted for sale. Approximately $862,000 pre-tax of the non-cash impairment charge relates to three consolidated non-AmeriHost Inn hotels anticipated to be sold, and has been included in "discontinued operations" (Note 14). The non-cash impairment charge represents an adjustment to reduce the carrying value of certain hotel assets to the estimated sales prices, net of estimated costs to sell. During the third quarter of 2003, the Company recorded an additional approximately $175,000 of non-cash impairment charges, including approximately $31,000 which has been included in "discontinued operations." These additional impairment adjustments recorded in the third quarter of 2003 were related to three hotels in which an impairment adjustment was recorded during the second quarter of 2003. The additional impairment adjustments were based upon offers or letters of intent received on certain hotels after the initial implementation of the plan to sell hotels, which were considered to be an updated estimate of the current market values. SFAS 144 also requires long-lived assets to be sold to be classified as "held for sale" in the period in which certain criteria are met, including the probable sale of the asset within one year. Based on the implementation of this plan for hotel dispositions, the hotel assets identified for sale, which are being actively marketed and expected to be sold within a twelve month period, have been classified as "held for sale" on the accompanying consolidated balance sheet as of September 30, 2003. Hotels identified as part of the plan of disposition which are not currently marketed, and are not expected to be sold within the next twelve months, have not been classified as "held for sale." The debt which is expected to be paid off (Note 12) as a result of these hotel sales has been classified as current liabilities in the accompanying consolidated financial statements. The results of the operations of business components which have been disposed of or classified as "held for sale" are to be reported as discontinued operations if such operations and cash flow have been or will be eliminated from the Company's ongoing operations. Accordingly, the disposition of non-AmeriHost Inn hotels have been treated as discontinued operations (Note 14). However, the disposition of AmeriHost Inn hotels, although classified as "held for sale" on the accompanying consolidated balance sheet, have not been treated as discontinued operations due to the ongoing royalty fees to be earned by the Company after their disposition. 14. DISCONTINUED OPERATIONS: The Company has reclassified its consolidated statements of operations for the three and nine months ended September 30, 2003 and 2002, and its consolidated balance sheet as of September 30, 2003, as a result of implementing SFAS 144 to reflect discontinued operations of seven consolidated non-AmeriHost Inn hotels sold during this period, or to be sold pursuant to the plan for hotel dispositions (Note 13). The non-AmeriHost Inn hotels held for sale are expected to be sold within the next twelve months. This reclassification has no impact on the Company's net income or net income per common share. Non-AmeriHost Inn hotels sold or held for sale, which are owned by joint ventures and accounted for using the equity method of accounting, are not presented as "discontinued operations," nor are the sales of the AmeriHost Inn hotels due to the Company's long-term royalty sharing agreement for all non-Company owned AmeriHost Inn hotels. This agreement provides for a revenue stream from Cendant Corporation, the owner of the AmeriHost Inn brand, after the properties are sold to a new or existing AmeriHost Inn franchisee. Condensed financial information of the results of operations for the hotels presented as discontinued operations is as follows: Page 17 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 14. DISCONTINUED OPERATIONS (CONTINUED):
Three Months Ended September 30, Nine months Ended September 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Hotel Operations: Revenue $ 1,839,565 $ 2,488,977 $ 5,138,333 $ 6,716,845 Costs and expenses 1,484,783 2,013,216 4,793,112 6,028,054 ----------- ----------- ----------- ----------- 354,782 475,761 345,221 688,791 Depreciation and amortization 96,439 235,719 769,607 832,176 Leasehold rents - hotels 43,233 64,850 172,933 264,013 Hotel impairment provision 31,368 -- 893,438 -- ----------- ----------- ----------- ----------- Operating income (loss) 183,742 175,192 (1,490,757) (407,398) Other income (expense): Interest expense (171,059) (211,764) (572,491) (559,601) Other income (expense) (70,387) (938) (72,263) (2,813) Gain on sale of property -- -- (86,235) -- ----------- ----------- ----------- ----------- Loss from discontinued operations, before minority interests and income taxes (57,704) (37,510) (2,221,746) (969,812) Minority interests in (income) loss of consolidated joint ventures -- (11,203) 76,118 (1,723) ----------- ----------- ----------- ----------- Loss from discontinued operations, before income taxes (57,704) (48,713) (2,145,628) (971,535) Income tax expense (benefit) (23,000) (20,000) (859,000) (390,000) ----------- ----------- ----------- ----------- Net loss from discontinued operations $ (34,704) $ (28,713) $(1,286,628) $ (581,535) =========== =========== =========== ===========
Page 18 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 14. DISCONTINUED OPERATIONS (CONTINUED): The assets and liabilities of the one non-AmeriHost Inn hotel sold in 2003, one leased non-AmeriHost Inn hotel which was terminated in the third quarter of 2003, and five consolidated non-AmeriHost Inn hotels to be sold pursuant to the plan for hotel disposition, and which are included in discontinued operations, have been classified as held for sale and liabilities related to assets held for sale in the accompanying consolidated balance sheet as of September 30, 2003. Condensed balance sheet information for these hotels is as follows:
September 30, 2003 ------------ ASSETS Current assets: Cash and cash equivalents $ 376,652 Accounts receivable 125,281 Prepaid expenses and other current assets 29,157 ------------ Total current assets 531,090 ------------ Property and equipment 17,159,125 Less accumulated depreciation and amortization (5,601,758) ------------ 11,557,367 ------------ Other assets, net of accumulated amortization 209,847 ------------ $ 12,298,304 ============ LIABILITIES Current liabilities: Accounts payable $ 221,091 Accrued payroll and other expenses 345,453 Current portion of long-term debt 1,373,281 ------------ Total current liabilities 1,939,825 Long-term debt, net of current portion 9,035,114 Minority interests -- ------------ $ 10,974,939 ============
15. SUPPLEMENTAL CASH FLOW DATA: The following represents the supplemental schedule of noncash investing and financing activities for the nine month periods ended September 30:
2003 2002 ----------- ----------- Notes received in connection with the sale of hotels $ 250,000 =========== Sale of assets: Cost basis of assets sold $ 2,583,835 $ 32,578 Accumulated depreciation at sale (1,535,059) (7,147) Deferred income -- (352,507) Gain on sale 313,765 727,076 ----------- ----------- Net cash proceeds $ 1,362,541 $ 400,000
Page 19 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - --------------------------------------------------------------------------------
2003 2002 ----------- ----------- Interest paid, net of interest capitalized $ 3,845,000 $ 4,339,000 =========== =========== Liabilities assumed in connection with the acquisition of hotel partnership interests $ 1,244,000 $ 1,521,000 =========== =========== Reclassification of deferred gain against the basis of acquired assets (Note 9) $ 263,000 $ 348,000 =========== =========== Exchange of note receivable and accrued interest for an investment in a hotel partnership $ 1,214,000 ===========
Page 20 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- 16. SALE OF AMERIHOST INN BRAND, INCENTIVE AND ROYALTY FEES: The Company sold the AmeriHost Inn brand name and franchising rights to Cendant Corporation ("Cendant") in 2000. Pursuant to the terms of the sale agreement, in addition to the funds received upon closing, the Company was due three annual installments of $400,000 each. The Company received each of the $400,000 payments as scheduled, including the final installment which was due on September 30, 2003. These payments have been classified as gain on sale of assets in the accompanying consolidated financial statements. In connection with the sale of the brand, Cendant agreed to pay the Company a development incentive fee each time the Company sells one of its existing AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise agreement with Cendant. In addition, this fee also will be paid to the Company for new hotels that the Company develops which are then sold to a buyer who executes a franchise agreement with Cendant. This fee applies to the first 370 hotels sold by the Company during the 15-year term of the agreement. To date, the Company has collected the fee on 24 hotels. Since the Company may be required to reimburse Cendant, from future fees earned, in the event the buyer defaults on the franchise agreement, within the first 76 months, these fees are deferred when received, in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The deferred fees are amortized as incentive and royalty sharing segment revenue in the accompanying consolidated financial statements on a straight-line basis over the 76-month period as the contingencies on the revenues are removed. 17. EMPLOYEE AND DIRECTOR COMPENSATION: Prior to 2003, the Company applied APB No. 25, Accounting for Stock Issued to Employees, and related interpretations, and the intrinsic method, in accounting for options granted to employees. Accordingly, no compensation costs were recognized for stock options granted, when the exercise price was equal to the market value of the underlying stock on the date of grant. During the second quarter of 2003, the Company adopted FASB Statement No. 123, "Accounting for Stock Based Compensation," as amended by FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" prospectively, with an effective date of January 1, 2003. Under FASB Statement No. 123, the Company records the fair value of any stock based award as compensation expense as of the date the award is granted. Non-employee Director Restricted Stock Plan On August 13, 2003, the 1996 Non-Employee Director Stock Option Plan was terminated. On October 29, 2003, the shareholders approved the Non-Employee Director Restricted Stock Plan. This plan provides for the issuance of restricted common stock to non-employee directors as part of their overall compensation. A total of 200,000 restricted shares of common stock can be issued under the plan. On November 10, 2003, the Company granted 40,500 shares of restricted common stock to the directors pursuant to the plan, of which 75% vested immediately, as these shares related to services performed during the first three quarters of 2003, and 25% will vest on December 31, 2003. The Company will expense approximately $156,000 in the fourth quarter of 2003 in connection with these restricted stock grants. Long-Term Incentive Plan On October 29, 2003, the Company's 1996 Omnibus Incentive Stock Plan was terminated and the shareholders approved a Long-Term Incentive Plan ("LTIP") for key employees. The LTIP provides for the issuance of stock based awards to key employees as part of their overall compensation. A total of 550,000 restricted shares of common stock, stock options, or other stock based awards can be issued under the plan. No stock based awards have been granted pursuant to this plan to date. Employment Agreements During the three months ended September 30, 2003, the Company entered into employment agreements with two executives. The agreements expire in December 2005, and provide for total annual base compensation of approximately $303,000. The agreements also provide for performance bonuses payable in a combination of cash and restricted common stock of the Company, pursuant to the LTIP. Page 21 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- During the first quarter of 2003, the Company entered into an employment agreement with its Chief Executive Officer. The agreement expires on December 31, 2005, and provides for total annual base compensation of $300,000. The agreement also provides for performance bonuses tied to company performance, and is payable in a combination of cash and restricted common stock of the Company. In connection with his employment agreement, during the first quarter of 2003, the Chief Executive Officer was granted a 30-day right to purchase up to 75,000 shares of restricted common stock by February 6, 2004, at a price which was the greater of the (i) $3.00 per share, (ii) the January 6, 2003 closing price of the Company's stock, or (iii) the closing price of the stock immediately preceding a press release announcing the CEO's hiring. If not exercised during the initial 30 days, the agreement also provided an additional 30 days to exercise the right at a price which was the greater of (i) the first option price, (ii) $3.25 per share, or (iii) the average closing price of the 30 days prior to the date of exercise. The Chief Executive Officer exercised a portion of the right and purchased 40,000 newly issued shares of common stock, subject to restrictions, for approximately $126,000. The fair value of this right to purchase restricted stock was nominal, and will be recorded as compensation expense pursuant to the transition rules of FASB Statement No. 148. An employment agreement with another executive executed in August 2003 contained a 30-day right to purchase up to 25,000 shares of restricted common stock by September 18, 2003, at a price which was the greater of (i) $3.18 per share, (ii) the August 18, 2003 closing price of the Company's stock, or (iii) the closing price of the stock on the day immediately preceding a press release announcing the executive's hiring. The agreement was later amended to provide an additional 30-day option at a price which was at the greater of (i) the first option price, (ii) $3.49 per share, or (iii) the average closing price of the 30 days prior to the date of exercise. As an incentive to the executive to exercise this right, the agreement provided for a cash bonus of up to 10% of the total purchase price of the stock purchased pursuant to this right, subject to a maximum of $6,000, prorated for the number of shares purchased. The fair value of these rights to purchase restricted stock was nominal, and was recorded as compensation expense during the third quarter of 2003. This option expired on October 18, 2003, without exercise. 18. RESTRUCTURING COSTS: In conjunction with the implementation of the plan for hotel dispositions (Note 13) and the anticipated reduction in hotel ownership, starting in July 2003, the Company announced a plan to reduce its corporate and regional operations staff by 13 people, or approximately 20 percent, over the next six months. In addition, the Company's corporate office space needs have been reduced. The Company owns the building that houses its corporate offices, and plans to lease the vacated space. The Company follows Financial Accounting Standards Board Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that the costs associated with exit or disposal activity, including restructuring costs, be recognized and measured at fair value when the liability is incurred. The Company estimates incurring total non-recurring restructuring charges of approximately $140,000 through January 2004, which include severance benefits, insurance benefits, outplacement services, legal and office reconfiguration costs. Through September 30, 2003, the Company has incurred approximately $73,000 in such expenses, which has been recorded as operating expense in the accompanying consolidated financial statements. 19. SUBSEQUENT EVENTS: Subsequent to September 30, 2003, the Company sold two wholly owned AmeriHost Inn hotels at a gain, including one of the five under contract at the time the plan for hotel disposition was implemented (Note 13) and the first AmeriHost Inn sold under the plan, and used approximately $2.9 million of proceeds from these sales to pay off the related mortgage debt. In addition, a joint venture in which the Company had a controlling ownership interest sold its non-AmeriHost Inn hotel at a slight gain and used approximately $1.3 million to pay off the related mortgage debt. These sale transactions will be reported in the Company's fourth quarter 2003 statement of operations. Page 22 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- Subsequent to September 30, 2003, one wholly owned AmeriHost Inn hotel which had been included in the plan for disposition (Note 13) was removed from the hotels actively marketed for sale to allow more time for the hotel to stabilize in its market, and will therefore be reclassified to an operating asset during the fourth quarter of 2003. Depreciation which would have been recorded during the third quarter on this asset will be recorded in the fourth quarter of 2003 upon the decision to remove this hotel from the plan for disposition. On October 29, 2003, the shareholders approved a "reverse/forward stock split," which provides for a 1-for-100 reverse stock split, followed immediately by a redemption of the outstanding fractional shares by the Company and an automatic 100-for-1 stock split. The effective date of the transaction is expected to be November 28, 2003, however the Company's Board of Directors can abandon the proposed transaction prior to this date. The price used for the redemption will be the average closing stock price of the 30-days prior to the effective date. Page 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that are not historical, including statements regarding management's intentions, beliefs, expectations, representations, plans or predictions of the future, and are typically identified by words such as "believe," "expect," "anticipate," "intend," "estimate," "may," "will," "should," and "could." There are numerous risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. For a discussion of these factors, see "Factors Affecting Future Performance" below. OVERVIEW We are engaged in developing and selling AmeriHost Inn hotels, and the owning, operating and managing of AmeriHost Inn hotels and other mid-price, primarily limited-service, hotels. As of September 30, 2003, we had 59 AmeriHost Inn hotels open, of which 50 were wholly-owned or leased, one was majority-owned, and eight were minority-owned. During the past 12 months, we built and opened four AmeriHost Inn hotels in which we have an ownership interest. Several additional hotels are in various stages of development, including one AmeriHost Inn hotel which recently commenced construction. Cendant Corporation ("Cendant") is the owner and franchisor of the AmeriHost Inn brand. Consequently, we are a franchisee of Cendant, and the buyers of our AmeriHost Inn hotels become franchisees of Cendant when they continue to operate the hotels as AmeriHost Inn hotels. Same room revenues for all AmeriHost Inn hotels we owned and operated, including unconsolidated minority-owned hotels, are presented below. These results relate to all the AmeriHost Inn hotels that have been operating for at least 13 full months during the periods presented. Page 24
Three Months Nine months Twelve Months Ended Ended Ended September 30 September 30 September 30 ------------ ------------ ------------- Occupancy - 2003 64.3% 58.3% 57.0% Occupancy - 2002 64.3% 58.5% 57.3% Increase (decrease) 0.0% (0.3%) (0.5%) Average Daily Rate - 2003 $58.91 $57.34 $57.12 Average Daily Rate - 2002 $58.89 $57.56 $57.21 Increase (decrease) 0.0% (0.4%) (0.2%) Revenue per Available Room - 2003 $37.91 $33.46 $32.56 Revenue per Available Room - 2002 $37.86 $33.67 $32.78 Increase (decrease) 0.0% (0.7%) (0.8%)
Occupancy and average daily rate fluctuate as a result of the changes in demand for, and supply of, hotel rooms in each of our local markets. Revenue per Available Room ("RevPAR") is a productivity measure, computed as a combination of occupancy and average daily rate. In addition, similar to general business and leisure travel patterns, our hotels are seasonal in nature whereby hotel revenues are higher in the second and third calendar quarters, compared to the first and fourth quarters. SUMMARY OF HOTELS. The table below sets forth information regarding our hotels at September 30, 2003.
Open Under Hotels Construction Total --------------- --------------- --------------- Hotels Rooms Hotels Rooms Hotels Rooms ------ ----- ------ ----- ------ ----- Consolidated (1): AmeriHost Inn hotels 51 3,282 -- -- 51 3,282 Other brands 6 796 -- -- 6 796 ----- ----- ----- ----- ----- ----- 57 4,078 -- -- 57 4,078 ----- ----- ----- ----- ----- ----- Unconsolidated: AmeriHost Inn hotels 8 574 1 79 9 653 Other brands 2 228 -- -- 2 228 ----- ----- ----- ----- ----- ----- 10 802 1 79 11 881 ----- ----- ----- ----- ----- ----- Totals: AmeriHost Inn hotels 59 3,856 1 79 60 3,935 Other brands 8 1,024 -- -- 8 1,024 ----- ----- ----- ----- ----- ----- 67 4,880 1 79 68 4,959 ===== ===== ===== ===== ===== =====
(1) Consolidated hotels are those in which we have a 100% or controlling ownership interest or a leasehold interest. Excluding hotels under development, we had an ownership interest in 67 hotels at September 30, 2003, versus 76 hotels at September 30, 2002. Total consolidated hotels decreased to 57 hotels at September 30, 2003, versus 63 hotels at September 30, 2002. The increase in newly constructed AmeriHost Inn hotels for our own account and for joint ventures in which we have a non-controlling minority ownership interest, was more than offset by the sale of both AmeriHost Inn and non-AmeriHost Inn hotels. We also have several additional new AmeriHost Inn hotel projects in various stages of development. SOURCES OF REVENUE. Revenues from hotel operations consist of the revenues from all consolidated hotels. Consolidated hotels are those hotels in which we have a 100% or controlling ownership or leasehold interest, and are consolidated in our financial statements. Unconsolidated hotels are those hotels in which we have a minority or non-controlling ownership or leasehold interest. These hotels are accounted for by the equity method. Non-core hotels are those hotels operated as independent of a franchise affiliation, or under a national franchise affiliation other than the AmeriHost Inn brand, such as Days Inn, Ramada Inn, and Howard Johnson Express. Development and construction revenues consist of fees for new construction and renovation activities we perform for unconsolidated hotels and unrelated third parties. We record commissions and revenue from the sale of our consolidated AmeriHost Inn hotels, based upon the net sale price, as these sales are considered part of our ongoing operations of building and selling hotels, and therefore expanding the AmeriHost Inn brand. We receive revenue Page 25 from management and employee leasing services provided to unconsolidated hotels and unrelated third parties. Incentive and royalty sharing fees consist of the amortization of one-time development incentive fees received upon the sale of an AmeriHost Inn hotel to a third party who enters into an AmeriHost Inn franchise agreement, and our portion of the franchise royalty fees paid by all non-Arlington Hospitality owned AmeriHost Inn hotels to Cendant Corporation, the owner of the AmeriHost Inn brand. Finally, we also own the office building in which our headquarters is located, and receive revenues as a landlord from the third-party tenants in the building. SUMMARY OF THIRD QUARTER AND YEAR-TO-DATE RESULTS. Total revenues increased 49.7% and 14.2% for the three and nine months ended September 30, 2003, respectively, primarily due to increases in hotel sales and commissions and incentive and royalty sharing. Total revenues from Consolidated AmeriHost Inn hotels decreased during the three and nine months ended September 30, 2003, due primarily to the sale of hotels and a 1.5% and 1.2% decrease in same room revenue for these hotels for the three and nine months ended September 30, 2003, respectively. Revenues from the development segment decreased during the three and nine months ended September 30, 2003, due to the decrease in hotel development activity for minority-owned and third party entities. Revenues from hotel sales and commissions increased during the three and nine months ended September 30, 2003, as a result of the sale of six AmeriHost Inn hotels during the first nine months of 2003, including three in the third quarter, at prices higher than the three AmeriHost Inn hotels, including one leased hotel, which were sold during the first nine months of 2002. Revenues from hotel management and employee leasing segments decreased during both the three and nine month periods ended September 30, 2003, compared to the same periods in 2002, due primarily to the reduction of hotels under management contracts. We recorded net income of $1.1 million for the third quarter of 2003, compared to net income of $746,000 during the third quarter of 2002. We recorded a net loss of ($3.8) million for the nine months ended September 30, 2003, compared to net income of approximately $222,000 for the nine months ended September 30, 2002. These results include non-cash hotel impairment provisions in 2003 and discontinued operations related to non-AmeriHost Inn hotels which have been recorded in connection with the implementation of the plan for hotel disposition and hotel development repositioning as discussed below. The results for the three and nine months periods are summarized as follows:
Three Months Ended September 30, Nine months Ended September 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 ------------- ----------- ------------ ------------ Net income (loss) from continuing operations, before impairment $ 1,201,438 $ 774,400 $ 412,568 $ 803,538 Impairment provision, net of tax (84,496) -- (2,883,008) -- ----------- ----------- ----------- ----------- Net income (loss) from continuing operations $ 1,116,942 $ 774,400 $(2,470,440) $ 803,538 Discontinued operations (34,704) (28,713) (1,287,628) (581,535) ----------- ----------- ----------- ----------- Net income (loss) $ 1,082,238 $ 745,687 $(3,758,068) $ 222,003 =========== =========== =========== =========== Net income (loss) per share - Diluted: From continuing operations $ 0.23 $ 0.15 $ (0.48) $ 0.15 From discontinued operations (0.01) (0.01) (0.26) (0.11) ----------- ----------- ----------- ----------- $ 0.22 $ 0.14 $ (0.74) $ 0.04 =========== =========== =========== ===========
CENDANT AGREEMENT. On September 30, 2000, we sold the AmeriHost Inn brand and franchising rights to Cendant. In connection with this sale we entered into agreements with Cendant that provide for both short-term and long-term incentive payments to us as the AmeriHost Inn brands are expanded, including: o for the 25-year term of a royalty-sharing agreement, favorable royalty payment terms on any AmeriHost Inn hotels we own or lease and operate, including hotels owned through joint ventures with prior approval from Cendant; o for the 25-year term of the royalty-sharing agreement, the sharing of royalties received by Cendant from all AmeriHost Inn hotels in the franchise system excluding those we own or lease and operate; and Page 26 o for the 15-year term of a development agreement, a hotel development incentive fee each time an AmeriHost Inn hotel we own/lease and operate is sold to an operator who becomes a Cendant franchisee. We received approximately $721,000 and $1,641,000 in development incentive fees during the third quarter and first nine months of 2003, respectively, which were deferred and are being amortized over a 76-month period. HOTEL DISPOSITION PLAN AND RESTRUCTURING Effective July 10, 2003, we adopted a strategic plan to sell approximately 25 to 30 hotel properties over the next two years. The properties to be sold include 20 to 25 AmeriHost Inns and six non-AmeriHost hotels that are wholly or partially-owned or in which we have an ownership interest. These hotels were in addition to any properties then under contract for sale, and the five hotels sold during the first six months of 2003. The sale of the hotels is expected to: o reduce outstanding debt; o increase operating cash flow; o accelerate the generation and realization of sales and royalty-sharing fees related to our agreements with Cendant; o provide capital for future hotel development; and o provide capital to repurchase common stock at attractive prices. We believe that the hotels to be sold as part of the strategic plan, plus the hotels under contract for sale at the time the plan was adopted, will generate net cash of approximately $11.3 million to $14.5 million, after the repayment of the related mortgage debt secured by the individual properties. See "Factors Affecting Future Performance" discussed below. In addition, we believe that the sales will improve operating cash flow by approximately $1.6 million, pre-tax, annually. Upon successful completion of the sale of the properties in the plan and the properties then under contract, we expect to own or lease 30 to 35 AmeriHost Inn hotels and two non-AmeriHost Inn hotels, excluding any new hotels we develop. Actual sales prices may be materially less than what we expect. There is no assurance, for example, that we will generate the expected proceeds associated with the strategic plan for hotel disposition. By selling the hotels, we hope to redeploy the net cash into activities that will earn higher returns than we were earning on these hotels, such as hotel development for third parties and joint ventures. By the end of 2005, we would like our joint venture development activity to grow to an annual rate of 10 to 15 joint venture hotels. Developing hotels through joint ventures requires less capital from the Company, compared to a wholly owned project, allowing us to build more hotels. In addition, the Company intends to develop larger hotels, which is expected to create operational efficiencies, and increase the cash flow from the Cendant agreements through larger development incentive fees and greater royalty sharing payments. In accordance with Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for Long-Lived Assets," we recorded a $5.4 million pre-tax, non-cash impairment charge in the second quarter of 2003, related to 17 of the hotels targeted for sale, comprised of approximately $4.6 million pre-tax related to 14 AmeriHost Inn hotels and approximately $862,000 pre-tax related to three of the other branded hotels. During the third quarter of 2003, an additional $175,000 pre-tax, non-cash impairment charge was recorded in connection with the strategic plan, comprised of approximately $84,000 pre-tax related to one AmeriHost Inn hotel and approximately $91,000 pre-tax related to two other branded hotel. The additional impairment charges recorded in the third quarter of 2003, which were related to three hotels in which an impairment charge was recorded during the second quarter of 2003, were the result of the progression of the sale process on these hotels. In total, we expect to record an overall book gain, net of the non-cash impairment charges, from all hotels under contract at the time the plan for hotel disposition was implemented and those slated to be sold pursuant to the plan, ranging from approximately $1.1 million to $4.3 million, pre-tax. The hotels expected to be sold at a gain will be reported as of the date the sale transactions close for each of these hotels. There can be no assurance that the anticipated sales will be consummated on terms satisfactory to us. The anticipated results from these sales could differ materially from the final amounts included in our quarterly and annual financial statements when they are issued. Our line-of-credit agreement contains certain financial covenants related to tangible net worth, debt to equity ratio and cash flow to debt service ratio. Our lender Page 27 has agreed to exclude the impact of the non-cash impairment charges from these covenant calculations through the third quarter of 2003. The year end 2003 results will be reviewed in connection with a renewal of the line-of-credit, if any, with this lender. We have reported, as discontinued operations, the results for the two non-AmeriHost Inn hotels sold or disposed of during the periods presented and the five consolidated non-AmeriHost Inn properties currently marketed for sale, including one which was sold subsequent to September 30, 2003. We have reclassified our consolidated statements of operations for the three and nine months ended September 30, 2003 and 2002, and our consolidated balance sheet as of September 30, 2003, as a result of implementing SFAS 144 to reflect discontinued operations of consolidated non-AmeriHost Inn hotels sold during this period, or to be sold pursuant to the disposition plan. This reclassification has no impact on our net income or net income per common share. Operations of non-AmeriHost Inn hotels held for sale which are owned by joint ventures, and which are accounted for using the equity method of accounting, are not treated as "discontinued operations" under the provisions of SFAS 144. The sale of AmeriHost Inn hotels are not treated as discontinued operations since we have a long-term royalty sharing agreement for all AmeriHost Inn hotels which provides for a revenue stream after the properties are sold to a new or existing AmeriHost Inn franchisee. The non-cash impairment charge of approximately $893,000 pre-tax, including approximately $31,000 recorded in the third quarter of 2003, related to two of the consolidated non-AmeriHost Inn hotels to be sold, has also been included in "discontinued operations" on the accompanying consolidated statement of operations. The remaining three non-AmeriHost Inn hotels to be sold pursuant to this plan are expected to be sold at a total gain of approximately $426,000. However, these anticipated gains will be recorded in the consolidated financial statements only as the sale of each of these hotels is consummated. There can be no assurance that the sale of these hotels will be consummated on terms as anticipated. In conjunction with the implementation of our hotel disposition plan and the anticipated reduction in hotel ownership, we have implemented a restructuring under which we will reduce our corporate and regional operations staff by 13 people, or approximately 20%. This move is expected to result in annual savings of approximately $580,000 in labor and related costs. We expect these savings to be partially offset by the addition of personnel in the hotel development and financial areas, as described below. In addition, as part of the restructuring: o we have not replaced several corporate positions which had been vacated as a result of normal attrition during the last six months, saving us approximately $165,000 annually in payroll and related costs; o we have not filled several positions which had been budgeted for in 2003; and o our corporate office space needs will be reduced, which will allow us to lease the vacated space. The reduction in staff in connection with the restructuring, coupled with the hiring of additional personnel described below, is designed to change the composition of our staff to reflect our future direction, which we believe will better position us for growth. We expect to incur non-recurring restructuring charges of approximately $140,000 through the first quarter of 2004. These charges reflect costs of items such as severance benefits, insurance benefits, outplacement services, legal services and office reconfiguration. Approximately $73,000 in such restructuring costs were incurred during the third quarter of 2003 and recorded as operating expenses in the accompanying consolidated financial statements. Concurrently with the restructuring, we are increasing our business and hotel development team to assist in expanding new hotel development, primarily through joint ventures, and to identify other business opportunities. We have enhanced and replaced the roles of two executive hotel development and construction positions vacated earlier in 2003, and have added one individual in the market analysis area, with one additional position to be added in the finance area. These new and enhanced positions are expected to bring additional depth and knowledge in hotel development, acquisitions and capital markets. Page 28 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002 The following tables set forth our selected operations data for the three month periods ended September 30, 2003 and 2002. This data should be read in conjunction with our financial statements in Item 1 on this Form 10-Q.
Three Months Ended Three Months Ended September 30, 2003 September 30, 2002 % ---------------------- ------------------------- --------- Amount % of Amount % of Increase (thousands) Revenues (thousands) Revenues (Decrease) --------- -------- --------- --------- --------- Revenue: Hotel operations: AmeriHost Inn hotels $ 11,718 49.2% $ 12,737 80.1% (8.0%) Other hotels 490 2.1% 754 4.7% (35.0%) Development and construction 381 1.6% 930 5.8% (59.0%) Hotel sales and commissions 10,041 42.2% -- 0.0% -- Management services 124 0.5% 267 1.7% (53.3%) Employee leasing 606 2.5% 929 5.8% (34.8%) Incentive and royalty sharing 265 1.1% 131 0.8% 102.8% Office building rental 181 0.8% 153 1.0% 18.1% --------- -------- --------- --------- --------- 23,806 100.0% 15,901 100.0% 49.7% --------- -------- --------- --------- --------- Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 8,027 33.7% 8,271 52.0% (3.0%) Other hotels 644 2.7% 522 3.3% 23.5% Development and construction 591 2.5% 945 5.9% (37.4%) Hotel sales and commissions 8,445 35.5% -- -- -- Management services 66 0.3% 166 1.0% (60.2%) Employee leasing 586 2.5% 916 5.8% (36.1%) Office building rental 46 0.2% 71 0.4% 31.2% --------- -------- --------- --------- --------- 18,405 77.4% 10,891 68.5% 69.4% --------- -------- --------- --------- --------- 5,400 22.6% 5,010 31.5% 6.9% Depreciation and amortization 701 2.9% 1,088 6.8% (35.6%) Leasehold rents - hotels 1,263 5.3% 1,241 7.8% 1.8% Corporate general & administrative 527 2.2% 755 4.7% (30.2%) Impairment provision 143 0.6% -- -- -- --------- -------- --------- --------- --------- Operating income (loss) $ 2,766 11.6% $ 1,926 12.1% 41.2% ========= ======== ========= ========= ========= Operating Income by Segment: Hotel operations: AmeriHost Inn hotels $ 1,910 8.0% $ 2,386 15.0% (19.9%) Other hotels (276) (1.2%) 85 0.5% (424.1%) Non-cash impairment provision (143) (0.6%) -- -- -- Development and construction (211) (0.9%) (16) (0.1%) (1,206.0%) Hotel sales and commissions 1,596 6.7% -- -- -- Management services 47 0.2% 88 0.6% (46.2%) Employee leasing 20 0.1% 12 0.1% 61.7% Incentive and royalty sharing 265 1.1% 131 0.8% 102.8% Office building rental 94 0.4% 42 0.3% 12.9% Corporate general & administrative (536) (2.3%) (802) (5.0%) (33.1%) --------- -------- --------- --------- --------- Operating income (loss) $ 2,766 11.6% $ 1,926 12.1% 41.2% ========= ======== ========= ========= =========
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the sale of six Consolidated AmeriHost Inn hotels to Cendant franchisees, whereby the operations of these hotels were included in our hotel operations segment during the third quarter of 2002; however such hotels were not included during all or part of the Page 29 2003 third quarter. In addition, revenues from Consolidated AmeriHost Inn hotels also decreased due to a 1.5% decrease in same room revenues for these hotels. The decrease in Consolidated AmeriHost Inn revenue was partially offset by the opening of two newly constructed AmeriHost Inn hotels. We opened another wholly owned AmeriHost Inn hotel during the first quarter of 2003, however sold the property within 30 days after its opening. The hotel operations segment included the operations of 51 AmeriHost Inn hotels and six non-AmeriHost Inn hotel comprising 4,078 rooms at September 30, 2003, compared to 55 AmeriHost Inn hotels and eight non-AmeriHost Inn hotel comprising 4,595 rooms at September 30, 2002. Our hotel revenues have been impacted by general economic and industry conditions, and 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. We believe that as the number of AmeriHost Inn hotels increases, the greater the benefits will be at all locations from marketplace recognition and repeat business. In addition, we typically build new hotels in growing markets where we anticipate a certain level of additional hotel development. Hotel development revenues are directly related to the number of hotels being developed and constructed for minority-owned entities or unrelated third parties, and the timing of the construction period. We were constructing one hotel for a minority-owned entity during the three months ended September 30, 2003, compared to one minority-owned hotel and one unrelated third party hotel during the three months ended September 30, 2002. However, we also had several additional projects in various stages of pre-construction development during both three-month periods. We closed on the sale of three wholly owned AmeriHost Inn hotels during the three months ended September 30, 2003, compared to none during the three months ended September 30, 2002. We intend to continue to build and sell AmeriHost Inn hotels in order to maximize the value inherent in the agreement with Cendant while enhancing net income and cash flow. Three hotels have been sold subsequent to September 30, 2003, including two wholly owned AmeriHost Inn hotels and one Consolidated non-AmeriHost Inn hotel. One wholly owned AmeriHost Inn hotel is currently under contract to sell, with additional hotels anticipated to be sold pursuant to the plan of disposition discussed above. Hotel management revenue decreased, due primarily to the decrease in the number of hotels managed for third parties and minority-owned entities, which was 10 hotels, representing 802 rooms, at September 30, 2003, versus 13 hotels, representing 1,034 rooms, at September 30, 2002. Employee leasing revenue decreased, due primarily to the reduction in rooms managed for minority-owned entities and unrelated third parties as described above, a concerted effort to decrease hotel employee payroll costs which is the basis for the employee leasing revenue, and the pass through of workers compensation insurance cost as revenue in 2002 versus a reimbursable cost in 2003. Cendant pays us a development incentive fee each time we sell one of our existing AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise agreement with Cendant. The development incentive fees are typically paid by Cendant within 20 days from the sale of an AmeriHost Inn hotel owned by us to an unrelated AmeriHost Inn franchisee. For financial statement purposes, these fees are deferred and recognized as revenue over a 76-month period from the date of sale. Cendant also pays us a portion of all royalty fees Cendant receives from all of its AmeriHost Inn franchisees. Generally, Cendant receives royalty fees from each of their franchisees based upon a percentage of guest room revenue, ranging from 4% to 5%. In turn, Cendant pays us a portion of this fee as stipulated in our agreement with Cendant. Royalty sharing fees are typically paid by Cendant to us on a monthly basis. These royalty sharing revenues are generally recorded when the related royalty fee is earned. Development incentive and royalty sharing revenue increased as a result of the sale of additional AmeriHost Inn hotels and the increase in the number of non-Company owned AmeriHost Inn hotels franchised by Cendant. We received approximately $721,000 and $220,000 during the three months ended September 30, 2003 and 2002, respectively, in development incentive fees from the sale of AmeriHost Inn hotels. Approximately $171,000 and $95,000 was recognized during the three months ended September 30, 2003 and 2002, respectively, from the amortization of this deferred income. We also recorded approximately $94,000 and $36,000 in royalty sharing revenue during the third quarter of 2003 and 2002, respectively. Office building rental consisting of leasing activities at our office building, increased due primarily to the annual increases as stipulated in the various lease agreements with the tenants. The building contains approximately 54,000 rentable square feet. We occupy approximately 15,500 square feet, as reduced by the restructuring activities discussed above, allowing us to make available for lease a greater portion of the building to unrelated third parties. During the third quarter of 2003, we hired a national real estate leasing broker to assist us in obtaining additional Page 30 tenants. Most of the remaining space is leased to unrelated third parties pursuant to long-term lease agreements. Including our space, the building is approximately 74% occupied. OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased, primarily due to an increase in operating costs and expenses from hotel sales and commissions, as described below. A decrease in operating costs in the hotel operations segment was due primarily to the fewer number of hotels included in this segment -- 57 hotels at September 30, 2003, as compared to 63 hotels at September 30, 2002. Operating costs and expenses as a percentage of revenues for the Consolidated AmeriHost Inn hotels increased due to several hotels operating during their initial stabilization period when revenues are typically lower and significant start-up costs are incurred, as well as increases primarily in the costs of insurance, general and administrative, real estate taxes and ongoing maintenance. Operating costs and expenses for the hotel development segment decreased, consistent with the decrease in hotel development revenues for the three months ended September 30, 2003, compared to the three months ended September 30, 2002. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased during the three month period ended September 30, 2003 due to the level of hotel construction activity from third parties and minority-owned entities, which has a higher ratio of costs to revenue. Hotel management segment operating costs and expenses decreased primarily due to the decrease in the number of hotel rooms operated and managed for unrelated third parties and minority-owned entities. Employee leasing operating costs and expenses decreased during the three months ended September 30, 2003, compared to the three months ended September 30, 2002, consistent with the decrease in segment revenue for the three months ended September 30, 2003. Office building rental operating costs and expenses consist primarily of expenses related to the management of our office building. Some of the office building costs have been allocated to the other operating segments. Depreciation and amortization expense decreased, primarily due to the sale of consolidated AmeriHost Inn hotels during the last twelve months, offset by the opening of newly constructed hotels, and the acquisition or consolidation of existing hotels. We stopped taking depreciation deductions on all of the hotel properties held for sale as of July 1, 2003 as required by Generally Accepted Accounting Principals, offset by the opening of newly constructed hotels, and the acquisition or consolidation of existing hotels. Leasehold rents - hotels increased slightly during the third quarter of 2003 compared to the third quarter of 2002, as the annual rent increased as provided for by the existing leases. The increase was partially offset by the purchase of one leased AmeriHost Inn hotel and the termination of a non-AmeriHost Inn hotel lease upon its expiration during the third quarter of 2003. Corporate general and administrative expense decreased during the third quarter of 2003 compared to the third quarter of 2002 due primarily to non-recurring management transition expenses incurred during 2002, offset by increases in professional fees and director expenses. Director expenses include director fees which were revised in 2003 to be competitive with other public companies of a similar size and increases in travel costs. The hotel impairment provision was recorded in connection with our plan for the disposition of certain hotel assets which are marketed for sale as discussed above. The amount represents an adjustment for certain hotel assets to decrease the carrying value of the assets to the anticipated market value, net of closing costs. The impairment adjustment includes $84,000 pre-tax related to one AmeriHost Inn hotels to be sold and $59,000 related to an unconsolidated joint venture, which have been included in operating income. An additional $31,000 pre-tax related to one non-AmeriHost Inn hotel to be sold has been included in "discontinued operations" in the accompanying consolidated statements of operations. OPERATING INCOME BY SEGMENT. The following discussion of operating income by segment excludes corporate general and administrative expense and the non-cash hotel impairment charges. Operating income from Consolidated AmeriHost Inn hotels decreased due to a decrease in same room revenues, certain new hotels operating during their ramping up stage when revenues are typically lower, and increases in certain expenses, including insurance, general and administrative expenses, real estate taxes, and maintenance. Operating loss from the hotel development segment increased due to the decrease in hotels developed and constructed for third parties and minority-owned entities during the third quarter of 2003, compared with the third quarter of 2002. Operating income from hotel sales and commissions increased due to the sale of three AmeriHost Inn hotels at a significant Page 31 profit during the third quarter of 2003, versus none during the third quarter of 2002. The decrease in hotel management segment operating income during the third quarter of 2003, was due primarily to a reduction in the number of hotels managed. Employee leasing operating income increased slightly, due primarily to the decrease in employee leasing operating expenses. Incentive and royalty sharing operating income increased due to the greater number of AmeriHost Inn franchisees who pay royalty fees to Cendant. Office building rental operating income increased, attributable to the annual rental increases pursuant to certain of the lease agreements with the tenants. INTEREST EXPENSE. The decrease in interest expense during the third quarter of 2003 compared to 2002 was attributable to the sale of AmeriHost Inn hotels and the use of proceeds to repay the related mortgage debt, thus reducing our overall debt, and the decrease from lower interest on floating rate debt. The decrease in interest expense was offset by the mortgage financing of newly constructed or acquired consolidated hotels. Interest expense does not include interest incurred on hotels under development and construction. We capitalize interest incurred during the pre-opening construction period of a consolidated hotel project, as part of the total development cost. The amount capitalized includes both interest charges from a direct construction loan, plus interest computed at our incremental borrowing rate on the total costs incurred to date in excess of the construction loan funding. GAIN ON SALE OF ASSETS. Pursuant to the terms of the agreement for the sale of the AmeriHost Inn brand name and franchising rights to Cendant Corporation in 2000, the Company was due three annual installments of $400,000 each. The Company received each of the $400,000 payments as scheduled, including the final installment which was due on September 30, 2003. These payments have been classified as gain on sale of assets in the consolidated financial statements. CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during the third quarter of 2003, compared to 2002, was primarily attributable to the write down to fair value of property in a hotel partnership by $59,000 during the third quarter of 2003, and the recognition of our share of the operations in excess of our stated ownership interest as a result of our position as general partner. Distributions from affiliates were $458 during both the three months ended September 30, 2003, and the three months ended September 30, 2002. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002 The following tables set forth our selected operations data for the nine month periods ended September 30, 2003 and 2002. This data should be read in conjunction with our financial statements in Item 1 on this Form 10-Q.
Nine months Ended Nine months Ended September 30, 2003 September 30, 2002 ----------------------- ------------------------- % Amount % of Amount % of Increase (thousands) Revenues (thousands) Revenues (Decrease) --------- -------- --------- -------- -------- Revenue: Hotel operations: AmeriHost Inn hotels $ 31,254 54.5% $ 33,582 66.8% (6.9%) Other hotels 1,336 2.3% 1,759 3.5% (24.1%) Development and construction 2,478 4.3% 5,741 11.4% (56.8%) Hotel sales and commissions 19,074 33.2% 4,900 9.8% 289.2% Management services 353 0.6% 764 1.5% (53.8%) Employee leasing 1,665 2.9% 2,649 5.3% (37.2%) Incentive and royalty sharing 695 1.2% 387 0.8% 79.5% Office building rental 537 0.9% 471 0.9% 14.0% -------- ----- -------- ----- ------- 57,392 100.0% 50,254 100.0% 14.2% -------- ----- -------- ----- ------- Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 23,425 40.8% 23,675 47.1% (1.1%) Other hotels 1,532 2.7% 1,606 3.2% (4.6%) Development and construction 2,728 4.8% 5,569 11.1% (51.0%) Hotel sales and commissions 15,779 27.5% 3,529 7.0% 347.2% Management services 206 0.4% 504 1.0% (59.2%) Employee leasing 1,612 2.8% 2,593 5.2% (37.8%)
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Nine months Ended Nine months Ended September 30, 2003 September 30, 2002 ----------------------- ------------------------- % Amount % of Amount % of Increase (thousands) Revenues (thousands) Revenues (Decrease) --------- -------- --------- -------- -------- Office building rental 142 0.2% 117 0.2% 62.5% -------- ----- -------- ----- ------- 45,424 79.1% 37,593 74.8% 21.0% -------- ----- -------- ----- ------- 11,968 20.9% 12,661 25.2% (5.8%) Depreciation and amortization 2,767 4.8% 3,222 6.4% (14.1%) Leasehold rents - hotels 3,803 6.6% 3,860 7.7% (1.5%) Corporate general & administrative 1,490 2.6% 1,529 3.0% (2.5%) Impairment provision 4,808 8.4% -- -- -- -------- ----- -------- ----- ------- Operating income (loss) $ (900) (1.5%) $ 4,051 8.1% (123.4%) ======== ===== ======== ===== =======
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Nine months Ended Nine months Ended September 30, 2003 September 30, 2002 ----------------------- ------------------------- % Amount % of Amount % of Increase (thousands) Revenues (thousands) Revenues (Decrease) --------- -------- --------- -------- -------- Operating Income (Loss) by Segment: Hotel operations: AmeriHost Inn hotels $ 1,836 3.2% $ 3,546 7.1% (48.2%) Other hotels (559) (1.0%) (288) (0.6%) (94.2%) Non-cash impairment provision (4,808) (8.4%) -- -- -- Development and construction (253) (0.4%) 168 0.3% (250.4%) Hotel sales and commissions 3,295 5.7% 1,372 2.7% 140.3% Management services 113 0.2% 220 0.4% (48.5%) Employee leasing 51 0.1% 54 0.1% (7.0%) Incentive and royalty sharing 695 1.2% 387 0.8% 79.5% Office building rental 274 0.5% 236 0.5% (4.5%) Corporate general & administrative (1,544) (2.7%) (1,645) (3.3%) (6.2%) -------- ----- -------- ----- ------- Operating income (loss) $ (900) (1.5%) $ 4,051 8.1% (123.4%) ======== ===== ======== ===== =======
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the sale of nine Consolidated AmeriHost Inn hotels to Cendant franchisees, whereby the operations of these hotels were included in our hotel operations segment during all or part of the nine months ended September 30, 2002; however such hotels were not included during all or part of the 2003 nine month period. In addition, same room revenues for these Consolidated AmeriHost Inn hotels decreased 1.2%. The decrease in revenues from Consolidated AmeriHost Inn hotels was partially offset by the opening of three newly constructed AmeriHost Inn hotels. Our hotel revenues have been impacted by general economic and industry conditions, and 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. We believe that as the number of AmeriHost Inn hotels increases, the greater the benefits will be at all locations from marketplace recognition and repeat business. In addition, we typically build new hotels in growing markets where we anticipate a certain level of additional hotel development. Hotel development revenues are directly related to the number of hotels being developed and constructed for minority-owned entities or unrelated third parties, and the timing of the construction period. We were constructing two hotels for minority-owned entities during the nine months ended September 30, 2003, compared to two minority-owned hotels and one unrelated third party hotel during the nine months ended September 30, 2002. However, we also had several additional projects in various stages of pre-construction development during both nine-month periods in 2002 and 2003. We closed on the sale of six wholly owned AmeriHost Inn hotels during the nine months ended September 30, 2003, and two wholly owned AmeriHost Inn hotels during the nine months ended September 30, 2002. In addition, we facilitated the sale of one AmeriHost Inn hotel leased to us by the REIT during the first nine months of 2002. Year to date, we have sold eight wholly owned AmeriHost Inn hotels generating net hotel revenues of approximately $22.8 million. We intend to continue to build and sell AmeriHost Inn hotels in order to maximize the value inherent in the agreement with Cendant while enhancing net income and cash flow. Hotel management revenue decreased, due primarily to the decrease in the number of hotels managed for third parties and minority-owned entities. Employee leasing revenue decreased, due primarily to the reduction in rooms managed for minority-owned entities and unrelated third parties as described above, a concerted effort to decrease hotel employee payroll costs which is the basis for the employee leasing revenue, and the pass through of workers compensation insurance cost as revenue in 2002 versus a cost reimbursement in 2003. Development incentive and royalty sharing revenue increased as a result of the sale of additional AmeriHost Inn hotels and the increase in the number of non-Company owned AmeriHost Inn hotels franchised with Cendant. We received approximately $1,641,000 and $991,000 during the nine months ended September 30, 2003 and 2002, respectively, in development incentive fees from the sale of AmeriHost Inn hotels. Approximately $471,000 and $263,000 was recognized during the nine months ended September 30, 2003 and 2002, respectively, from the amortization of this deferred income. We also recorded approximately $224,000 and $124,000 in royalty sharing revenue during the first nine months of 2003 and 2002, respectively. Page 34 Office building rental consisting of leasing activities from our office building, increased due to the annual increases as stipulated in the various lease agreements with the tenants, and the leasing of additional office space during the nine months ended September 30, 2003 versus the nine months ended September 30, 2002. We occupy approximately 22% of the rentable square feet, as reduced as part of the restructuring activities discussed above. Most of the remaining space is leased to unrelated third parties pursuant to long-term lease agreements, and we have hired a national real estate broker to assist us in leasing the rest of the available space. OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased, primarily due to an increase in operating costs and expenses from hotel sales and commissions as described below. A decrease in operating costs in the hotel operations segment was due primarily to the fewer number of hotels included in this segment -- 57 hotels at September 30, 2003, as compared to 63 hotels at September 30, 2002. Operating costs and expenses as a percentage of revenues for the consolidated AmeriHost Inn hotels increased due to several hotels operating during their initial stabilization period when revenues are typically lower and significant start-up costs are incurred, as well as increases primarily in the costs of insurance, real estate taxes, energy, general and administrative, and ongoing maintenance. Operating costs and expenses for the hotel development segment decreased, consistent with the decrease in hotel development revenues for the nine months ended September 30, 2003, compared to the nine months ended September 30, 2002. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased during the nine month period ended September 30, 2003 due to the level of hotel construction activity from third parties and minority-owned entities, which has a higher ratio of operating costs to revenues. Hotel management segment operating costs and expenses decreased primarily due to the decrease in the number of hotel rooms operated and managed for unrelated third parties and minority-owned entities. Employee leasing operating costs and expenses decreased during the nine months ended September 30, 2002, compared to the nine months ended September 30, 2002, consistent with the decrease in segment revenue for the nine months ended September 30, 2003. Office building rental operating costs and expenses consisted primarily of expenses related to the management of our office building. Certain of the office building costs have been allocated to the other operating segments. Depreciation and amortization expense decreased, primarily due to the sale of consolidated AmeriHost Inn hotels during the last twelve months, offset by the opening of newly constructed hotels, and the acquisition or consolidation of existing hotels. We stopped taking depreciation deductions on hotel assets held for sale as of July 1, 2003, Leasehold rents - hotels decreased slightly during the first nine months of 2003 compared to the first nine months of 2002, due to the disposition of one leased hotel during the first quarter of 2002, and the purchase of one leased AmeriHost Inn hotel and the termination of another non-AmeriHost Inn hotel lease upon its expiration during the third quarter of 2003, partially offset by the annual rent increase. Corporate general and administrative expense decreased due primarily to management transition expenses incurred during the third quarter of 2002, offset by increases in professional fees and director expenses. Director expenses include director fees which were revised in 2003 to be competitive with other public companies of a similar size and increases in travel costs. In addition, the decrease in corporate general and administrative expense for the nine month period was also offset by the non-recurring reimbursement of a portion of the out of pocket costs and professional fees in the amount of approximately $64,000 incurred by the Committee To Enhance Shareholder Value, which was responsible for the election of two of our independent directors at the 2002 annual meeting. This reimbursement was approved unanimously by all disinterested members of the Company's Board. The hotel impairment provision was recorded primarily in connection with our plan for the disposition of certain hotel assets that we intend to market for sale as discussed above. The amount represents an adjustment for certain hotel assets to decrease the carrying value of the assets to the anticipated market value, net of closing costs. The impairment adjustment includes $4.8 million pre-tax related to AmeriHost Inn hotels to be sold which has been included in operating income. An additional $893,000 pre-tax related to non-AmeriHost Inn hotels to be sold has been included in "discontinued operations" in the accompanying statements of operations. OPERATING INCOME BY SEGMENT. The following discussion of operating income by segment excludes any corporate general and administrative expense and the non-cash hotel impairment charges. Operating income from consolidated AmeriHost Inn hotels decreased due to a decrease in same room revenues, certain new hotels operating during their ramping up stage when revenues are typically lower, and increase in certain expenses, including insurance, real estate taxes, energy, general and administrative, and maintenance. Operating income from the hotel Page 35 development segment in 2002 decreased to an operating loss in 2003 due to the decrease in hotels developed and constructed for third parties and minority-owned entities during the first nine months of 2003, compared with the first nine months of 2002. Operating income from hotel sales and commissions increased due to the sale of more AmeriHost Inn hotels and at a greater profit during the first nine months of 2003, versus the sale of AmeriHost Inn hotels during the first nine months of 2002. The decrease in hotel management segment operating income during the first nine months of 2003 was due primarily to a reduction in hotels managed. Employee leasing operating income decreased slightly, due primarily to the decrease in hotel employee payroll expenses. Office building rental operating income decreased, attributable to the change in allocation of expenses to our other business segments. INTEREST EXPENSE. The decrease in interest expense during the first nine months of 2003 compared to 2002 was attributable to the sale of AmeriHost Inn hotels and the use of proceeds to repay the related mortgage debt, thus reducing our overall level of debt. The decrease from lower interest on floating rate debt was offset by the mortgage financing of newly constructed or acquired consolidated hotels. Interest expense does not include interest incurred on hotels under development and construction. We capitalize interest expense incurred during the pre-opening construction period of a consolidated hotel project, as part of the total development cost. The amount capitalized includes both interest charges from a direct construction loan, plus interest computed at our incremental borrowing rate on the total costs incurred to date in excess of the construction loan funding. GAIN ON SALE OF ASSETS. Pursuant to the terms of the agreement for the sale of the AmeriHost Inn brand name and franchising rights to Cendant Corporation in 2000, the Company was due three annual installments of $400,000 each. The Company received each of the $400,000 payments as scheduled, including the final installment which was due on September 30, 2003. These payments have been classified as gain on sale of assets in the consolidated financial statements. CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during the first nine months of 2003, compared to 2002, was primarily attributable to the recognition of our share of the operations in excess of our stated ownership interest as a result of our position as general partner. Distributions from affiliates were $9,794 during the nine months ended September 30, 2003, compared to $10,768 during the nine months ended September 30, 2002. OFF-BALANCE SHEET ARRANGEMENTS Through wholly-owned subsidiaries, we are a general partner or managing member in 15 joint ventures as of September 30, 2003. As a general partner or managing member, we are secondarily liable for the obligations and liabilities of these joint ventures. As of September 30, 2003, these joint ventures had $27.9 million outstanding under mortgage loan agreements. Approximately $6.3 million of this amount has been included in our consolidated financial statements as of September 30, 2003, reflecting the debt owed by joint ventures in which we have a majority or controlling ownership interest, leaving approximately $21.6 million in off-balance sheet mortgage debt owed by unconsolidated joint ventures. If we subsequently obtain a majority or controlling ownership interest in a joint venture, the joint venture's debt will be included in our consolidated financial statements. Of this $21.6 million of financing, we also have provided approximately $17.0 million in guarantees to the lenders. Other partners have also guaranteed $10.8 million of these financings. One unconsolidated joint venture mortgage loan in the amount of approximately $1.7 million at September 30, 2003 matured on November 1, 2003, however the lender has extended the maturity of the loan to November 1, 2004. Unless the properties collateralizing the debt are sold, the remaining joint venture mortgage loans mature after 2004. From time to time, we advance funds to these joint ventures for working capital and renovation projects. The advances bear interest at rates ranging from prime to 10% per annum and are due upon demand. The advances were $2.2 million at September 30, 2003, and are included in investments in and advances to unconsolidated hotel joint ventures in our consolidated financial statements. We expect the joint ventures to repay these advances through cash flow generated from hotel operations, mortgage financing, or the sale of the hotel. These advances will be repaid to us prior to distributions being paid to the partners. We apply the provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," with respect to mortgage loan guarantees for joint ventures in which the Company is a partner. This interpretation elaborates on the disclosures required by the guarantor and requires the guarantor to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. During the third quarter of 2003, the Company provided a guarantee related to the mortgage debt of a joint venture in which it shares the responsibility of the guarantee on a joint and several basis with its joint Page 36 venture partners. The guarantee is effective for the 20-year term of the mortgage loan. The Company has recorded as an additional investment in this joint venture, and a liability for its share of this guarantee of approximately $40,000, its estimated fair value, as of September 30, 2003. In January 2003, Interpretation No. 46, "Consolidation of Variable Interest Entities", was issued. We are required to adopt the requirements of this Interpretation for interim periods beginning after December 15, 2003. This Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and requires that we present any variable interest entities in which we have a majority variable interest on a consolidated basis in our financial statements. We are continuing to assess the provisions of this Interpretation and the impact to us of adopting this Interpretation. Therefore the following amounts may change based on additional analysis. Due to the adoption of this Interpretation, we expect that we will begin to present our investments in three joint ventures in which we have a majority variable interest, as determined in accordance with the provisions of this Interpretation, on a consolidated basis in our financial statements beginning with the consolidated financial statements issued for the quarterly period ended December 31, 2003. The consolidation of these joint ventures is expected to add approximately $6.8 million in assets and $6.1 million in liabilities to our consolidated balance sheet. As of September 30, 2003, we had investments in, and advances to, these joint ventures of approximately $608,000, which was presented as such under the equity method of accounting in the accompanying consolidated financial statements. We expect that we will continue to present all of our other unconsolidated investments under the equity method. The following table summarizes our contractual obligations, including off-balance sheet mortgage loan guarantees provided for certain joint ventures:
Payments due by period ------------------------------------------------------------------------------------ Less than 1 - 3 3 - 5 More than Total 1 year years years 5 years ------------ ------------ ------------ ------------ ------------ Long-term debt - consolidated $ 36,654,943 $ 2,899,632 $ 7,060,695 $ 4,547,838 $ 22,146,778 Long-term debt of assets held for sale - non-AmeriHost Inn hotels 10,408,395 10,408,395 -- -- -- Long-term debt of assets held for sale - AmeriHost Inn hotels 23,105,654 23,105,654 -- -- -- Long-term debt - unconsolidated joint ventures 21,594,345 2,388,622 1,390,186 2,111,167 15,704,370 Line of credit 2,250,000 2,250,000 -- -- -- Operating leases - consolidated 64,486,985 5,814,823 11,365,607 11,801,669 35,504,886 Operating leases - unconsolidated -- -- -- -- -- Purchase obligations: Construction contracts 1,082,659 1,082,659 -- -- -- Other long-term liabilities -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Total $159,582,981 $ 47,949,785 $ 19,816,488 $ 18,460,674 $ 73,356,034 ============ ============ ============ ============ ============
We expect these obligations to be funded through operations, including the sale of hotels, or refinanced/extended prior to maturity. The sale of the hotels to be sold as part of our hotel disposition plan, and those under contract for sale at the time the plan was implemented, is expected to generate net cash of approximately $11.3 million to $14.5 million, after the repayment of the related mortgage debt which is included in the amounts above. See "Risk Factors" discussed below. Actual sales prices may be materially less than what we expect. There is no assurance, for example, that we will generate the expected proceeds associated with the strategic plan for hotel disposition. CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS We currently lease 21 hotels from a REIT. Pursuant to an amendment to the master lease agreement with this REIT, we can facilitate the sale of up to eight leased hotels by the REIT. When the REIT sells a leased hotel to a buyer who becomes an AmeriHost Inn franchisee of Cendant, we receive: o a commission from the REIT for facilitating the transaction which is based upon the sales price; Page 37 o an incremental fee from Cendant, and o long-term royalty sharing fees from Cendant from the future royalties paid to Cendant. Both we and the REIT choose which properties are sold. For each hotel chosen by us, one hotel is also chosen by the REIT. Our choice is final when the sale transaction closes. The REIT makes their corresponding choice at this time. If we, or the REIT, are not successful in selling the REIT's choice to a third party, then we are obligated under the agreement to purchase the hotel from the REIT at predetermined prices. If we do not complete the purchase of the hotel within the specified time period, then our rent payment on all of the REIT hotels shall be increased by 0.25% each time. We cannot close on the sale of our third and fourth choice until the first and second REIT choices have been sold (or purchased by us), respectively. During 2001, we facilitated the sale of two hotels by the REIT (our first and second choices), and purchased one hotel from the REIT (the REIT's first choice). During 2002, we purchased the REIT's second choice, using approximately $680,000 in cash, plus mortgage financing already committed from an affiliate of the REIT, and facilitated the sale of one hotel by the REIT. The third scheduled increase was avoided in September 2003, when the Company purchased a hotel from the REIT, using cash of approximately $556,000 and mortgage financing provided by the REIT of approximately $1.7 million. If the Company does not either facilitate the sale to a third party, or purchase from the REIT, one hotel prior to June 5, 2004, the fourth 0.25% rent increase becomes effective. If the Company decides to purchase this hotel prior to June 4, 2004 with approximately $2.0 million of mortgage financing already committed by the REIT, it will need to use approximately $656,000 in operating cash flow or working capital to consummate the purchase. LIQUIDITY AND CAPITAL RESOURCES We have seven main sources of cash from operating activities: o revenues from hotel operations; o fees from development, construction and renovation projects, o revenues from the sale of hotel assets; o fees from management contracts, o fees from employee leasing services, o hotel development incentive fees and royalty sharing pursuant to the Cendant transaction, and o rental income from the ownership of an office building. Approximately 10% of our hotel operations revenue not received at checkout is generated through other businesses and contracts, such as direct billings to local companies using the hotel and third party hotel room brokers, which is usually paid within 30 to 45 days from billing. Fees from development, construction and renovation projects are typically received within 15 to 45 days from billing. Due to the procedures in place for processing our construction draws, we typically do not pay our contractors until we receive our draw from the equity or lending source. We typically receive an earnest money deposit from the buyer of a hotel when a sales contract is executed. The remaining proceeds from the sale of hotel assets are received at the time of closing. Management fee revenues typically are received by us within five working days of the end of each month. Cash from our employee leasing segment typically is received as of or prior to the pay date. The development incentive fee from Cendant is typically received within 20 days of the simultaneous closing of the sale of an AmeriHost Inn hotel and the execution by the buyer of a franchise agreement with Cendant, including all proper documentation. Royalty sharing payments from Cendant are received quarterly, based on the actual royalty payments received by Cendant from all AmeriHost Inn hotel franchisees, except for those operated by us. Office space rents are typically received monthly in advance, around the first of each month. During the first nine months of 2003, we received cash from operations of $17.9 million, compared to cash received from operations of $9.2 million during the first nine months of 2002, or an increase in cash provided by operations of $8.7 million. The increase in cash flow from operations during the first nine months of 2003, when compared to 2002, can be primarily attributed to the sale of six wholly-owned hotels in 2003, versus the sale of two wholly-owned hotels and one leased hotel in 2002, offset by a decrease in hotel development for a minority-owned hotels during 2003, and the decrease in operating income from hotel operations. The increase in accounts receivable during the nine months ended September 30, 2003, compared to the same period in 2002 was due to three development incentive fees outstanding from Cendant for sales consummated during the third quarter of 2003, plus other hotel development activity. The decrease in accounts payable for the nine months ended September 30, 2003, compared to the same period in 2002, was attributable to the reduction in payables as a result of increased operating cash flow. Deferred income tax asset increased significantly during the nine months ended September 30, 2003, due Page 38 to the deferred taxes recognized in connection with the hotel impairment adjustments. The significant increase in deferred income in both 2003 and 2002 was primarily attributable to the receipt of significant development incentive fees from Cendant. A significant portion of operating cash flow from hotel operations is anticipated to be used for leasehold rent obligations. We invest cash in three principal areas: o to purchase property and equipment for constructing and renovating consolidated hotels; o to purchase equity interests in hotels; and o to make loans to affiliated and non-affiliated hotels for the purpose of construction, renovation and working capital. From time to time, we may also utilize cash to purchase our own common stock. Our board of directors has authorized a common stock buy back, at any time and without notice, of up to 1,000,000 shares under certain conditions and consistent with securities laws governing these buybacks. Under this authorization, to date in 2003 we have repurchased 36,800 shares. All shares that we have repurchased have been retired. In addition, 37,000 options to purchase stock were exercised during the third quarter of 2003 resulting in proceeds to us of approximately $130,000. During the first nine months of 2003, we used $6.4 million in investing activities compared to using $15.3 million during the first nine months of 2002. During the first nine months of 2003, we used $6.3 million to purchase property and equipment for consolidated AmeriHost Inn hotels, used approximately $571,000 for investments in and advances to affiliates, net of distributions and collections on advances from affiliates, and used approximately $777,000 for the acquisition of partnership interests, offset by approximately $1.4 million in net proceeds from the sale of a non-AmeriHost Inn hotel and the final installment from the sale of the AmeriHost Inn brand to Cendant Corporation. During the first nine months of 2002, we used $14.1 million to purchase property and equipment for consolidated AmeriHost Inn hotels, used $464,000 for investments in and advances to affiliates, net of distributions and collections on advances from affiliates, and used approximately $797,000 for the acquisition of partnership interests. Cash used in financing activities was $11.3 million during the first nine months of 2003, compared to cash provided by financing activities of $3.8 million during the first nine months of 2002. In 2003, we incurred principal repayments on our debt of $18.2 million, primarily through the repayment of mortgages in connection with the sale of hotels, and net repayments on the line of credit, compared to $5.7 million in 2002, including the repayment of mortgages and net repayments on the line of credit. We also generated fewer proceeds from debt issuance, from $9.7 million in 2002 to $6.9 million in 2003. We have secured a $20 million construction line of credit facility, which provides for both construction financing as well as long-term mortgage financing. We utilize this facility primarily for the construction of wholly-owned AmeriHost Inn properties, as approved by the lender on a project-by-project basis. The loans under this facility bear interest at the floating rate of LIBOR plus 2.25%. As of September 30, 2003, approximately $8.2 million has been utilized for three hotel projects, which has already been, or will be, automatically converted to long-term financing. The lender's commitment to utilize this facility for new construction projects expired October 31, 2003, however the Company is currently negotiating with this lender for an extended and enhanced construction line of credit facility. Certain of our hotel mortgage notes and our office building mortgage note contain financial covenants, principally minimum net worth requirements, debt to equity ratios, and minimum debt service coverage ratios. These financial covenants are typically measured annually, based upon our fiscal year end. We are not aware of any covenant violations as of September 30, 2003. The Company's plan to sell certain AmeriHost Inn hotel assets is expected to result in the payoff of the related mortgage debt in the amount of approximately $23.1 million, which has been classified in current liabilities in the accompanying consolidated balance sheet as of September 30, 2003. At September 30, 2003, we had $2.25 million outstanding under our $6.0 million operating line-of-credit, which matures April 30, 2004. The line-of-credit is collateralized by substantially all of our assets, subject to first mortgages from other lenders on hotel assets. The amount we can draw under this line declines to $5.5 million on February 27, 2004. Draws on the line-of-credit bears interest at the rate of prime, plus 2.5%, with a floor of 6.75%. The credit line agreement also requires us to maintain certain financial covenants, including minimum tangible net worth, a maximum leverage ratio, a minimum debt service coverage ratio, and a minimum net income covenant for Page 39 2003. Our lender has agreed to exclude the impact of the non-cash impairment charges from these covenant calculations through the third quarter of 2003. The year end 2003 results will be reviewed in connection with a renewal of the line-of-credit, if any, with this lender. During the third quarter of 2003, we reduced the outstanding balance on the line-of-credit by approximately $4.1 million, due primarily to the net proceeds from the sale of three hotels and the positive cash flow from hotel operations. We intend to pursue longer term financing options with our current line-of-credit lender or other lenders that is consistent with our business plan of developing, building and selling AmeriHost Inn hotels. However, there can be no assurance that we will obtain an alternative credit facility of longer duration under terms and conditions that we deem satisfactory. We expect cash from operations, including proceeds from the sale of hotels, to be sufficient to pay all operating and interest expenses during the next 12 months, as well as commitments to purchase hotel assets, provided that current financing facilities remain in place. SEASONALITY The lodging industry, in general, is seasonal by nature. Our hotel revenues are generally greater in the second and third calendar quarters than in the first and fourth quarters due to weather conditions in the primarily midwest markets in which many of our hotels are located, as well as general business and leisure travel trends. This seasonality can be expected to continue to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors, securities and geopolitical concerns and other general factors affecting travel. In addition, hotel construction is seasonal, depending upon the geographic location of the construction projects. Construction activity in the Midwest may be slower in the first and fourth calendar quarters due to weather conditions. Also, since our management fees are based upon a percentage of the hotel's total gross revenues, we are further susceptible to seasonal variations. RECENTLY ISSUED ACCOUNTING STANDARDS In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," and interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002. As described in Note 4, the Company has guaranteed mortgage loan obligations on certain joint ventures in which the Company holds a minority ownership interest, to secure undertakings made by those joint ventures. For those guarantees issued prior to 2003, the Company anticipates that no such contingent liability will be realized, and that the various guarantees will eventually expire. As such, the Company believes the aggregate fair value of all such guarantees is negligible. The Company issued a guarantee during the third quarter of 2003 in connection with a mortgage loan of a joint venture in which it shares the responsibility of the guarantee on a joint and several basis with its joint venture partners. The guarantee is effective for the 20-year term of the mortgage loan. The Company has recorded as an additional investment in this joint venture, and a liability for its share of this guarantee, of approximately $40,000, its estimated fair value, as of September 30, 2003. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN46) an interpretation of ARB No. 51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests obtained in variable interest entities after January 31, 2003. For public companies like the Company, the interpretation is applied to the enterprise no later than the beginning of the first annual reporting period beginning after December 15, 2003. The interpretation requires certain disclosures in the consolidated financial statements issued after January 15, 2003, if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the interpretation becomes effective. The Company currently anticipates consolidating three variable interest entities upon the application of FIN 46, however the Company is continuing to assess the provisions of this Interpretation and the impact to the Company of adopting this Interpretation. Therefore, the impact may change based upon this additional analysis. Page 40 In June 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that the costs associated with exit or disposal activity be recognized and measured at fair value when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. As discussed in Note 18, the Company anticipates incurring restructuring charges of approximately $140,000 through the first quarter of 2004. In December 2002, the FASB issues SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). This statement amends FASB Statement No. 123, "Accounting for Stock-based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 and the disclosure requirements of Statement No. 123 require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002, and are included in the notes to these consolidated financial statements. During 2003, the Company has adopted the provisions of FASB No. 123, including the reporting of the fair value of any options as a charge against earnings. On May 15, 2003 the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). The issuance of SFAS 150 was intended to improve the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position and also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. SFAS 150 affects the issuer's accounting for a number of freestanding financial instruments, including mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. Most of the guidance in Statement 150 is effective for all financial instruments entered into or modified after May 31, 2003. The Company does not expect that the implementation of SFAS 150 will result in a material financial statement impact. FACTORS AFFECTING FUTURE PERFORMANCE The following important factors, among others, have affected, and may in the future continue to affect, our business, results of operations and financial condition, and could cause our operating results to differ materially from those expressed in any forward-looking statements made by us or on our behalf elsewhere in this report. Our development activities may be more costly and take longer than we have anticipated. o As part of our growth strategy, we plan to develop additional AmeriHost Inn hotels. Development involves many substantial risks, which include the following: o actual development costs may exceed our budgeted or contracted amounts; o construction delays may prevent us from opening hotels on schedule; o we may not be able to obtain all necessary zoning, land use, building, occupancy and construction permits; o these properties may not achieve our desired revenue or profit goals; and o we compete for suitable development sites, and may not be able to locate attractive sites in terms of location or economic feasibility. Our ability to sell hotels in a timely manner and at favorable prices could be adversely affected by market conditions and other factors. Our ability to increase our revenues and operate profitably depends to a large extent on our ability to sell hotels that we develop at favorable prices. The sales prices and timing of hotel sales are affected by numerous factors, such as demand and supply of hotel product and conditions in the real estate and capital markets, as well as the uncertainties associated with negotiating conditions and terms of sales, many of which are beyond our control. Actual sales prices may be materially less than we expect. There is no assurance for example, that we will generate the expected Page 41 proceeds associated with "Operation Sell." If we are not able to sell the hotels we develop in a timely manner and at favorable prices, our revenues and ability to operate profitably will be significantly impaired. We may have to make significant capital improvements to maintain our hotel properties. We may be required to replace, from time to time, furniture, fixtures and equipment and to make other capital improvements at the hotels we operate. We also must make periodic capital improvements to comply with standards established by Cendant Corporation, the franchisor of our hotels, under our franchise agreements. Generally, we are responsible for the costs of these capital improvements, which give rise to the following risks: o cost overruns and delays; o the disruption to operations and potential lost room revenue associated with renovations; o the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and o the risk that the return on our investment in these capital improvements will not be what we expect. In the past we have funded capital expenditures from cash flow from operations and, to a lesser degree, by borrowing. If we are required to borrow additional funds to fund capital expenditures, this could have a material adverse effect on our financial condition. Our financial performance depends in part on Cendant promoting and supporting the AmeriHost brand. The successful operation of the hotels we own, operate or manage depends in part on the promotion of the AmeriHost brand by Cendant, the owner of the AmeriHost Inn brand and on Cendant devoting sufficient resources to support services, such as reservation systems, frequent guest loyalty and marketing programs, provided to franchisees. We have very little control over Cendant's activities in these areas, including the amount it spends on brand promotion or franchisee support. If Cendant Corporation is unable or unwilling to successfully promote the AmeriHost brand or to provide adequate support to franchisees, our results of operations and financial condition could be adversely affected. Our business is concentrated in particular segments of a single industry and our hotels are primarily operated under a single brand name. Nearly all of our business has been, and will likely continue to be, hotel related. Our current strategy is to develop, operate and sell mid-market hotels. We are thus exposed to downturns in the hotel industry and are more susceptible to adverse conditions in the mid-market segment of the hotel industry than more diversified hotel companies. Finally, our hotels are operated primarily under the AmeriHost brand name, and our success depends heavily on the strength of this single brand. We may not be able to effectively compete for guests with other branded and independent hotels. The mid-market segment of the hotel business is highly competitive. Our hotels compete on the basis of location, room rates and quality, service levels, reputation, and reservation systems, among many other factors. There are many competitors in our market segment, and many of them or the brands under which they are franchisees, may have substantially greater marketing and financial resources. New hotels are continually being constructed and opened, in some cases. without corresponding increases in demand for hotel rooms. The result in some cases may be decreased revenues. We will encounter risks that may adversely affect real estate ownership. Our investments in hotels are subject to the numerous risks generally associated with owning real estate, including among others: o adverse changes in general or local economic or real estate market conditions; o changes in zoning laws; Page 42 o changes in traffic patterns and neighborhood characteristics; o increases in assessed valuation and real estate tax rates; o increases in the cost of property insurance; o governmental regulations and fiscal policies; o the potential for uninsured or underinsured property losses; o the impact of environmental laws and regulations; and o other circumstances beyond our control. Moreover, real estate investments are relatively illiquid, and we may not be able to vary our portfolio in response to changes in economic and other conditions. Environmental problems are possible and can be costly. We believe that our properties comply, in all material respects, with applicable environmental laws. Unidentified environmental liabilities could arise, or we may be required to investigate, clean up or pay for property damage caused by hazardous or toxic substances that may arise at one of our properties whether we knew of or caused the presence of the contaminants. We are also required to properly manage and maintain any asbestos that may be present in our hotels. Failure to do so may subject us to fines and penalties and may allow third parties to seek recovery for personal injury associated with exposure to asbestos fibers. Changes in government regulation may have significant effects on our business. We are subject to numerous laws and regulations including the Americans with Disabilities Act or "ADA." The ADA requires that all public accommodations such as hotels meet federal requirements related to access and use by disabled persons. Compliance with, or changes in any of these laws, including the ADA, could reduce the revenue and profitability of our hotels and could otherwise adversely affect our results of operations and financial condition. Uninsured and underinsured losses could result in loss of value of hotel properties. Our insurance coverage may not be sufficient to fully protect our business and assets from all claims or liabilities, including environmental liabilities. Further, we may not be able to obtain existing or additional insurance at commercially reasonable rates. There are certain types of losses, generally of a catastrophic nature or related to certain environmental liabilities, that are either uninsurable or not insurable at a reasonably affordable price. In the event losses or claims are beyond the limits or scope of our coverage, our results of operations or financial condition could be materially adversely affected. We are subject to the risks of hotel operations. Through our ownership of our hotels, or our serving as lessee under long-term leases, we are subject to the risk of fluctuating hotel operating expenses at our hotels, including but not limited to: o wage and benefit costs; o repair and maintenance expenses; o gas and electricity costs; o insurance costs, including health, general liability and workers compensation; and o other operating expenses. Page 43 These operating expenses are difficult to predict and control, resulting in an increased risk of volatility in our results of operations. Our revenues are significantly influenced by economic conditions in the Midwest. Our hotels are located primarily in the States of Illinois, Ohio, Indiana, Michigan, and Wisconsin. In 2002, more than two-thirds of our revenues were derived from hotels in the Midwest. As a result, our results of operations and financial condition are largely dependent on economic conditions in the Midwest, and could be adversely affected by a decline in economic conditions in this region. Geopolitical events could adversely affect us. Geopolitical events including terrorist attacks have adversely affected the travel and hospitality industries. The impact which these terrorist attacks have had, or could have on our business in particular and the United States economy, the global economy and global financial markets in general is indeterminable. These attacks or the potential for future attacks could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties. The seasonal nature of the lodging industry may cause our quarterly results to fluctuate significantly. The lodging industry, in general, is seasonal in nature. As is typical in the industry, our 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 our hotels are located and general business and leisure travel trends. Thus, our quarterly revenues and earnings may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors and other factors affecting travel. In addition, hotel construction is seasonal, depending upon the geographic location of the construction projects. For example, construction activity in the Midwest may be slower in the first and fourth quarters due to weather conditions. If we are not able to obtain capital on favorable terms or at all, our ability to grow will be hampered and our financial results may suffer. We require a substantial amount of capital to develop additional hotels. We or the joint venture in which we are an investor and which owns a hotel, as the case may be, typically invests between 0% and 50% of the total cost of developing and constructing a hotel in the form of equity, with the remaining portion of the costs generally financed through a bank, or through a development line of credit. In addition, our operating cash flow is not always sufficient to fund our operations. Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions and development, and discretionary capital improvements. The capital markets have been adversely affected by the occurrence of recent events including various geopolitical events. These events or other future events deemed negative by capital market providers could adversely affect the availability and cost of capital for our business. We cannot assure you that we will be successful in attracting sufficient debt or equity financing to fund future growth and operations at an acceptable cost, or at all. We have substantial leverage and other long-term obligations, which could limit our flexibility or otherwise adversely affect our financial condition. We have a significant amount of debt and obligations under long-term leases requiring us to dedicate a substantial portion of our cash flow from operations to make these required payments. These payments reduce the cash flow otherwise available to fund capital expenditures, expansion efforts, distributions to our shareholders and other general corporate needs. If our cash flow and working capital is not sufficient to fund our expenditures or to make our debt and lease payments, we will have to raise additional funds through: o the sale of capital stock; o borrowing additional monies; or o selling assets. Page 44 We cannot assure you that any of these sources would be available to us on acceptable terms, if at all. An inability to fund our capital needs would have a material adverse effect on our results of operations and financial condition. Rising interest rates could have an adverse effect on our cash flow and interest expense. Most of the money we have borrowed requires us to pay interest that varies over time. In addition, we may borrow money in the future requiring us to pay interest at "variable rates." Accordingly, increases in interest rates could increase our interest expense and adversely affect our results of operations and cash flow and reduce the amounts available to make payments on our other indebtedness, make acquisitions, or pursue other business opportunities. We have restrictive debt covenants that could adversely affect our ability to run our business. o The agreement governing our corporate and our development line of credit contains various restrictive covenants including, among others, provisions that can restrict our ability to: o borrow additional money; o make common and preferred distributions; o make investments; o make investments in capital expenditures and acquiring hotels in excess of certain amounts; o engage in transactions with affiliates; o merge or consolidate with another person; and o dispose of all or substantially all of our assets. These restrictions may adversely affect our ability to finance our operations or engage in other business activities that may be in our best interest. In addition, these agreements require us to maintain certain specified financial ratios. Our ability to comply with these ratios may be adversely affected by events beyond our control. The breach of any of these covenants and limitations could result in the acceleration of amounts outstanding under our line of credit. We may not be able to refinance or repay our debt in full under those circumstances. It may be difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. Some provisions of our certificate of incorporation and bylaws, as well as some provisions of Delaware law, may discourage, delay or prevent third parties from acquiring us, even if doing so would be beneficial to our shareholders. Each of these provisions makes it more difficult for shareholders to obtain control of our board or initiate actions that are opposed by the then current board. For example, our certificate of incorporation allows for the issuance of undesignated preferred stock, which gives our board the ability to issue preferred stock with voting or other rights and preferences that could impede the success of any attempted change of control. Delaware law also could make it more difficult for a third party to acquire us. Section 203 of the Delaware General Corporation Law may have an anti-takeover effect with respect to transactions not approved in advance by our board, including discouraging attempts that might result in a premium over the market price of our common stock. Page 45 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. We have some cash flow exposure on our long-term debt obligations to changes in market interest rates. We primarily enter into long-term debt obligations in connection with the development and financing of hotels. We maintain a mix of fixed and floating debt to mitigate our exposure to interest rate fluctuations. We do not enter into any market risk sensitive investments for trading purposes. Our management believes that fluctuations in interest rates in the near term would not materially affect our consolidated operating results, financial position or cash flows as we have limited risks related to interest rate fluctuations. The table below provides information about financial instruments that are sensitive to changes in interest rates, for each interest rate sensitive asset or liability as of September 30, 2003. As the table incorporates only those exposures that existed as of September 30, 2003, it does not consider those exposures or positions which could arise after that date. Moreover, the information presented therein is merely an estimate and has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, hedging strategies and prevailing interest rates at the time.
Average Nominal Carrying Value Interest Rate -------------- --------------- Operating line of credit - variable rate $ 2,250,000 6.75% Mortgage debt - fixed rate $ 25,751,189 7.72% Mortgage debt - variable rate $ 44,417,802 5.85%
ITEM 4. CONTROLS AND PROCEDURES Our chief executive officer and our chief financial officer have concluded, based on their evaluation within 90 days before the filing date of this quarterly report, that our disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act"), are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of this evaluation. Page 46 PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: The following exhibits were included in the Registrant's Report on Form 10-K filed on March 26, 1993, and are incorporated by reference herein: Exhibit No. Description - ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) 4.2 Specimen Common Stock Purchase Warrant for Employees 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 exhibit was included in the Registrant's Report on Form 10-K filed March 30, 1999: Exhibit No. Description - ----------- ----------- 10.5 Agreement of Purchase and Sale between PMC Commercial Trust and Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.), including exhibits thereto The following exhibits were included in the Registrant's Report on Form 10-Q filed November 7, 2000: Exhibit No. Description - ----------- ----------- 10.10 Asset Purchase Agreement between Arlington Hospitality, Inc. and AmeriHost Inn Franchising Systems, Inc. (a subsidiary of Cendant Corporation) 10.11 Royalty Sharing Agreement between Arlington Hospitality, Inc. and AmeriHost Inn Franchising Systems, Inc. (a subsidiary of Cendant Corporation) 10.12 Development Agreement between Arlington Hospitality, Inc. and AmeriHost Inn Franchising Systems, Inc. (a subsidiary of Cendant Corporation) The following exhibits were included in the Registrant's Report on Form 10-Q filed November 14, 2002: Exhibit No. Description - ----------- ----------- 10.7 Form of Indemnification Agreement executed by independent directors The following exhibits were included in the Registrant's Report on Form 8-K filed December 19, 2002: Exhibit No. Description - ----------- ----------- 10.13 Employment agreement between Arlington Hospitality, Inc. and Jerry H. Herman dated December 19, 2002 The following exhibit was included in the Registrant's Report on Form 10-K filed March 31, 2003: Exhibit No. Description - ----------- ----------- 10.14 Line-of-credit agreement with LaSalle Bank, NA Page 47 The following exhibits were included in the Registrant's Proxy Statement for Annual Meeting of Shareholders filed on September 26, 2003, and are incorporated by reference herein: Exhibit No. Description - ----------- ----------- 10.15 Non-Employee Director Restricted Stock Plan 10.16 Long Term Incentive Plan The following exhibits are included in this Report on Form 10-Q filed November __, 2003: Exhibit No. Description - ----------- ----------- 3.2 By-laws of Arlington Hospitality, Inc. as revised on September 8, 2003 3.3 Amendment to By-laws of Arlington Hospitality, Inc. dated September 8, 2003 10.17 Employment agreement between Arlington Hospitality, Inc. and Stephen Miller dated July 25, 2003 10.18 Amendment to employment agreement between Arlington Hospitality, Inc. and Stephen Miller dated September 10, 2003 10.19 Employment agreement between Arlington Hospitality, Inc. and James B. Dale dated January 12, 2001 and Amendment No. 1 thereto dated October 29, 2001 10.20 Supplemental retention and performance agreement between Arlington Hospitality, Inc. and James B. Dale dated December 1, 2002 10.21 Employment agreement between Arlington Hospitality, Inc. and Richard A. Gerhart dated July 1, 2002 10.22 Supplemental retention and performance agreement between Arlington Hospitality, Inc. and Richard A. Gerhart dated December 1, 2002 31.1 Certification of Chief Executive Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to SEC Rules 13a-15(e) and 15(d)-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Reports on Form 8-K: The Company filed the following reports on Form 8-K during the three months ended September 30, 2003: Date Filed Description - ---------- ----------- August 15, 2003 Press release announcing second quarter 2003 results October 30, 2003 Press release announcing results of the annual shareholder meeting Page 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARLINGTON HOSPITALITY, INC. By: /s/ Jerry H. Herman ------------------------------------ Jerry H. Herman Chief Executive Officer By: /s/ James B. Dale ------------------------------------ James B. Dale Chief Financial Officer Chief Accounting Officer Date: November 14, 2003 Page 49 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 3.2 By-laws of Arlington Hospitality, Inc. as revised on September 8, 2003 3.3 Amendment to By-laws of Arlington Hospitality, Inc. dated September 8, 2003 10.17 Employment agreement between Arlington Hospitality, Inc. and Stephen Miller dated July 25, 2003 10.18 Amendment to employment agreement between Arlington Hospitality, Inc. and Stephen Miller dated September 10, 2003 10.19 Employment agreement between Arlington Hospitality, Inc. and James B. Dale dated January 12, 2001 and Amendment No. 1 thereto dated October 29, 2001 10.20 Supplemental retention and performance agreement between Arlington Hospitality, Inc. and James B. Dale dated December 1, 2002 10.21 Employment agreement between Arlington Hospitality, Inc. and Richard A. Gerhart dated July 1, 2002 10.22 Supplemental retention and performance agreement between Arlington Hospitality, Inc. and Richard A. Gerhart dated December 1, 2002 31.1 Certification of Chief Executive Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 50 EX-3.2 3 c81028exv3w2.txt BY-LAWS, AS REVISED ON SEPTEMBER 8, 2003 AMENDED AND RESTATED 11/2003 Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF ARLINGTON HOSPITALITY, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETING OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held in the City of Des Plaines, State of Illinois, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of meeting. Meetings of stockholders for any other purposes may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 1989, shall be held on the first Tuesday in August, 1989, if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 A.M., or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by plurality vote a Board of Directors, and transact such other business as may properly by brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the Chairman of the Board of Directors, president or secretary at the request in writing of the Chairman of the Board of Directors or a majority of the Board of Directors, or at the request in writing of the stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except at otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole Board shall be not less than five nor more than eleven. The exact number of directors shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. The number of directors may be increased by amendment of these By-laws by the affirmative vote of a majority of the directors, though less than a quorum, or, by the affirmative vote of a majority in interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualify. Section 3. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 4. The business of the corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these by-laws directed or required to be exercised or done by the stockholders. Section 4.5. [ADOPTED 10/22/2002] The Board of Directors may appoint a Director to serve as Chairman of the Board. The Chairman of the Board shall not be an officer of the Corporation, unless specifically designated as an officer by the Board of Directors. The Chairman of the Board shall, if present, preside at all meetings of the stockholders, of the Board of Directors, and of the Executive Committee, if any, and shall designate the acting secretary for such meetings to take the minutes thereof, for delivery to the Secretary. The Chairman of the Board shall have such other powers, authority and duties as may be determined by the Board of Directors. The Chairman of the Board shall be elected by, and may be removed at any time (with or without cause) by, the affirmative vote of a majority of the Board of Directors. MEETINGS OF THE BOARD OF DIRECTORS Section 5. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 6. The first meeting of each newly elected Board of Directors shall follow the annual stockholders' meeting or shall be held at such other time as the Board of Directors shall decide and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 7. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 8. Special meetings of the Board of Directors may be called by the Chairman of the Board or President on two days notice to each director, which notice does not have to specify the purpose of the meeting, either personally, by mail, by telegram or by facsimile; special meetings shall be called by the Chairman of the Board or President or Secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director; in which case, special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of the sole director. Section 9. At all meetings of the Board, a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 11. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 12. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, members of the Board of Directors, or any committee designated by the Board of Directors, or any committee, may participate in a meeting of the Board of Directors or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS Section 12. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one of more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 13. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 14. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS Section 15. Unless otherwise restricted by the Certificate of Incorporation or by law, (i) any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority or shares entitled to vote at an election of directors, and (ii) any director may be removed for cause by a majority of the directors then in office. A director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him. ARTICLE IV NOTICES Section 1. [AMENDED 09/10/2003] Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram, facsimile or electronic transmission. Section 2. [AMENDED 09/10/2003] Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these by-laws, a waiver, whether before or after the time stated therein, shall be deemed equivalent thereto. Such waiver shall be effective as to any stockholder or director if in writing and signed by the person or persons entitled to said notice. A director's attendance at a meeting of the Board of Directors, or any committee thereof, unless such attendance is expressly for the limited purpose of objecting to the validity of the notice for such meeting, shall also be deemed an effective waiver of notice as to such director. ARTICLE V OFFICERS Section 1. [ADOPTED 10/22/2002] The officers of the corporation shall be chosen by the Board of Directors. The Board of Directors may appoint a president, one or more executive vice-presidents, one or more vice-presidents, a secretary and a treasurer. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. Section 2. [ADOPTED 10/22/2002] [Reserved] Section 3. [ADOPTED 10/22/2002] The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4. [ADOPTED 10/22/2002] The salaries of all officers of the corporation shall be fixed by the Board of Directors or a Committee of the Board of Directors or their designee. Section 5. [ADOPTED 10/22/2002] The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time without cause and without notice by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. Section 6. [ADOPTED 10/22/2002] [Reserved] Section 7. [ADOPTED 10/22/2002] The President. Unless the Board of Directors determines otherwise, the President shall [report to the Board of Directors] and shall be the chief executive officer of the corporation and on a day to day basis shall, subject to the direction of the Board of Directors, be in charge of (i) the active management of the business, property, operations and affairs of the corporation, (ii) the direction and supervision of the other officers. The President shall also assume an active role in planning and policy making for the corporation and such other duties as the Board of Directors may assign to him from time to time. The President may sign, with the Secretary, any Assistant Secretary, Treasurer or any Assistant Treasurer, certificates for shares of the corporation, and may sign any policies, contracts, deeds, mortgages, bonds, or other instruments which the Board of Directors have authorized to be executed, except in those cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these By-Laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; appoint and discharge agents and employees of the corporation and, in general, shall perform all duties incident to the office of president. The President shall be responsible for ensuring that all orders and resolutions of the Board of Directors are carried out and shall make such reports on the affairs of the Company as the Board of Directors may from time to time require. THE EXECUTIVE VICE PRESIDENT Section 8. The Executive Vice President shall assist the Chairman of the Board and the President in the discharge of their duties as they may direct and shall perform such other duties as from time to time may be assigned by the Board of Directors. The Executive Vice President shall assist the President in the direction and supervision of other officers and in corporate planning and policy making. In the absence of the President or in the event of his inability or refusal to act, the Executive Vice President shall perform the duties of the President, and when so acting, shall have the powers of and be subject to all the restrictions upon the President. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the corporation or a different mode of execution is expressly prescribed by the Board of Directors or these By-Laws, the Executive Vice President may execute for the corporation certificates for its shares and any policies, contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, and he may accomplish such execution either under or without the seal of the corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors, according to the requirements of the form of the instrument. THE VICE PRESIDENTS Section 9. The Vice President (or in the event there be more than one Vice President, each of the Vice Presidents) shall assist the Chairman of the Board, the President and the Executive Vice President in the discharge of their duties as they may direct and shall perform such other duties as from time to time may be assigned by the Chairman of the Board, the President and the Executive Vice President or by the Board of Directors. In the absence of the President, the Executive Vice President and the Chairman of the Board or in the event of their inability or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or by the President if the Board of Directors has not made such a designation, or in the absence of any designation, then in the order of seniority of tenure as vice president) shall perform the duties of the President, and when so acting, shall have the powers of and be subject to all the restrictions upon the President. Solely in those instances in which the authority to execute is expressly delegated to the Vice President (or each of them if there are more than one), the Vice President (or each of them if there are more than one) may execute for the corporation any policies, contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, and he may accomplish such execution either under or without the seal of the corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors, according to the requirements of the form of the instrument. THE TREASURER Section 10. The Treasurer shall be the principal accounting and chief financial officer of the corporation. He shall: (a) have charge of and be responsible for the maintenance of adequate books of account for the corporation; (b) have charge and custody of all funds and securities of the corporation, and be responsible therefor and for the receipt and disbursement thereof; and (c) perform all the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board, the President or by the Board of Directors. If required by the Board of Directors, the Treasurer shall, at the corporation's expense, give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors may determine. THE SECRETARY Section 11. The Secretary shall: (a) record the minutes of the stockholders' and of the Board of Directors' meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder; (e) sign with the President or the Executive Vice President, or any other officer thereunto authorized by the Board of Directors, certificates for shares of the corporation, the issue of which shall have been authorized by the Board of Directors, and any policies, contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, according to the requirements of the form of the instrument, except when a different mode of execution is expressly prescribed by the Board of Directors or these By-Laws; (f) have general charge of the stock transfer books of the corporation; (g) perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or by the Board of Directors. VICE CHAIRMAN, ASSISTANT VICE PRESIDENTS, ASSISTANT TREASURERS, AND ASSISTANT SECRETARIES Section 12. The Vice Chairman, Assistant Vice Presidents, Assistant Treasurers, and Assistant Secretaries shall perform such duties as shall be assigned to them by the Chairman of the Board of Directors, the Executive Vice President, Vice Presidents, Treasurer or the Secretary, respectively, or by the President or the Board of Directors. The Assistant Secretaries may sign with the Chairman of the Board of Directors, the President, the Executive Vice President, or a Vice President, or any other officer thereunto authorized by the Board of Directors, certificates for shares of the corporation, the issue of which shall have been authorized by the Board of Directors, and any contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, according to the requirements of the form of the instrument, except when a different mode of execution is expressly prescribed by the Board of Directors or these By-Laws. The Assistant Treasurers shall, if required by the Board of Directors and at the corporation's expense, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. ARTICLE VI CERTIFICATE OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman of the Board of Directors, or the President, or the Executive Vice President or any other officer thereunto authorized by the Board of Directors and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shared owned by him in the corporation. Section 2. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The Board of Directors or the transfer agent may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors or the transfer agent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate of certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the other certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Director may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS Section 3. All checks or demand for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. INDEMNIFCATION Section 7. The corporation shall indemnify and advance its officers, directors, employees and agents to the fullest extent permitted by the General Corporation Law of Delaware, as amended (the "Act"), provided, however, the indemnification and advancement of expenses provided by or granted pursuant to the Act shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding such office. The indemnification and advancement of expenses shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VIII AMENDMENTS Section 1. These by-laws may be altered, amended or repealed or new by-laws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if, in the event of a stockholders' meeting, notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such special meeting. If the power to adopt, amend or repeal by-laws is conferred upon the Board of Directors by the Certificate of Incorporation, it shall not divest or limit the power of the stockholders to adopt, amend or repeal by-laws. AMENDMENT TO BYLAWS OF ARLINGTON HOSPITALITY, INC. ADOPTED BY THE BOARD OF DIRECTORS ON JUNE 27, 2002 - -------------------------------------------------------------------------------- CORPORATE GOVERNANCE PROVISIONS 1. At least two-thirds of the members of the board of directors (the "Board") shall be independent. For purposes of any action of the Board, at least one-half of the directors present and eligible to vote must be independent. An independent director means a person who: (a) has not been an employee of the Company or any of its subsidiaries for the previous three years; (b) is not affiliated with a significant customer or supplier of the Company ("significant" means more than 1% of annual sales); (c) is not employed by an entity and has not had, during the past two years, any interest in any significant transaction with the Company and/or any executive officer, or any business or financial relationship with the Company and/or any executive officer, or an affiliate of the Company (other than service as a director) for which the Company has been required to make disclosure under Regulation S-K of the Securities and Exchange Commission; (d) is not a relative of an executive officer or director of the Company; (e) receives no compensation from the Company other than director's fees; (f) does not personally receive and is not an employee, director, or trustee of a foundation, university, or other institution that receives grants or endowments from the Company that are material to the Company or to either the recipient and/or the foundation, university or institution; or, (g) is not employed by an entity of which (i) an executive officer of the Company serves as a director or trustee, or (ii) a director of the Company serves in a senior executive capacity. 2. There shall be an Audit Committee of the Board, composed entirely of independent directors, which shall oversee the Company's financial reporting process and internal controls, review compliance with laws and accounting standards, recommend the appointment of public accountants, and provide a direct channel of communication to the Board for public accountants, internal auditors and finance officers. This Committee will be required to meet at least four times per year. 3. There shall be a Compensation Committee of the Board, composed entirely of independent directors, which shall be responsible for (a) ensuring that senior management will be accountable to the Board through the effective application of compensation policies, and (b) monitoring the effectiveness of senior management. The Compensation Committee shall establish compensation policies applicable to the Company's executive officers. A fair summary of such policies and the relationship of corporate performance to executive compensation, including the factors and criteria upon which the Chief Executive Officer's compensation was based, shall be disclosed to shareholders in the Company's proxy statement for the annual meeting. This Committee will be required to meet at least two times per year and conduct written reviews of at least the CEO and the CFO (with respect to Board performance). Page 1 of 2 4. There shall be a Corporate Governance Committee of the Board, composed entirely of independent directors, which shall be responsible for: I. Reviewing all related-party transactions involving the Company, and considering and making recommendations to the full Board with respect to all proposals involving (a) a change in control, or (b) the purchase or sale of assets constituting more than 10% of the Company's total assets. Additionally, this Committee shall be responsible for reviewing all transactions or proposed transactions that trigger the Company's shareholders' rights plan, if any. The Committee will then make a recommendation to the full Board. II. Evaluation and nomination of all new prospective Board members. Any interested party should be directed to this Committee for evaluation and review. This Committee will then recommend to the full Board for their approval any nominee to serve as a Director of the Company. III. Review all disclosed related party transactions between Board members. Any Board member that desires to do business with any other Board member must first submit to this Committee a detailed plan of the proposed business dealing. This Committee will be responsible to analyze the proposed business dealing, explain it to the full Board and make a recommendation to the full Board. IV. Create the format to review each of the Board members. The reviews will be conducted on a yearly basis in accordance with the format that this committee designs. The results of the reviews will be distributed to all Board members for their review and consideration. This Committee will be required to meet at least four times per year. Any existing Board member, excluding management of the Company, will be deemed to be independent until December 31, 2004, at which time they must qualify under these provisions. 5. The foregoing provisions are adopted as part of the Bylaws of the Company and cannot be amended or repealed without either (a) approval by the stockholders of the Company, or (b) approval by a two-thirds majority of all the directors of the Company. Any inconsistent provisions of the Bylaws are hereby modified to be consistent with these provisions. The foregoing provisions, insofar as they establish eligibility to serve as a director or as a committee member, shall not have the effect of removing any director or committee member from office but shall be given effect at the next election of directors and the next selection of committee members, as the case may be. The foregoing provisions shall not be construed to limit or restrict the effective exercise of statutory cumulative voting rights by any shareholder, but the Corporate Governance Committee shall not nominate candidates for election to the Board except as may be consistent with such provisions, and no corporate funds may be expended for the solicitation of proxies which are inconsistent with the foregoing provisions. [END] Page 2 of 2 EX-3.3 4 c81028exv3w3.txt AMENDMENT TO BY-LAWS, DATED SEPTEMBER 8, 2003 EXHIBIT 3.3 AMENDMENT TO BY-LAWS OF ARLINGTON HOSPITALITY, INC. I, James B. Dale, Secretary of Arlington Hospitality, Inc. (the "Corporation"), hereby certify that the Board of Directors of the Corporation approved the following amendment to the by-laws of the Corporation at a meeting of the Board of Directors on September 10, 2003, and that such amendment is effective as of September 10, 2003: Article IV of the by-laws is hereby amended to read in its entirety as follows: ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram, facsimile or electronic transmission. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these by-laws, a waiver, whether before or after the time stated therein, shall be deemed equivalent thereto. Such waiver shall be effective as to any stockholder or director if in writing and signed by the person or persons entitled to said notice. A director's attendance at a meeting of the Board of Directors, or any committee thereof, unless such attendance is expressly for the limited purpose of objecting to the validity of the notice for such meeting, shall also be deemed an effective waiver of notice as to such director. By: /s/ James B. Dale ------------------------------------ James B. Dale, Secretary of Arlington Hospitality, Inc. EX-10.17 5 c81028exv10w17.txt EMPLOYMENT AGREEMENT - STEPHEN MILLER EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 25th day of July, 2003 by and between ARLINGTON HOSPITALITY, INC., a Delaware corporation (the "Company"), and STEPHEN K. MILLER ("Employee"). RECITALS: A. The Company is in the business of developing, owning and managing economy hotels and limited service hotels. Each such hotel which during the term of this Agreement is either owned or managed in whole or part by the Company or one of its subsidiaries or other Affiliates (as defined below) is referred to individually as a "Hotel" or collectively, as the "Hotels"). B. The Company desires to employ Employee and Employee desires to be employed by the Company, subject to the terms, conditions and covenants hereinafter set forth with the initial position of Employee set forth in Section 1.1 or such other title and responsibilities as the Company shall designate from time to time (the "Position"). C. As a condition of the Company's employing Employee, Employee has agreed not to compete with the Company and not to solicit the Company's key financing sources, investors, vendors, customers or employees, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and the agreements, covenants and conditions set forth herein, Employee and the Company hereby agree as follows: ARTICLE I EMPLOYMENT 1.1 Employment. The Company hereby employs, engages and hires Employee, and Employee hereby accepts employment with the Company for the Position, upon the terms and conditions set forth in this Agreement, and subject to such job responsibilities as allocated from time to time by the Company's President, or such other person(s) or entity directing the business affairs of the Company. Employee's title shall be Senior Vice President - Real Estate and Business Development. 1.2 Activities and Duties During Employment. Employee represents and warrants to the Company that Employee is free to accept employment with the Company and that Employee has no prior or other commitments or obligations of any kind to anyone else which would hinder or interfere with the acceptance and performance of his obligations under this Agreement. Employee accepts the employment described in Article I of this Agreement and agrees to devote his exclusive full time and efforts to the faithful and diligent performance of the services described herein, including the performance of such other services and responsibilities as the Company may, from time to time, stipulate. Notwithstanding the foregoing, Employee may: (i) serve on the board of directors of one company that is not publicly traded (provided he does not serve as an officer or as chairman of the board of such company), or serve as an officer (other than president) or on the board of directors (provided he does not serve as chairman of the board) of one hobby, avocation, civic, educational, professional or charitable organization, provided that such service does not materially interfere or conflict with his duties hereunder, and, provided further that Employee may serve as director of additional non-public companies or as an officer or director of additional hobby, avocation, civic, educational, professional or charitable organizations with the Company's consent; and (ii) subject to Section 4.2, make and manage personal investments of his choice. ARTICLE II TERM 2.1 Term. The term of employment under this Agreement shall be for the period commencing effective as of August 19, 2003 and ending December 31, 2005. The period of Employee's employment hereunder is referred to as the "Employment Term." 2.2 Cessation of Rights and Obligations; Survival of Certain Provisions. On the date of expiration or earlier termination of the Employment Term for any reason, all of the respective rights, duties, obligation and covenants of the parties, as set forth herein, shall, except as specifically provided herein to the contrary, cease and become of no further force or effect as of the date of said termination, and shall only survive as expressly provided for herein. 2.3 Termination by the Company for Cause. The Company has the right, at any time by serving notice, to terminate Employee's employment under this Agreement and to discharge Employee with or without "Cause" (as hereinafter defined). If Company terminates Employee with "Cause," then Company's obligation to Employee shall be limited to the payment and/or satisfaction of unpaid base salary and expense reimbursements accrued up to the effective date specified in the Company's termination notice. Employee shall also be permitted to maintain health insurance benefits for himself and covered dependents pursuant to COBRA commencing on the date Employee's employment is terminated. As used in this Section 2.3, the term "Cause" shall mean and include: (a) misappropriation of any money or other assets or properties of the Company or any subsidiary of the Company other than an isolated, insubstantial and unintentional misappropriation which is promptly remedied by Employee after receipt of written notice thereof given by the Company; (b) material breach by Employee of the terms of this Agreement after a written demand for substantial performance is delivered to Employee by the Company which specifically identifies the manner in which the Company believes that Employee has not substantially performed his duties and such breach is not remedied within fifteen (15) days after receipt of such written notice; and (c) illegal conduct or conduct which adversely impacts the reputation or business of the Company. 2 2.4 Severance Upon Termination Without Cause. If the Company terminates Employee's employment without Cause (other than pursuant to Section 2.5) effective as of a date three (3) months or more prior to the end of the Employment Term, it shall continue to pay Employee the base salary specified in Exhibit A for a period ending on the lesser of six (6) months after the termination or the end of the Employment Term. If the Company terminates Employee's employment without Cause (other than pursuant to Section 2.5) effective as a date less than three (3) months prior to the end of the Employment Term, it shall make a severance payment to Employee equal to three (3) months of the base salary specified in Exhibit A. 2.5 Termination for Failure to Relocate. If Employee does not relocate to the Chicago metropolitan area within six (6) months of the commencement of the Employment Term, the Company has the right to terminate Employee without Cause, provided, however, that if Employee has listed his current home for sale at a competitive price with a recognized real estate broker doing business in Employee's housing market and is unable to sell his home during such six (6) month period, such six (6) month period shall be extended for an additional three (3) months. If Company terminates Employee pursuant to this Section 2.5, the Company's obligation to Employee shall be limited to: (i) the payment and/or satisfaction of unpaid base salary and expense reimbursements accrued up to the effective date specified in the Company's termination notice; and (ii) severance compensation equal to three (3) months salary. Employee shall also be permitted to maintain health insurance benefits for himself and covered dependents pursuant to COBRA commencing on the date Employee's employment is terminated. 2.6 Voluntary Termination. If Employee voluntarily terminates his employment, Employee agrees to provide the Company with at least sixty (60) days written notice and he shall be entitled to no severance compensation. 2.7 Business Expenses. (a) Reimbursement. The Company shall reimburse Employee for all reasonable, ordinary, and necessary business expenses incurred by him in connection with the performance of his duties hereunder including, but not limited to, ordinary and necessary travel expenses and entertainment expenses. The reimbursement of business expenses will be governed by the Company's policies and the terms otherwise set forth herein or as modified by the Company from time to time. (b) Accounting. Employee shall provide the Company with an accounting of his expenses, which accounting shall clearly reflect which expenses were incurred for proper business purposes in accordance with the policies adopted by the Company and as such are reimbursable by the Company. Employee shall provide the Company with such other supporting documentation and other substantiation of reimbursable expenses as will conform to Internal Revenue Service or other requirements. All such reimbursements shall be payable by the Company to Employee within a reasonable time after receipt by the Company of appropriate documentation therefor. 3 ARTICLE III COMPENSATION AND BENEFITS 3.1 Compensation. During the Employment Term, the Company shall pay Employee such base salary and bonus as set forth on Exhibit A, the terms of which are incorporated by reference herein; however, the Company shall not be obligated to pay any bonus to Employee pursuant to this Agreement unless Employee remains in the employ of the Company for the full term of the period over which the bonus is measured and the Company in its sole discretion (which shall be binding upon Employee) determines that all the criteria for the bonus are met (or in its sole discretion waives one or more criteria). 3.2 Relocation. The Company shall pay Employee's reasonable expenses of relocating from Employee's current home to the Chicago, Illinois, metropolitan area, up to a maximum of Twenty-Five Thousand Dollars ($25,000), provided that the Company shall have no obligation to pay such expenses unless Employee has relocated to the Chicago metropolitan area within six (6) months of the commencement of the Employment Term (or nine (9) months if the six (6) month period described in Section 2.5 is extended as described therein). Such expenses shall include moving, travel, temporary residence (such as a hotel or apartment) and similar expenses, but shall not include any expenses relating to the sale of any residence. All claims for reimbursement of expenses under this Section 3.2 shall be supported by receipts or other appropriate documentation. 3.3 Stock Option. Employee shall have the right to purchase up to 25,000 shares of common stock of Company (the "Purchase Right Shares") for a period of thirty (30) days from August 19, 2003, at a purchase price per share equal to the greater of: (i) $3.18 per Share; (ii) the closing price of Company's common stock as quoted in The Wall Street Journal for August 18, 2003 or, if no stock transfer occurred on such date, the closing price as quoted aforesaid on the next prior day in which Company's common stock traded on the public markets; or (iii) if a Company press release is issued announcing Employee's hiring, the closing price of Company's common stock as quoted in The Wall Street Journal on the last trading day immediately preceding the Company's issuance of such release. In order to exercise the purchase rights contained in this Section 3.3, Employee must tender to the Company written notice of exercise specifying the number of shares he wishes to purchase together with good funds (in the form of cashier's or certified check, wire transfer or other form of payment acceptable to the Board) within the applicable thirty (30) day period, which notice must be delivered at least four (4) business days prior to the scheduled stock purchase. The Company shall issue and deliver the certificates for all shares purchased per this Section 3.3 promptly following such purchase and such certificates shall contain the Company's customary restrictive legend for privately issued shares. 3.4 Payment. All compensation shall be payable in intervals in accordance with the general payroll payment practice of the Company. The compensation shall be subject to such withholdings and deductions by the Company as are required by law. 3.5 Leave. Employee shall be entitled to up to two (2) weeks paid leave (for illness and/or vacation) during calendar year 2003 (prorated over the four and one-half (4 1/2) months of 4 2003), and three (3) weeks of paid leave (for illness and vacation) during each calendar year thereafter (prorated for partial years). In addition Employee shall, during the Employment Term, be entitled to standard sick leave and personal days as are provided for the in the Company's employee manual. Any leave not taken during a particular year shall lapse. Employee shall not be entitled to cash for vacation time not taken. 3.6 Other Benefits. (a) On the first (1st) day of the first (1st) calendar month following the sixtieth (60th) day of Employee's employment, Employee will be eligible to enroll in the Company's health plan. On the first (1st) day of the first (1st) calendar month following the thirtieth (30th) day of Employee's employment, Employee will be eligible to enroll in the Company's dental plan. The costs of enrollment in the health and dental plans shall depend on the level of coverage chosen by Employee, in accordance with the Company's standard cost-sharing allocations; (b) On the first day of the first calendar month following the commencement of Employee's employment, Employee will be eligible for coverage under the Company's life insurance and disability plans, with additional term life insurance provided on a basis commensurate with that of other senior executives of the Company; and (c) Employee will become eligible to enroll in the Company's 401(k) Retirement and Savings Plan upon completion of one (1) year's continuous employment with the Company, upon the terms and conditions set forth in such plan. Notwithstanding the forgoing, the Company shall be under no obligation to institute or continue the existence of any such benefit plan. ARTICLE IV NON-SOLICITATION AND NON-COMPETE 4.1 Confidentiality Covenant. Employee hereby acknowledges and agrees that the duties and services to be performed by Employee under this Agreement are special and unique and that as of a result of the employment hereunder, Employee will acquire, develop and use information of a special and unique nature and value that is not generally known to the public or to the Company's industry, including, but not limited to, sources of financing, identity of investors, joint venture partners and Hotel purchasers, terms and conditions of financing contracts and investments of the Company and its Affiliates, cost and pay structures for Company employees, operations and Hotels, Hotel designs, Hotel construction methods, records, phone locations, e-mail addresses, documentation, software programs, price lists, customer lists, prospect lists, contractual relationships, contract prices for the Company's services, business plans and prospects of the Company, equipment configurations, ledgers and general information, employee records, mailing lists, accounts receivable and payable ledgers, financial and other records of the Company or its Affiliates, and other similar matters (all such information being hereinafter referred to as "Confidential Information"). "Confidential Information" shall not include information that Employee can prove (a) was known to him prior to his receipt of such information from Company; (b) became generally publicly known other than by Employee's 5 direct or indirect act; (c) was rightfully disclosed to Employee by a third party without restriction; or (d) was independently developed by Employee (and is supported by written evidence) without use of or access to the Confidential Information. Employee further acknowledges and agrees that the Confidential Information is of great value to the Company and its affiliates and that the restrictions and agreements contained in this Agreement are reasonably necessary to protect the Confidential Information and the goodwill of the Company. Accordingly, Employee hereby agrees that: (a) Employee will not, while employed by the Company or for thirty (30) months thereafter, directly or indirectly, except in connection with Employee's performance of the duties under this Agreement, or as otherwise authorized in writing by the Company for the benefit of the Company or its "Affiliates" (as hereinafter defined), divulge to any person, firm, corporation, limited liability company, or organization, other than the Company or its Affiliates (hereinafter referred to as "Third Parties"), or use or cause or authorize any Third Parties to use, the Confidential Information, except as required by law; and (b) Upon the termination of Employee's employment for any reason whatsoever, Employee shall deliver or cause to be delivered to the Company any and all Confidential Information, including all computers, drawings, notebooks, notes, records, keys, disks data and other documents and materials belonging to the Company or its Affiliates and all copies thereof and all abstracts thereof which are in his possession or under his control relating to the Company or its Affiliates, regardless of the medium upon which it is stored, and will deliver to the Company upon such termination of employment any other property of the Company or its Affiliates which is in his possession or control. 4.2 Non-Solicitation Covenants. During Employee's employment with Company or any of its Affiliates and for one year thereafter, Employee shall not, directly or indirectly without Company's prior written consent: (a) solicit, divert or take away, any Customer for purposes of, or with respect to, selling a product or service which competes with the Business of Company and its related entities and Affiliates or which is otherwise unrelated to furthering of the Business of the Company; or (b) take any affirmative action in regard to establishing or continuing a relationship with a Customer for purposes of making, or which directly or indirectly results in, a sale of a product or service which competes with the Business of Company and its related entities and affiliates. For purposes of this Agreement, a "Customer" shall be deemed to include any person or entity who has done business with the Company or any of its Affiliates within the twelve (12) month period immediately preceding: (i) the action by Employee while in the employ of the Company or its Affiliates; or 6 (ii) the date of termination of Employee's employment if he is no longer in the employ of the Company or its Affiliates. "Business of Company" shall include any business activities related to the development, ownership and/or management of economy hotels, mid-scale hotels without food and beverage and limited service hotels. 4.3 Non-Solicitation of Employees; Financing Sources. During the Term, and for a period of one (1) year following termination of Employee's employment with Company or any of its Affiliates, Employee shall not, directly or indirectly: (a) recruit or hire, or attempt to recruit or hire (as an employee, independent contractor, consultant or otherwise), any employee of Company or its related entities and Affiliates who was employed by Company or its related entities and affiliates during the Term and who is actively employed at the time of solicitation or attempted solicitation; or (b) except on behalf of Company or its Affiliates, solicit equity funding with respect to any hotel project involving any of the "Brands" (as that term is enumerated in Exhibit A) from a source (other than an entity listed on Exhibit B) which directly or indirectly through itself or an affiliate: (i) has provided $5,000,000 or more of equity funding to or for the benefit of Company or any of its related entities or affiliates (but only if such amount constitutes greater than fifty percent (50%) of the equity funding provided by such source to the Brands at the time of such solicitation); or (ii) has purchased or sold a hotel property from or to (as the case may be) Company or any of its related entities or affiliates (but only if the purchasing and selling of the Brands comprises greater than fifty percent (50%) of such source's business at the time of such solicitation). 4.4 Non-Competition. Employee agrees that, during the Term and for a period of one (1) year following the termination of Employee's employment by Company (subject to the provisos contained at the end of this Section 4.4) for whatever reason, with or without "cause" or otherwise, Employee will not, directly or indirectly, expressly or tacitly, for himself or on behalf of any entity anywhere within the United States: (a) act as an officer, director, manager, advisor, executive, controlling shareholder, or consultant to any business in which his duties at or for such business include oversight of or actual involvement in providing (A) services which are competitive with the Business of the Company (including any of its related entities or affiliates), or (B) services or products being provided or which are being produced or developed by Company or its related entities and affiliates, or are under active investigation by Company or its related entities and affiliates at the time of termination of his employment, provided that such services or products relate directly to the Business of the Company; or (b) become employed by such an entity in any capacity which would require Employee to carry out, in whole or in part, the duties Employee has performed for 7 Company or its related entities and affiliates which are competitive with the Business of the Company (including any of its related entities or affiliates) or services or products being provided or which are being produced or developed by Company its related entities and affiliates, or are under active investigation by Company or its related entities and affiliates at the termination of his employment, provided that such services or products relate directly to the Business of the Company. Notwithstanding anything to the contrary contained herein, the restrictive covenants contained in this Section 4.4 shall not apply in the event of discharge of Employee without Cause, unless in such event Company continues to pay Employee the amounts set forth in Section 2.4. Notwithstanding anything to the contrary contained herein, any employment of Employee or provision of services by Employee following termination of employment by Company, its related entities or affiliates to any hotel franchisor, hotel owner or hotel operator other than to: (i) any division of a franchisor of hotel Brands listed on Exhibit A solely devoted to one or more of such Brands; (ii) any hotel owner or operator of more than five (5) AmeriHost Inn hotels; or (iii) any hotel owner or operator whose portfolio of hotels is comprised of more than fifty percent (50%) of the hotel Brands listed on Exhibit A (such a position described in (1), (2) and (3) above sometimes referred to as a "Competitive Position"), shall not be deemed to constitute a violation of the restrictive covenants contained in this Section 4.4. For purposes of clarification, the Company acknowledges that the preceding sentence permits Employee, following termination of his employment with the Company, its related entities or affiliates, to provide services to a division of a franchisor of a Brand listed on Exhibit A so long as such division is not solely devoted to one or more Brands listed on Exhibit A. For example, this sentence would permit Employee to perform services for a division of Marriot International, Inc. (the franchisor of Fairfield Inn) not affiliated with the Fairfield Inn Brand and not solely devoted to one or more of the other Brands listed on Exhibit A. 4.5 Remedies. (a) Injunctive Relief. Employee expressly acknowledges and agrees that the Business of the Company is highly competitive and that a violation of any of the provisions of Sections 4.1, 4.2, 4.3 or 4.4 would cause immediate and irreparable harm, loss and damage to the Company not adequately compensable by a monetary award. Employee further acknowledges and agrees that the time periods and territorial areas provided for herein are the minimum necessary to adequately protect the Business of the Company and the goodwill of the Company. Without limiting any of the other remedies available to the Company at law or in equity, or the Company's right or ability to collect money damages, Employee agrees that any actual or threatened violation of any of the provisions of Sections 4.1, 4.2, 4.3 or 4.4 may be immediately restrained or enjoined by any court of competent jurisdiction, and that a temporary restraining order or emergency, preliminary or final injunction may be issued in any court of competent jurisdiction, without notice and without bond. Notwithstanding anything to the contrary contained in 8 this Agreement, the provisions of this Article IV shall survive the termination of Employee's employment. (b) Enforcement. It is the desire of the parties that the provisions of Sections 4.1, 4.2, 4.3 or 4.4 be enforced to the fullest extent permissible under the laws and public policies in each jurisdiction in which enforcement might be sought. Accordingly, if any particular portion of Sections 4.1, 4.2, 4.3 or 4.4 shall ever be adjudicated as invalid or unenforceable, or if the application thereof to any party or circumstance shall be adjudicated to be prohibited by or invalidated by such laws or public policies, such section or sections shall be (i) deemed amended to delete therefrom such portions so adjudicated or (ii) modified as determined appropriate by such a court, such deletions or modifications to apply only with respect to the operation of such section or sections in the particular jurisdictions so adjudicating on the parties and under the circumstances as to which so adjudicated. (c) Legal Fees. In any action to enforce the terms of this Agreement, each party shall be responsible for his, her or its own legal fees and costs. 4.6 Definition of Affiliates. As used in this Agreement, "Affiliates" shall have the same meaning as under Rule 405 of the Securities Act of 1933, as amended. 4.7 Quit Claims. By execution of this Agreement, Employee: (i) assigns and quit claims to the Company all right, title and interest as relates to the Business of the Company in any patentable or potentially patentable invention or design within the meaning of Title 35 of the United States Code, and any utility or design created or discovered by Employee during the course of his employment with the Company; and (ii) agrees that if during the course of his employment by the Company, he discovers, invents or produces, without limitation, any information, formulae, product, device, software, system, technique, drawing, program or process, which is a "trade secret" within applicable law or deemed to be such in the opinion of the Company's managers, such information, formulae, product, device, system, technique, drawing, program or process shall be assigned to the Company. Employee agrees to fully cooperate with the Company in protecting the value and secrecy of any such trade secrets, and further agrees to execute any and all documents the Company deems necessary to document any such assignment to the Company. Employee designates the Company his attorney-in-fact to execute any documents the Company may deem necessary that relates to any such trade secret or assignment thereof to the Company. Notwithstanding anything to the contrary herein, this Agreement does not apply to any invention for which no equipment, supplies, facility or trade secret information of the Company was used and which was developed entirely on Employee's own time, unless: (a) the invention relates: (i) to the Business of the Company; or (ii) to the Company's actual demonstrably anticipated research or development; or (b) the invention results from any work performed by Employee for the Company. 9 ARTICLE V MISCELLANEOUS 5.1 Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given, delivered and received: (a) when delivered, if delivered personally; (b) four (4) days after mailing, when sent by registered or certified mail, return receipt requested and postage prepaid; (c) one (1) business day after delivery to a private courier service, when delivered to a private courier service providing documented overnight service; and (d) on the date of delivery if delivered by telecopy, receipt confirmed, provided that a confirmation copy is sent on the next business day by first class mail, postage prepaid, in each case addressed as follows: TO EMPLOYEE, AT: His home address as reflected on the Company's records. TO COMPANY, AT: Arlington Hospitality, Inc. 2355 South Arlington Heights Road - Suite 400 Arlington Heights, IL 60005 Attention: President Facsimile: 847-228-5422 WITH A COPY TO: Shefsky & Froelich Ltd. 444 North Michigan Avenue - Suite 2500 Chicago, IL 60611 Attention: Mitchell D. Goldsmith, Esq. Facsimile: 312-527-3194 E-Mail: mgoldsmith@shefskylaw.com AND A COPY TO: The Company c/o its general counsel. Any party may change its address for purposes of this paragraph by giving the other party written notice of the new address in the manner set forth above. 5.2 Entire Agreement; Amendments, Etc. This Agreement contains the entire agreement and understanding of the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. Except as provided in Sections 4.3(b) or 5.5 above, no modification, amendment, waiver or alteration of this Agreement or any provision or term hereof shall in any event be effective unless the same shall be in writing, executed by both parties hereto, and any waiver so given shall be effective only in the specific instance and for the specific purpose for which given. 5.3 Benefit. This Agreement shall be binding upon, and inure to the benefit of, and shall be enforceable by, the heirs, successors, legal representatives and permitted assignees of Employee and the successors, assignees and transferees of the Company. This Agreement or any 10 right or interest hereunder may not be assigned by Employee without the prior written consent of the Company. This Agreement is assignable by the Company to any entity which acquires all or substantially all of the assets of the Company. 5.4 No Waiver. No failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder or pursuant hereto shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder or pursuant thereto. 5.5 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law but, if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. If any part of any covenant or other provision in this Agreement is determined by a court of law to be overly broad thereby making the covenant unenforceable, the parties hereto agree, and it is their desire, that the court shall substitute a judicially enforceable limitation in its place, and that as so modified the covenant shall be binding upon the parties as if originally set forth herein. 5.6 Compliance and Headings. Time is of the essence of this Agreement. The headings in this Agreement are intended to be for convenience and reference only, and shall not define or limit the scope, extent or intent or otherwise affect the meaning of any portion hereof. 5.7 Governing Law. The parties agree that this Agreement shall be governed by, interpreted and construed in accordance with the laws of the State of Illinois. All parties hereto waive their right to trial by jury with respect to the adjudication of any dispute hereunder. 5.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original and all of which together will constitute one and the same instrument. 5.9 Recitals. The Recitals set forth above are hereby incorporated in and made a part of this Agreement by this reference. 11 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be effective as of the day and year first above written. COMPANY: EMPLOYEE: ARLINGTON HOSPITALITY, INC. /s/ Stephen K. Miller -------------------------------------- STEPHEN K. MILLER By: /s/ Jerry H. Herman Address: 1360 French Creek Drive ------------------------------ Wayzata, MN 55391 Its: President ------------------------------ Date of Execution: 7-25-03 Date of Execution: 7-26-03 ---------------- ------------------- 12 EXHIBIT A EMPLOYMENT AGREEMENT - ARLINGTON HOSPITALITY, INC. AND STEPHEN K. MILLER COMPENSATION 1. Base Salary. During the Employment Term, the Company shall pay Employee a base salary ("Base Salary") of One Hundred and Seventy-Five Thousand Dollars ($175,000) per year, payable in increments as is customarily paid by the Company. The Company shall review the Base Salary annually. 2. Bonus. Employee shall be eligible and entitled to earn a bonus comprised of a "Cash Bonus" and an "Equity Performance Bonus," as follows: (a) In the 2004 calendar year, Employee shall be paid a total bonus sliding on a scale range (the "2004 Bonus") such that if the objectives set forth in Section 2(c)(i) are achieved, equal to approximately 50% of Base Salary, with the precise amount of the 2004 Bonus to be determined by the Company's Chief Executive Officer ("CEO") in his discretion (subject to mandates, if any, from the Board of Directors or its Compensation Committee). Employee shall also be eligible to receive, in addition to the 2004 Bonus, a Supplemental 2004 Bonus as set forth in Section 2(d). (b) Allocation of 2004 Bonus. If the 2004 Bonus is earned pursuant to the terms of this Section 2, forty percent (40%) of such 2004 Bonus shall be in the form of a cash payment and sixty percent (60%) in the form an Equity Performance Bonus (as defined below). (c) Bonus Components. The payment of the 2004 Bonus shall depend upon achievement of the following objectives: (i) Up to twenty percent (20%) of the 2004 Year Bonus shall be earned upon the Company's selling the number of Hotels at the prices in the aggregate established by the Company as part of Operation Sell (as that program is in existence and modified from time to time as determined by the CEO, subject to mandates, if any, from the Board of Directors or its Compensation Committee); (ii) Up to forty percent (40%) of the 2004 Year Bonus shall be earned upon the Company's and/or Affiliates' acquiring land and/or existing hotels, and commencing construction on any new developments, pursuant to the Company's budget goals and its underwriting criteria for 2004 (as those goals and criteria are modified from time to time as determined by the CEO, subject to mandates, if any, from the Board of Directors or its Compensation Committee); and (iii) Up to forty percent (40%) of the 2004 Year Bonus shall be earned upon project specific (i.e., entities formed to acquire or develop Hotels) subsidiaries or Affiliates of the Company (collectively, "New Ventures") raising capital in the form of equity from new partners, members or other sources ("New Equity"), pursuant to the Company's budget goals for 2004. A-1 It is further understood that a portion of such Bonus Components shall be subject to overall Company and/or development segment EBITDA budget goals for 2004. (d) Supplemental 2004 Bonus. If in the CEO's reasonable discretion, Employee plays a significant leadership role in the oversight and execution of New Ventures raising New Equity in an amount greater than Four Million Dollars ($4,000,000) in the 2004 calendar year, a "Supplemental 2004 Bonus" will be payable as follows: (i) 0.40% of each dollar received during 2004 between $4 million to $6 million; (ii) 0.50% of each dollar received during 2004 between $6 million to $7 million; (iii) 0.65% of each dollar received during 2004 between $7 million to $8 million; and (iv) 0.80% of each dollar received during 2004 in excess of $8 million. Any Supplemental 2004 Bonus will be paid in accordance with the percentage allocation between a Cash Payment and Equity Performance Bonus set forth in Section 2(b). (e) Equity Performance Bonus. "Equity Performance Bonus" shall be an award to Employee in form of restricted shares of the Company's common stock, $.005 par value (the "Restricted Stock"). The terms of such Restricted Stock shall be pursuant to a "Restricted Stock Grant Program" to be developed by Company prior to January 1, 2004, provided, that if such Restricted Stock Grant Program is not adopted by the Company or not approved by the Company's shareholders, the Company shall have the right to make a payment or grant to Employee with substantially similar economic benefits, which may be in the form of equity, options, cash or such other method as the CEO determines in good faith. Each stock certificate issued pursuant to the terms of this Section 2(e) shall contain Employer's customary restrictive legend utilized in connection with the private placement of its shares. Any Restricted Stock earned in the 2004 calendar year shall be subject to vesting according to the following schedule: one-third when earned, one-third one year after earned, and one-third two years after earned, as long as Employee is employed with the Company on the vesting date, and has been continuously employed since the date first set forth above, at each anniversary. (f) Discretionary Standards. All determinations by the CEO with respect to Employee's compensation per the terms of this Exhibit A shall be final absent bad faith or manifest error. (g) 2003 Stub Period. The Company in its sole discretion may elect whether or not to provide Employee a bonus with respect to employment performance in calendar year 2003. A-2 (h) 2005 Bonus. The parameters for any bonus for Employee for 2005 shall be established by the CEO in his discretion (subject to mandates, if any, from the Board of Directors or its Compensation Committee). (i) Timing of Bonus Compensation. It is contemplated that Employee's 2004 Bonus, the Supplemental 2004 Bonus and any 2005 bonus will include both annual and quarterly components. 3. Brands. The "Brands" for purposes of Article IV of this Agreement are the following: AmeriHost Inn Motel 6 Best Western Holiday Inn Express Comfort Inn Econolodge Ramada Inn Howard Johnson Microtel Days Inn Knights Inn Sleep Inn Baymont Inns Travelodge Fairfield Inns A-3 EXHIBIT B Oxford Capital Partners, Inc. AEW Capital Management, L.P. Olympus Real Estate Partners Crow Family Holdings Charlesbank Capital Partners LLC GE Capital Real Estate BCL Hospitality Advisors, LLC Highgate Hotels B-1 EX-10.18 6 c81028exv10w18.txt AMENDMENT TO EMPLOYMENT AGREEMENT - STEPHEN MILLER EXHIBIT 10.18 EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "1st Amendment to Agreement") is made this 10th day of September, 2003 by and between ARLINGTON HOSPITALITY, INC., a Delaware corporation (the "Company"), and STEPHEN K. MILLER ("Employee") and amends the Agreement dated the 25th day of July, 2003 between Company and Employee (the "Agreement"). RECITAL: The Company has elected to modify the terms upon which the stock option as defined in Section 3.3 is offered to Employee. NOW, THEREFORE, in consideration of the foregoing and the agreements, covenants and conditions set forth herein, Employee and the Company hereby agree to amend the Agreement as follows: 1. Section 3.3 of the Agreement is hereby deleted in its entirety and the following Section 3.3 is inserted. 3.3 Stock Option. Employee shall have the right to purchase up to 25,000 shares of common stock of Company (the "Purchase Right Shares") for a period of thirty (30) days from August 19, 2003, at a purchase price per share equal to the greater of: (i) $3.18 per Share; (ii) the closing price of Company's common stock as quoted in The Wall Street Journal for August 18, 2003 or, if no stock transfer occurred on such date, the closing price as quoted aforesaid on the next prior day in which Company's common stock traded on the public markets ("Start Date Price"); or (iii) if a Company press release is issued announcing Employee's hiring, the closing price of Company's common stock as quoted in The Wall Street Journal on the last trading day immediately preceding the Company's issuance of such release. To the extent Employee has not purchased all of the Purchase Right Shares within said thirty (30) day period then for a period of thirty (30) days thereafter (i.e., lapsing at the end of the sixtieth (60th) day following August 19, 2003), Employee shall have the right to purchase any remaining Purchase Right Shares at a price per share equal to the greatest of (i) the Start Date Price; (ii) the closing price of the Company's stock price as quoted in the Wall Street Journal for September 18, 2003 ($3.49); or (iii) the average closing price of Company's common stock as quoted in the Wall Street Journal for the thirty (30) calendar days preceding the date on which the notice of exercise of purchase of Purchase Right Shares is delivered to Company. In order to exercise the purchase rights contained in this Section 3.3, Employee must tender to the Company written notice of exercise specifying the number of shares he wishes to purchase together with good funds (in the form of cashier's or certified check, wire transfer or other form of payment acceptable to the Board) within the applicable thirty (30) day period, which notice must be delivered at least four (4) business days prior to the scheduled stock purchase. The Company shall issue and deliver the certificates for all shares purchased per this Section 3.3 promptly following such purchase and such certificates shall contain the Company's customary restrictive legend for privately issued shares. As an independent to Employee's purchase of Purchase Right Shares, the Company agrees to pay to Employee a bonus ("Purchase Bonus") equal to the lesser of Six Thousand Dollars ($6,000) or ten percent (10%) of the purchase price for the Purchase Right Shares. 2. The Agreement has not been amended in any way other than the terms set forth in 1 above of this First Amendment. IN WITNESS WHEREOF, each of the parties hereto has caused this First Amendment to Agreement to be effective as of the day and year first above written. COMPANY: EMPLOYEE: ARLINGTON HOSPITALITY, INC. Stephen K. Miller By: /s/ Jerry H. Herman Address: 1360 French Creek Drive ------------------------------ Wayzata, MN 55391 Its: President ------------------------------ Date of Execution: as of 9-10-03 Date of Execution: 9/26/03 ---------------- -------------- 881424_1 2 EX-10.19 7 c81028exv10w19.txt EMPLOYMENT AGREEMENT - JAMES B. DALE EXHIBIT 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 12th day of January, 2001 by and between Arlington Lodging Group, Inc. ("Company") and James B. Dale ("Executive"). WITNESSETH: WHEREAS, the Company is engaged in the business of developing and operating hotels. WHEREAS, pursuant to this Agreement, the Executive shall be employed by the Company as its Senior Vice President of Finance, and the Company and Executive desire to formalize the Executive's employment with this Agreement, and the Executive desires to continue employment on the terms and conditions described herein. NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements of the parties herein contained, the parties agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ the Executive as its Senior Vice President of Finance for the Term (as hereinafter defined) and the Executive agrees to accept such employment on the terms and conditions set forth herein. 2. DUTIES. The Executive shall perform for the Company and all its subsidiaries the responsibilities of the office of Senior Vice President of Finance and the duties consistent with such office, subject to the direction of the President of the Company. The Executive shall report to the President of the Company or his designee. 3. TERM. The initial term of the Executive's employment under this Agreement (the "Initial Term") shall commence January 12, 2001, and shall continue for three calendar years, unless earlier terminated as herein provided. 4. COMPENSATION AND OTHER BENEFITS. 4.1. COMPENSATION. As compensation for all services to be rendered pursuant to this Agreement, the Company shall pay the Executive during the Term, Cash Compensation and Bonus at a rate specified in Exhibit A hereto ("Annual Compensation") payable, unless otherwise specified, in accordance with the payroll policies of the Company. 4.2. MISCELLANEOUS EMPLOYEE BENEFITS. During the Term, the Executive shall be permitted to participate in any group life, hospitalization, dental or disability insurance plan, health program, pension plan, similar benefit plan or other so-called "fringe benefits" of the Company (collectively, "Benefits"), which may be available to other executives of the Company generally on the same terms as such other executives. 4.3. GENERAL BUSINESS EXPENSES. The Company shall pay or reimburse the Executive for all reasonable expenses reasonably and necessarily incurred by the Executive during the Term in the performance of the Executive's services under this Agreement. Such payment shall be made upon presentation of itemized expense statements or vouchers or such other supporting information as the Company may require. 5. TERMINATION BY THE COMPANY FOR CAUSE. The Company has the right, at any time by serving notice, to terminate the Executive's employment under this Agreement and to discharge the Executive for "Cause" (as hereinafter defined). If such right is exercised, the Company's obligation to the Executive shall be limited to the payment and/or satisfaction of unpaid Cash and Benefits accrued up to the effective date specified in the Company's termination notice. The Executive shall also be permitted to maintain health insurance benefits for himself and covered dependants pursuant to COBRA commencing on the date the Executive's employment is terminated. As used in this Section 5.1, the term "Cause" shall mean and include (i) misappropriation of any money or other assets or properties of the Company or any subsidiary of the Company other than an isolated, insubstantial and unintentional misappropriation which is promptly remedied by the Executive after receipt of written notice thereof given by the Company; (ii) willful and material breach by the Executive of the terms of this Agreement after a written demand for substantial performance is delivered to the Executive by the President of the Company which specifically identifies the manner in which the President of the Company believes that the Executive has not substantially performed his duties and such breach continues after receipt of such written notice; (iii) illegal conduct which has a significant negative effect on the reputation or business of the Company; and (iv) significant problems with the quality and/or timing of the hotels. 6. SEVERANCE UPON TERMINATION WITHOUT CAUSE. If the Company terminates the Executive's employment without Cause, it shall continue to pay the Executive all compensation specified in Exhibit A for a period ending six (6) months after the termination date. 7. VOLUNTARY TERMINATION. If the Executive voluntarily terminates his employment, the Executive agrees to provide the Company with at least sixty (60) days written notice. 8. OTHER PROVISIONS. 8.1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms have the following meanings unless the context otherwise requires: (i) "Person: means any individual, corporate, partnership, firm, joint venture, associate, joint-stock company, trust, incorporated organization, governmental or regulation body or other entity. (ii) "Cash flow" for any period means net income plus depreciation and amortization for such period, all determined in accordance with generally accepted accounting principles. 8.2. NOTICES. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, five (5) days after the date of deposit in the United States mail, as follows: (i) If to the Company, to: President Arlington Hospitality, Inc. 2355 S. Arlington Heights Road, Suite 400 Arlington Heights, IL 60005 (ii) If to the Executive, to: James B. Dale 3105 Royal Fox Drive St. Charles, IL 60174 Any party may change its address for notice hereunder by notice to the other party hereto. 8.3. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. 8.4. WAIVERS AND AMENDMENTS. This Agreement may be amended, superseded, cancelled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power of privilege hereunder shall operate as a waiver thereof. Nor shall any waiver on the part of any party of any such right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 8.5. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the internal laws of the State of Illinois applicable to agreements made and to be performed entirely within such State. 8.6. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 8.7. COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.7. HEADINGS. The headings in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EXECUTIVE ARLINGTON LODGING GROUP, INC. /s/ James B. Dale By: /s/ Michael P. Holtz - ------------------- -------------------------------- James B. Dale Michael P. Holtz President EXHIBIT "A" SALARY AND BONUS PLAN 1. Base Salary to increase to $130,000 per year with annual increases of 5% per year thereafter. 2. You will be paid a bonus of $300 per month that I receive a financial statement on AH by the 25th of the following month. 3. You will be paid a bonus of $500 for each quarter that you file our 10Q within 25 days from the end of the period. 4. You will be paid a bonus of $500 for each AmeriHost Inn hotel that the Company sells to a third party. 5. In the event of a sale of the Company, even if you are retained by the new ownership entity, you will be paid the sum of six months base salary at the time of the sale. AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 to Employment Agreement (this "Amendment") is made and entered into as of the 29th day of October, 2001, by and between Arlington Hospitality, Inc. (the "Company") and James B. Dale ("Executive"). WITNESSETH: WHEREAS, the Company and Executive entered into that certain Employment Agreement (the "Employment Agreement"), dated January 12, 2001, by and between the Company and Executive; and WHEREAS, pursuant to the Employment Agreement, Executive is currently employed by the Company as its Chief Financial Officer and Senior Vice President of Finance; and WHEREAS, the Company and Executive desire to continue Executive's employment by the Company in such positions, pursuant to the terms of the Employment Agreement, as modified hereby, NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements of the parties herein contained, the parties hereto hereby agree as follows: 1. The base pay shall be increased immediately from $130,000 per year, to $145,000 per year, and the 5% increase in base pay scheduled for January 12, 2002 (the first anniversary of the Employment Agreement) is waived. This increase was granted in connection with the elimination of the Corporate Controller position and the anticipated annual savings to the Company in excess of $90,000 per year. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. EXECUTIVE ARLINGTON HOSPITALITY, INC. /s/ James B. Dale By: /s/ Michael P. Holtz - ------------------------ --------------------------- James B. Dale Michael P. Holtz President/CEO EX-10.20 8 c81028exv10w20.txt SUPPLEMENTAL RETENTION AND PERFORMANCE AGREEMENT EXHIBIT 10.20 DALE SUPPLEMENTAL RETENTION AND PERFORMANCE AGREEMENT This Supplemental Retention and Performance Agreement ("Agreement") is made as of this 1st day of December, 2002 by and between ARLINGTON HOSPITALITY, INC., a Delaware corporation ("Company"), whose address is 2355 South Arlington Heights Road, Arlington Heights, Illinois 60005, and JAMES B. DALE ("Employee"), whose address is 3105 Royal Fox Drive, St. Charles, Illinois 60174. Also party hereto for the purposes of Section 4 is Arlington Lodging Group, Inc. RECITALS: A. Employee is an executive officer of the Company. The Company is desirous of entering into this Agreement in order to provide Employee: (i) an incentive to continue his employment with the Company; and (ii) an incentive compensation program to reward Employee for attaining certain desirable mutually agreed objectives. B. Employee is willing to continue his employment with the Company, subject to the terms and conditions set forth below. NOW, THEREFORE, in consideration of the promises and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Recitals. The Recitals set forth above are incorporated by reference herein and made a part hereof as if fully rewritten. 2. Severance Bonus. In the event that between the date hereof and December 31, 2003, Employee's employment with the Company is terminated other than due to death, "Disability," "Voluntary Termination" or "Cause," Employee shall be entitled to a Severance Bonus of $50,000, payable at the rate of $10,000 per month on or before the 10th day of each month following the month in which Employee's employment is terminated. In the event Employee's employment is not terminated by the Company on or before December 31, 2003, or Employee's employment is terminated prior to such date due to death, Disability, Voluntary Termination or Cause, then Employee shall not be entitled to a Severance Bonus. For purposes of this Section 2, the following definitions shall apply: (a) "Disability" shall mean termination of Employee's employment following absence from the Company pursuant to circumstances which qualify Employee to receive disability payments pursuant to the disability insurance policy presently maintained by the Company for the benefit of Employee. (b) "Cause" shall mean termination of Employee's employment by the Company due to any of the following circumstances: (i) conduct amounting to fraud, embezzlement, illegal misconduct in connection with Employee's performance of services for the Company or any of its subsidiaries; (ii) the conviction of Employee by a court of proper jurisdiction of (or his written, voluntary and freely given confession to) a crime which constitutes a felony (other than a traffic violation) or an indictment that results in material injury to the Company's property, operation or reputation; (iii) the willful failure of Employee to comply with reasonable directions of the Board after: (1) written notice delivered to the Employee describing such willful failure; and (2) Employee has failed to cure or take substantial steps to cure such willful failure after a reasonable time period as determined by the Board in its reasonable discretion (not to be less than thirty (30) days) unless counsel for the Company, in good faith believes, that the directions of the Board (or its actions or inactions in response to the Employee's written notice) are illegal; or (iv) willful misconduct or a material default by the Employee in the performance or observance of any promise or undertaking of Employee or commission of an act of dishonesty in connection with Employee performing services to or for the benefit of the Company or any of its subsidiaries, which willful misconduct, default or dishonest act has a material adverse effect on the Company and has continued for a period of ten (10) business days after written notice thereof from the Company to the Employee; provided, that if such willful misconduct or default is of a nature that it or the injury therefrom cannot be reasonably cured within such ten (10) day period (but is curable -- for purposes hereof an act of dishonesty with material adverse consequences will not be deemed susceptible of cure) then, if Employee shall have commenced an attempt to cure such default within such ten (10) day period, the period to cure the default shall be extended until the earlier of: (1) the date which is forty-five (45) days after receipt of notice; or (2) the date that Employee has failed to diligently continue his efforts in a reasonable manner to cure his default. (c) "Voluntary Termination" shall mean Employee's voluntary resignation from employment by the Company. Company may maintain an employee leasing agreement under which Employee is employed by a separate corporation and then "leased" to the Company whereby the Company agrees to pay all costs of employment of Employee pursuant to an employee leasing contract ("ELC"). Notwithstanding anything to the contrary contained in the ELC, Employee shall be deemed to constitute an employee of, and employed by the Company, for purposes of this Agreement, whether Employee is a direct employee of the Company or leased to the Company pursuant to the ELC. 2 All determinations of Employee's entitlement to Severance Bonus shall be made in the sole discretion of the Company and shall be binding on Employee absent a showing of bad faith or manifest error. 3. Continued Employment Performance Bonus. If and only if Employee remains in the employ of the Company through December 31, 2003, then Employee shall be paid the "Retention Bonus Amount" on or before ten (10) days following the Company's completion of its audit for calendar year 2003, with such sum to be paid in cash ("Cash Retention Bonus Amount") plus common stock of the Company ("Stock Retention Bonus Amount") based upon that number of shares of common stock of the Company ("Shares") set forth below, subject to adjustment in the event of any stock split, reverse stock split, stock dividend, recapitalization, merger, consolidation, or other similar event occurs between the date hereof and January 10, 2004. By setting the Stock Retention Bonus Amount as a finite number of Shares, the Company is providing Employee the opportunity to share in the subsequent appreciation of such shares. Employee shall not be entitled to any Retention Bonus if Employee is not employed by the Company at January 1, 2004 for any reason. The Retention Bonus Amount shall be the sum of each of the "Targets" set forth below that are achieved by Employee during Employee's employment by the Company. All determinations of Target achievement shall be made in the sole discretion of the Company and shall be binding upon Employee absent a showing of bad faith or manifest error. The Company shall compute the aggregate Retention Bonus Amount as soon as practicable following completion of its financial statements for calendar year 2003 and shall total up the Cash Retention Bonus Amount plus the number of Shares comprising the Stock Retention Bonus Amount (any fractional Share shall be rounded up to the nearest whole Share amount). The Targets are as follows: (a) $150 per month plus 45.45 Shares per month for each month from December, 2002 through November, 2003 that Employee delivers to the CEO and the Board of Directors of the Company ("Board"), unaudited financial statements (income statement balance sheet and statement of cash flow) of the Company, by the 25th of the following month (maximum of $1,800 plus 545.45 Shares). (b) $250 per quarter plus 75.76 Shares per quarter for each quarter that a Form 10-Q is filed during 2003 within the SEC specified deadline (no extension) without requiring an amendment during the period of this Agreement (maximum of $750 plus 227.27 Shares). (c) $500 plus 151.52 Shares if Form 10-K required in 2003 is filed within SEC specified deadline (no extension). (d) $250 per quarter plus 75.76 Shares per quarter for every quarter in 2003 that involved a Form 3, 4 or 5 filing and the filing was filed within the SEC filing time frame and in a manner where no supplemental disclosure (proxy or otherwise) is required or any amendment (e.g., done right, done on time and Company does not look bad) (maximum of $1,000 plus 303.03 Shares in the event filings are made every quarter; no bonus allocable for any quarter in which a filing is not required). 3 (e) $1,250 plus 378.79 Shares for identification and hiring/naming of controller/successor acceptable to Board by April 1, 2003 (Target met if offer is accepted prior to such date but employment starts later). (f) $250 plus 75.76 Shares for every hotel sale by the Company or any of its subsidiaries under contract after November 7, 2002 and closed by December 31, 2003 not including Vicksburg or Freeport properties owned by Company subsidiaries. (g) $100 plus 30.30 Shares for initial draft minutes of Board of Directors meeting held after November 6, 2002 completed and circulated to board for comment/amendment within ten (10) business days following a board meeting. (h) $100 plus 30.30 Shares for management of the minutes amendment iteration process such that each set of minutes referred in subparagraph (g) above to be voted on at the next board meeting are not amended. (i) Financing Bonus. Financing terms of the following must be acceptable to the Board and closed by dates below: (i) $5,000 plus 1,515.15 Shares for a minimum $70,000,000 (Omnibus) if closed before February 1, 2003 and if LaSalle line extended; $2,500 plus 757.58 Shares if after February 1, 2003 and before May 31, 2003. (ii) Mutually exclusive with (i) above, (i.e., this test is not earned if the test in (i) above is earned) $3,750 plus 1,136.36 Shares for a minimum $8,500,000 holding company financing of at least two and one-half (2 1/2) years ("asset sale bridge note") if closed before December 31, 2002 or $2,500 plus 757.58 Shares if after December 31, 2002 and before February 1, 2003 or the extended LaSalle line termination but not later than May 31, 2003. (iii) Mutually exclusive with (i) and (ii) above (i.e., this test is not earned if the test in (i) or (ii) above is earned), $1,000 plus 303.03 Shares for a minimum $8,500,000 holding company financing of at least one (1) year but less than two and one-half (2 1/2) years ("LaSalle or replacement") if closed before December 31, 2002 or $500 plus 151.52 Shares if after December 31, 2002 and before February 1, 2003 or extended LaSalle line termination date. (iv) $500 plus 151.52 Shares if by November 3, 2002 and $250 plus 75.76 Shares if by December 31, 2002, LaSalle grants extension of line of credit in place as of November 6, 2002 past April 29, 2003. But not paid if renewed full line of LaSalle achieves Test (iii) above - Mutually exclusive (no double dip). (v) If no $70,000,000 refinancing (Omnibus) then $1,250 plus 378.79 Shares for executing during 2003, a 1 year or more extension of the $20,000,000 GECC development line for another year. The parties agree to take such actions and execute and deliver, promptly upon request, such additional documents as may be necessary or appropriate to implement the terms of this Agreement and effectuate its intent. 4 4. Employment Contract. The term of Employee's existing employment agreement ("Employment Agreement") is hereby extended to a termination date of January 12, 2005 and is hereby amended by substituting the Company for Arlington Lodging Group, Inc. as Employee's employer. Notwithstanding anything to the contrary contained in the Employment Agreement, the bonus amounts, if any, payable to Employee pursuant to Section 2 and Section 3 of this Agreement are specifically excluded from any severance compensation payable to Employee pursuant to the Employment Agreement. Notwithstanding anything to the contrary contained in Employee's Employment Agreement dated January 12, 2001 or in this Agreement, Company reserves the right on an annual basis, beginning for calendar year 2004, to modify the criteria for Employee's earning compensation under his Bonus Program in the Employment Agreement, pursuant to any business plan or new bonus program criteria approved by Company's Chief Executive Officer and/or Board of Directors, provided such revised criteria provide Employee the opportunity to earn potential bonus income at least substantially similar to that set forth in the Employment Agreement, as determined in good faith discretion of the Board of Directors. The terms of this Section 4 will supersede any inconsistencies with the remainder of this Agreement or the Employment Agreement. 5. Representations Regarding Stock Retention Bonus Amount. Employee acknowledges and represents the following to Company with respect to the shares of common stock of the Company, if any, that will be issued to Employee pursuant to the Stock Retention Bonus Amount (the "Shares"): (a) Employee will be subject to income tax based upon the fair market value of the Shares issued to Employee on the date of issuance. Employee acknowledges that in the event that the Shares appreciate over the per share price used in computing the Stock Retention Bonus Amount, Employee will be liable for taxes for such issuance, which taxes may exceed the Cash Bonus Retention Amount. Employee hereby grants to the Company the right to apply such amount of the Cash Bonus Retention Amount as it deems necessary to satisfy applicable withholding tax obligations with respect to the Retention Bonus Amount (cash and Shares amounts), and further agrees that should more than the full Cash Bonus Retention Amount be necessary to satisfy Company's applicable withholding tax obligations regarding Employee, then Employee shall immediately fund such shortfall on notice from the Company and further authorizes the Company to withhold from Employee's paycheck such additional sums as are necessary to fund the shortfall. (b) The Shares issuable to Employee will be acquired solely for the account of Employee for investment and not for subdivision, resale or redistribution. Employee has no direct or indirect agreements or understandings to sell or resell the Shares. (c) The Shares will not be registered under the Securities Act of 1933, as amended ("Act"), and accordingly, their resale will only be permitted pursuant to an exemption from registration under the Act or a registration statement under the Act. The Company has no obligation to register the Shares and has no obligation to file those reports under the Securities Exchange Act of 1934 necessary to qualify the Shares for resale pursuant to Rule 144 under the Act. The certificate for the Shares will contain a corresponding restrictive legend. 5 (d) Employee has: (i) sufficient knowledge regarding the Company to evaluate an investment in the Shares; (ii) sufficient net worth and liquidity to bear the entire risk of loss with respect to the Shares; and (iii) has been advised that he should consult with his tax advisors to evaluate the tax impact of issuance and ownership of the Shares, and has access to competent tax advisors for advice as to the foregoing. 6. Miscellaneous. (a) Survival. All representations, warranties and covenants of the parties contained in this Agreement or made pursuant hereto, shall survive the date of execution of this Agreement and remain in full force and effect, and shall survive the termination or expiration of this Agreement. (b) Counsel. All parties hereto have independent counsel, and no inference shall be drawn in favor of or against any party by virtue of the fact that such party's counsel was or was not the principal draftsman of this Agreement. (c) Notices. All notices or other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or sent by registered or certified mail, postage prepaid or via national courier, addressed as to the party entitled to notice at the address set forth above, or such other address as is subsequently provided by written notice from such party to the other party. (d) No Assignment. Except as expressly noted below, this Agreement and the rights of the parties under this Agreement may not be sold, assigned or otherwise transferred without the prior written consent of the other party. (e) Entire Agreement. This Agreement, sets forth the entire agreement and understanding of the parties hereto in respect of the subject matter contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. (f) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. Should any dispute arise under this Agreement, it shall be litigated in the state or federal courts situated in Cook County, Illinois, to which jurisdiction and venue all parties consent. (g) Counterparts. This Agreement may be executed in two or more counterparts, each of which, whether photocopy, facsimile or ink, shall be deemed an original, but all of which together shall constitute one instrument. (h) Approval. This Agreement shall be binding upon the parties, their respective heirs, successors and assigns, and each entity party represents and warrants that this Agreement has been duly approved by proper action. 6 [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first set forth above. ARLINGTON HOSPITALITY, INC. EMPLOYEE /s/ James B. Dale ---------------------------------- JAMES B. DALE By: /s/ Kenneth M. Fell -------------------------------- Its: -------------------------------- Date of Execution: 05-06-03 -------------- ARLINGTON LODGING GROUP, INC.(1) By: /s/ Kenneth M. Fell -------------------------------- Its: -------------------------------- Date of Execution: 05-06-03 ------------------ (1) For purposes of Section 4. 8 EX-10.21 9 c81028exv10w21.txt EMPLOYMENT AGREEMENT - RICHARD A. GERHART EXHIBIT 10.21 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 1st day of July, 2002 by and between Arlington Hospitality Management, Inc. ("Company") and Richard A. Gerhart ("Executive"). WITNESSETH: WHEREAS, the Company is engaged in the business of developing and operating hotels. WHEREAS, pursuant to this Agreement, the Executive shall be employed by the Company as its Senior Vice President of Hotel Operations, and the Company and Executive desire to formalize the Executive's employment with this Agreement, and the Executive desires to continue employment on the terms and conditions described herein. NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements of the parties herein contained, the parties agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ the Executive as its Senior Vice President of Hotel Operations for the Term (as hereinafter defined) and the Executive agrees to accept such employment on the terms and conditions set forth herein. 2. DUTIES. The Executive shall perform for the Company and all its subsidiaries the responsibilities of the office of Senior Vice President of Hotel Operations and the duties consistent with such office, subject to the direction of the President of the Company. The Executive shall report to the President of the Company or his designee. 3. TERM. The initial term of the Executive's employment under this Agreement (the "Initial Term") shall commence July 1, 2002, and shall continue for three calendar years, unless earlier terminated as herein provided. 4. COMPENSATION AND OTHER BENEFITS. 4.1. COMPENSATION. As compensation for all services to be rendered pursuant to this Agreement, the Company shall pay the Executive during the Term, Cash Compensation and Bonus at a rate specified in Exhibit A hereto ("Annual Compensation") payable, unless otherwise specified, in accordance with the payroll policies of the Company. 4.2. MISCELLANEOUS EMPLOYEE BENEFITS. During the Term, the Executive shall be permitted to participate in any group life, hospitalization, dental or disability insurance plan, health program, pension plan, similar benefit plan or other so-called "fringe benefits" of the Company (collectively, "Benefits"), which may be available to other executive of the Company generally on the same terms as such other executives. 4.3. GENERAL BUSINESS EXPENSES. The Company shall pay or reimburse the Executive for all reasonable expenses reasonably and necessarily incurred by the Executive during the Term in the performance of the Executive's services under this Agreement. Such payment shall be made upon presentation of itemized expense statements or vouchers or such other supporting information as the Company may require. 5. TERMINATION BY THE COMPANY FOR CAUSE. The Company has the right, at any time by serving notice, to terminate the Executive's employment under this Agreement and to discharge the Executive for "Cause" (as hereinafter defined). If such right is exercised, the Company's obligation to the Executive shall be limited to the payment and/or satisfaction of unpaid Cash and Benefits accrued up to the effective date specified in the Company's termination notice. The Executive shall also be permitted to maintain health insurance benefits for himself and covered dependents pursuant to COBRA commencing on the date the Executive's employment is terminated. As used in this Section 5.1, the term "Cause" shall mean and include (i) misappropriation of any money or other assets or properties of the Company or an subsidiary of the Company other than an isolated, insubstantial and unintentional misappropriation which is promptly remedied by the Executive after receipt of written notice thereof given by the Company; (ii) willful and material breach by the Executive of the terms of this Agreement after a written demand for substantial performance is delivered to the Executive by the President of the Company which specifically identifies the manner in which the President of the Company believes that the Executive has not substantially performed his duties and such breach continues after receipt of such written notice; and (iii) illegal conduct which has a significant negative effect on the reputation or business of the Company. 6. SEVERANCE UPON TERMINATION WITHOUT CAUSE. If the Company terminates the Executive's employment without Cause, it shall continue to pay the Executive all compensation specified in Exhibit A for a period ending six (6) months after the termination date. 7. VOLUNTARY TERMINATION. If the Executive voluntarily terminates his employment, the Executive agrees to provide the Company with at least thirty (30) days written notice. 8. OTHER PROVISIONS. 8.1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms have the following meanings unless the context otherwise requires: (i) "Person: means any individual corporate, partnership, firm, joint venture, associate, joint-stock company, trust, incorporated organization, governmental or regulation body or other entity. (ii) "Cash flow" for any period means net income plus depreciation and amortization for such period, all determined in accordance with generally accepted accounting principles. 8.2. NOTICES. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, five (5) days after the date of deposit in the United States mail, as follows: (i) If to the Company, to: President Arlington Hospitality, Inc. 2355 S. Arlington Heights Road, Suite 400 Arlington Heights, IL 60005 (ii) If to the Executive, to: Richard A. Gerhart 4 Queens Way Lincolnshire, IL 60069 Any party may change its address for notice hereunder by notice to the other party hereto. 8.3. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. 8.4. WAIVERS AND AMENDMENTS. This Agreement may be amended, superseded, cancelled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. Nor shall any waiver on the part of any party of any such right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 8.5. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the internal laws of the State of Illinois applicable to agreements made and to be performed entirely within such State. 8.6. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 8.7. COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.7. HEADINGS. The headings in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EXECUTIVE ARLINGTON HOSPITALITY MANAGEMENT, INC. /s/ Richard A. Gerhart By: /s/ Michael P. Holtz - ---------------------- ------------------------ Richard A. Gerhart Michael P. Holtz President EXHIBIT A RICK GERHART BASE SALARY: Year One $132,500 Year Two 137,800 Year Three 144,000 BONUS STRUCTURE: AMERIHOST INN HOTELS: Same Store Sales: The Senior Vice President of Operations will be entitled to participate in a quarterly incentive, based upon the Same Store Sales performance of the owned AmeriHost Inn hotels. Following are the percentages and incentive breakdowns:
% Increase/Same Store Sales Incentive $ --------------------------- ----------- 6% $600 7% $900 8% $1,200 9% $1,800
Each additional increase of 1% in Same Store Sales will result in $300 of additional bonus. Increase in GOP Over Budget: The Senior Vice President of Operations will be entitled to a bonus of 3% of the Actual GOP over the budgeted GOP. The bonus will be calculated and paid on a quarterly basis, and based upon the "pooled" of all AmeriHost Inns under his direction. This will exclude the Bortle managed hotels. Increase in GOP Over Last Year: The Senior Vice President of Operations will be entitled to a bonus of 2% of actual GOP over the previous year's GOP. In order to qualify for part of this bonus, the hotel must have been open for business for at least two (2) years. All hotels that were open more than two (2) years in the quarter will qualify for this plan. The bonus will be calculated and paid on a quarterly basis, based on the "pooled" performance of all the AmeriHost Inns that are managed by Arlington Hospitality. This excludes the Bortle managed hotels. NON-AMERIHOST HOTELS Same Store Sales: None Increase in GOP Over Budget: The Senior Vice President of Operations will be entitled to a bonus potential of 3% of the actual GOP over the budgeted GOP. The bonus will be calculated and paid on a quarterly basis, and based upon the "pooled" performance of all of the non-AmeriHost hotels under his direction. The Diversified properties will be excluded from participation in the bonus calculations. Property Sales: The Senior Vice President of Operations will be paid a bonus of $500 for each AmeriHost Inn that the Company sells and receives a fee from Cendant. This bonus will be paid at the time of the closing. Overall Company Performance: The Senior will receive a bonus equal to 10% of his base salary if the Company succeeds in achieving its budgeted net income, cash flow or EBITDA for the year. This will be due and payable within 10 days after the year end numbers are finalized. If the total of the above bonus plans paid to the Executive are equal to or greater than 10% of his base salary, no bonus will be due and payable to the Executive for Company performance. If the total of the above bonus plans paid to the Executive are less than 10% of his base salary, the Executive will be given bonus up to 10% of his base salary if the Company achieves its performance objectives. EX-10.22 10 c81028exv10w22.txt SUPPLEMENTAL RETENTION AND PERFORMANCE AGREEMENT EXHIBIT 10.22 GERHART SUPPLEMENTAL RETENTION AND PERFORMANCE AGREEMENT This Supplemental Retention and Performance Agreement ("Agreement") is made as of this 1st day of December, 2002 by and between ARLINGTON HOSPITALITY, INC., a Delaware corporation ("Company"), whose address is 2355 South Arlington Heights Road, Arlington Heights, Illinois 60005, and RICHARD A. GERHART ("Employee"), whose address is 4 Queens Way, Lincolnshire, Illinois 60005 Also party hereto for the purposes of Section 4 is Arlington Hospitality Management, Inc. ("AHMI") RECITALS: A. Employee is an executive officer of AHMI. AHMI is a wholly owned subsidiary of the Company. All references below to employment by the Company shall mean Employee's employment by any of Company, AMHI or such other subsidiary of Company as Company shall direct from time to time. The Company is desirous of entering into this Agreement in order to provide Employee: (i) an incentive to continue his employment with the Company; and (ii) an incentive compensation program to reward Employee for attaining certain desirable mutually agreed objectives. B. Employee is willing to continue his employment with the Company, subject to the terms and conditions set forth below. NOW, THEREFORE, in consideration of the promises and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Recitals. The Recitals set forth above are incorporated by reference herein and made a part hereof as if fully rewritten. 2. Severance Bonus. In the event that between the date hereof and December 31, 2003, Employee's employment with the Company is terminated other than due to death, "Disability," "Voluntary Termination" or "Cause," Employee shall be entitled to a Severance Bonus of $50,000, payable at the rate of $10,000 per month on or before the 10th day of each month following the month in which Employee's employment is terminated. In the event Employee's employment is not terminated by the Company on or before December 31, 2003, or Employee's employment is terminated prior to such date due to death, Disability, Voluntary Termination or Cause, then Employee shall not be entitled to a Severance Bonus. For purposes of this Section 2, the following definitions shall apply: (a) "Disability" shall mean termination of Employee's employment following absence from the Company pursuant to circumstances which qualify Employee to receive disability payments pursuant to the disability insurance policy presently maintained by the Company for the benefit of Employee. (b) "Cause" shall mean termination of Employee's employment by the Company due to any of the following circumstances: (i) conduct amounting to fraud, embezzlement, illegal misconduct in connection with Employee's performance of services for the Company or any of its subsidiaries; (ii) the conviction of Employee by a court of proper jurisdiction of (or his written, voluntary and freely given confession to) a crime which constitutes a felony (other than a traffic violation) or an indictment that results in material injury to the Company's property, operation or reputation; (iii) the willful failure of Employee to comply with reasonable directions of the Board after: (1) written notice delivered to the Employee describing such willful failure; and (2) Employee has failed to cure or take substantial steps to cure such willful failure after a reasonable time period as determined by the Board in its reasonable discretion (not to be less than thirty (30) days) unless counsel for the Company, in good faith believes, that the directions of the Board (or its actions or inactions in response to the Employee's written notice) are illegal; or (iv) willful misconduct or a material default by the Employee in the performance or observance of any promise or undertaking of Employee or commission of an act of dishonesty in connection with Employee performing services to or for the benefit of the Company or any of its subsidiaries, which willful misconduct, default or dishonest act has a material adverse effect on the Company and has continued for a period of ten (10) business days after written notice thereof from the Company to the Employee; provided, that if such willful misconduct or default is of a nature that it or the injury therefrom cannot be reasonably cured within such ten (10) day period (but is curable -- for purposes hereof an act of dishonesty with material adverse consequences will not be deemed susceptible of cure) then, if Employee shall have commenced an attempt to cure such default within such ten (10) day period, the period to cure the default shall be extended until the earlier of: (1) the date which is forty-five (45) days after receipt of notice; or (2) the date that Employee has failed to diligently continue his efforts in a reasonable manner to cure his default. (c) "Voluntary Termination" shall mean Employee's voluntary resignation from employment by the Company. Company may maintain an employee leasing agreement under which Employee is employed by a separate corporation and then "leased" to the Company whereby the Company agrees to pay all costs of employment of Employee pursuant to an employee leasing contract ("ELC"). Notwithstanding anything to the contrary contained in the ELC, Employee shall be deemed to constitute an employee of, and employed by the Company, for purposes of this Agreement, whether Employee is a direct employee of the Company or leased to the Company pursuant to the ELC. All determinations of Employee's entitlement to Severance Bonus shall be made in the sole discretion of the Company and shall be binding on Employee absent a showing of bad faith or manifest error. 2 3. Continued Employment Performance Bonus. If and only if Employee remains in the employ of the Company through December 31, 2003, then Employee shall be paid the "Retention Bonus Amount" on or before ten (10) days following the Company's completion of its audit for calendar year 2003, with such sum to be paid in cash ("Cash Retention Bonus Amount") plus common stock of the Company ("Stock Retention Bonus Amount") based upon that number of shares of common stock of the Company ("Shares") set forth below, subject to adjustment in the event of any stock split, reverse stock split, stock dividend, recapitalization, merger, consolidation, or other similar event occurs between the date hereof and January 10, 2004. By setting the Stock Retention Bonus Amount as a finite number of Shares, the Company is providing Employee the opportunity to share in the subsequent appreciation of such shares. Employee shall not be entitled to any Retention Bonus if Employee is not employed by the Company at January 1, 2004 for any reason. The Retention Bonus Amount shall be the sum of each of the "Targets" set forth below that are achieved by Employee during Employee's employment by the Company. All determinations of Target achievement shall be made in the sole discretion of the Company and shall be binding upon Employee absent a showing of bad faith or manifest error. The Company shall compute the aggregate Retention Bonus Amount as soon as practicable following completion of its financial statements for calendar year 2003 and shall total up the Cash Retention Bonus Amount plus the number of Shares comprising the Stock Retention Bonus Amount (any fractional Share shall be rounded up to the nearest whole Share amount). The Targets are as follows: (a) Third Party Sales. $250 plus 75.76 Shares for every hotel that Company sells to a third party that is put under contract for sale after November 6, 2002 and closed by December 31, 2003, not including Vicksburg or Freeport; extra $125 plus 37.88 Shares if Altoona and its food and beverage operations are under contract by December 31, 2003. (b) AmeriHost Inns. (i) $2500 plus 757.58 Shares if Company matches the same store sales bonus provided in current employment contract bonus plan; and (ii) Supplemental two percent (2%) of the lower of either Employee's current Employment Agreement bonus plan's "GOP over budget" or "GOP over previous year" pooled calculation. (c) Non-AmeriHost Inns. (i) Supplemental two percent (2%) of "actual GOP over budget" calculation used in Employee's current Employment Agreement bonus plan. (ii) Up to $5,000 plus 1515.15 Shares ("Target") EBITDAR based bonus: fifty percent (50%) of Target ($2500 plus 757.58 Shares) if EBITDAR equals or exceeds budget; and two and one-half percent (2.5%) of Target (up to fifty percent (50%)) for every full one percent (1%) EBITDAR exceeds budget capped at 20% in excess of budget ($2,500 plus 757.58 Shares maximum/twenty percent (20%) beat) not counting gains, any Cendant payments, income, royalty, etc., associated with sale of Vicksburg and Freeport. 3 The parties agree to take such actions and execute and deliver, promptly upon request, such additional documents as may be necessary or appropriate to implement the terms of this Agreement and effectuate its intent. 4. Employment Contract. Employee's existing employment agreement is between Employee and AHMI ("Employment Agreement"). Notwithstanding anything to the contrary contained in the Employment Agreement, the bonus amounts, if any, payable to Employee pursuant to Section 2 and Section 3 of this Agreement are specifically excluded from any severance compensation payable to Employee pursuant to the Employment Agreement. Notwithstanding anything to the contrary contained in Employee's Employment Agreement dated July 1, 2002 or in this Agreement, Company reserves the right on an annual basis, beginning for calendar year 2004, to modify the criteria for Employee's earning compensation under his Bonus Program in the Employment Agreement, pursuant to any business plan or new bonus program criteria approved by Company's Chief Executive Officer and/or Board of Directors, provided such revised criteria provide Employee the opportunity to earn potential bonus income at least substantially similar to that set forth in the Employment Agreement, as determined in good faith discretion of the Board of Directors. The terms of this Section 4 will supersede any inconsistencies with the remainder of this Agreement or the Employment Agreement. 5. Representations Regarding Stock Retention Bonus Amount. Employee acknowledges and represents the following to Company with respect to the shares of common stock of the Company, if any, that will be issued to Employee pursuant to the Stock Retention Bonus Amount (the "Shares"): (a) Employee will be subject to income tax based upon the fair market value of the Shares issued to Employee on the date of issuance. Employee acknowledges that in the event that the Shares appreciate over the per share price used in computing the Stock Retention Bonus Amount, Employee will be liable for taxes for such issuance, which taxes may exceed the Cash Bonus Retention Amount. Employee hereby grants to the Company the right to apply such amount of the Cash Bonus Retention Amount as it deems necessary to satisfy applicable withholding tax obligations with respect to the Retention Bonus Amount (cash and Shares amounts), and further agrees that should more than the full Cash Bonus Retention Amount be necessary to satisfy Company's applicable withholding tax obligations regarding Employee, then Employee shall immediately fund such shortfall on notice from the Company and further authorizes the Company to withhold from Employee's paycheck such additional sums as are necessary to fund the shortfall. (b) The Shares issuable to Employee will be acquired solely for the account of Employee for investment and not for subdivision, resale or redistribution. Employee has no direct or indirect agreements or understandings to sell or resell the Shares. (c) The Shares will not be registered under the Securities Act of 1933, as amended ("Act"), and accordingly, their resale will only be permitted pursuant to an exemption from registration under the Act or a registration statement under the Act. The Company has no obligation to register the Shares and has no obligation to file those reports under the Securities Exchange Act of 1934 necessary to qualify the Shares for resale pursuant to Rule 144 under the Act. The certificate for the Shares will contain a corresponding restrictive legend. 4 (d) Employee has: (i) sufficient knowledge regarding the Company to evaluate an investment in the Shares; (ii) sufficient net worth and liquidity to bear the entire risk of loss with respect to the Shares; and (iii) has been advised that he should consult with his tax advisors to evaluate the tax impact of issuance and ownership of the Shares, and has access to competent tax advisors for advice as to the foregoing. 6. Miscellaneous. (a) Survival. All representations, warranties and covenants of the parties contained in this Agreement or made pursuant hereto, shall survive the date of execution of this Agreement and remain in full force and effect, and shall survive the termination or expiration of this Agreement. (b) Counsel. All parties hereto have independent counsel, and no inference shall be drawn in favor of or against any party by virtue of the fact that such party's counsel was or was not the principal draftsman of this Agreement. (c) Notices. All notices or other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or sent by registered or certified mail, postage prepaid or via national courier, addressed as to the party entitled to notice at the address set forth above, or such other address as is subsequently provided by written notice from such party to the other party. (d) No Assignment. Except as expressly noted below, this Agreement and the rights of the parties under this Agreement may not be sold, assigned or otherwise transferred without the prior written consent of the other party. (e) Entire Agreement. This Agreement, sets forth the entire agreement and understanding of the parties hereto in respect of the subject matter contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. (f) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. Should any dispute arise under this Agreement, it shall be litigated in the state or federal courts situated in Cook County, Illinois, to which jurisdiction and venue all parties consent. (g) Counterparts. This Agreement may be executed in two or more counterparts, each of which, whether photocopy, facsimile or ink, shall be deemed an original, but all of which together shall constitute one instrument. (h) Approval. This Agreement shall be binding upon the parties, their respective heirs, successors and assigns, and each entity party represents and warrants that this Agreement has been duly approved by proper action. 5 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first set forth above. ARLINGTON HOSPITALITY, INC. EMPLOYEE /s/ Richard A. Gerhart ---------------------------------- RICHARD A. GERHART By: /s/ Kenneth M. Fell Its: ______________________________ Date of Execution: 01-27-03 -------------- ARLINGTON HOSPITALITY MANAGEMENT, INC.(1) By: /s/ Kenneth M. Fell Its: ______________________________ Date of Execution: 01-27-03 (1) For purposes of Section 4. 6 EX-31.1 11 c81028exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jerry H. Herman, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Arlington Hospitality, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Jerry H. Herman ----------------------------------- Chief Executive Officer EX-31.2 12 c81028exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER CERTIFICATIONS EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James B. Dale, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Arlington Hospitality, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ James B. Dale ----------------------------------- Chief Financial Officer EX-32.1 13 c81028exv32w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 To the best of my knowledge and belief, the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November __, 2003, by Arlington Hospitality, Inc. fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of Arlington Hospitality, Inc. A signed original of this written statement required by Section 906 has been provided to Arlington Hospitality, Inc. and will be retained by Arlington Hospitality, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Jerry H. Herman ----------------------------------- Name: Jerry H. Herman ----------------------------- Title: Chief Executive Officer ----------------------------- November 14, 2003 EX-32.2 14 c81028exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 To the best of my knowledge and belief, the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November __, 2003, by Arlington Hospitality, Inc. fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of Arlington Hospitality, Inc. A signed original of this written statement required by Section 906 has been provided to Arlington Hospitality, Inc. and will be retained by Arlington Hospitality, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. /s/ James B. Dale ----------------------------------- Name: James B. Dale ----------------------------- Title: Chief Financial Officer ----------------------------- November 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----