-----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, SSOaFiGpfHxerbwyiZvxGg52Ebb4SJG9gx/sfqJy9BduzKlTeSWzbvMTNTitX++H W5noODzjWq16YiVnE8afQg== 0000950137-04-002436.txt : 20040331 0000950137-04-002436.hdr.sgml : 20040331 20040331165927 ACCESSION NUMBER: 0000950137-04-002436 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040331 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15291 FILM NUMBER: 04706665 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-K 1 c84140e10vk.txt ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 2003 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-15291 ARLINGTON HOSPITALITY, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3312434 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2355 S. ARLINGTON HEIGHTS RD., SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005 - --------------------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 228-5400 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered - ------------------- --------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.005 per share ---------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2) of the Act) Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Common Stock on June 30, 2003 as reported on the Nasdaq National Market, was approximately $9.0 million. Common Stock held by officers, directors and each person who owns 10% or more of the outstanding Common Stock have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 30, 2004, 5,038,149 shares of the Registrant's Common Stock were outstanding. The following documents are incorporated into this Form 10-K by reference: None ================================================================================ PART I ITEM 1. BUSINESS. GENERAL As used herein, the terms "we," "us," "our," or the "Company" refer to Arlington Hospitality, Inc., a Delaware corporation organized in 1984, individually or together with its subsidiaries, and our predecessors. We are engaged in the development and construction of limited service hotels, without food and beverage facilities, as well as the ownership, operation, management and sale of these hotels. During the past several years, we have focused almost exclusively on AmeriHost Inn hotels, as the largest franchisee of this brand, with limited ownership and operation of other branded hotels. We are a full-service real estate company, with in-house expertise and resources in development, acquisitions, financing, construction management, property management, marketing, and accounting. As of December 31, 2003, we had approximately 1,200 employees, with our senior officers averaging more than 15 years experience in the hotel industry. Our hotels are located in 17 states, primarily in the Midwestern United States. The table below sets forth information regarding our hotels at December 31, 2003:
Open Under Hotels Construction Total -------------- ---------------- --------------- Hotels Rooms Hotels Rooms Hotels Rooms ------ ----- ------ ------- ------ ------ Consolidated (1): AmeriHost Inn hotels 49 3,161 - - 49 3,161 Other brands 5 692 - - 5 692 ------ ----- ------ ------- ------ ------ 54 3,853 - - 54 3,853 ------ ----- ------ ------- ------ ------ Unconsolidated: AmeriHost Inn hotels 8 574 1 96 9 670 Other brands 2 228 - - 2 228 ------ ----- ------ ------- ------ ------ 10 802 1 96 11 898 ------ ----- ------ ------- ------ ------ Totals: AmeriHost Inn hotels 57 3,735 1 96 58 3,831 Other brands 7 920 - - 7 920 ------ ----- ------ ------- ------ ------ 64 4,655 1 96 65 4,751 ====== ===== ====== ======= ====== ======
(1) Consolidated hotels are those in which we have a 100% or controlling ownership or leasehold interest and have therefore been included in our consolidated financial statements We created the AmeriHost Inn brand in 1989, with a focus on providing consistent, cost-effective development and operation of mid-price, limited-service hotels in various markets. After developing and operating the AmeriHost Inn brands for approximately 10 years, we sold the AmeriHost Inn brands and franchising rights to Cendant Corporation ("Cendant") (NYSE:CD) in September 2000 (see also "Strategic Business Plan" below under the subheading "Increase Cendant Fee Streams"). Cendant is one of the world's largest franchising companies with several hotel brands, in addition to the AmeriHost Inn brand, such as Super 8, Days Inn, Ramada, Howard Johnson and Wingate. To date, nearly all of our AmeriHost Inn hotels have been developed and constructed using a two- or three-story prototype, featuring 60 to 120 rooms, interior corridors and an indoor pool area, and generally have been located in smaller town markets, and to a lesser extent, secondary markets. We intend to focus our new AmeriHost Inn development on larger, secondary markets, and have designed a larger, three-story AmeriHost Inn & Suites prototype with more public space and certain other enhancements for this purpose. Each of our other brand hotels are franchised through Days Inn, Howard Johnson Express or Ramada Inn. As of December 31, 2003, we were constructing one AmeriHost Inn hotel for a joint venture in which we are a minority partner. In addition to our 57 AmeriHost Inn hotels, unaffiliated third parties also operated 46 AmeriHost Inn hotels under franchise agreements with Cendant as of December 31, 2003, nearly all of which were previously developed, owned and operated by us, until we sold them. As of December 31, 2003, according to a franchise system report provided by Cendant, there were a total of 103 AmeriHost Inn hotels open, including those owned, operated or managed by us, versus 92 as of December 31, 2002. Strategic Business Plan 2 In order to improve operating results, and liquidity, and to provide capital for growth, we are focused on a strategic business plan that is intended to shift our business model with the objective of generating increased recurring cash flow and income streams with less investment in physical assets and less indebtedness. Our strategies include: - to concentrate on a few carefully selected geographic markets, including the Midwestern U.S., California, and potentially the Southeastern U.S., and to be a leading limited service hotel operator and developer in those markets. Historically we have targeted smaller towns for hotel development. Currently, we are pursuing development opportunities in larger secondary markets with a larger hotel prototype, which we believe will provide a greater return on investment. We are also assessing the market and investment return for the potential acquisition of existing hotels for conversion to the AmeriHost Inn brand; - to explore joint venture opportunities with partners who seek to benefit from the depth of development and management expertise we are able to provide, leveraging our strength as owners and operators; - to pursue the sale of 25 to 30 existing hotel properties at an accelerated pace in order to realize the equity value within the properties, so as to improve liquidity, reduce debt, and to help fund future development projects; - to sell newly developed hotels for our own account as well as for joint ventures after a much shorter holding period than we have historically; - to seek third party development projects, that would provide additional fee income; - to maximize the fees generated from our contractual relationship with Cendant,; through the sale of hotels and the expansion of the brand; - to improve operations at, and returns from, existing hotels including through a possible restructuring of the long-term lease for 21 hotels; and - to improve our capital structure by reducing existing debt, while exploring new, long-term sources of growth and operating capital. As a result, we expect that our revenue mix will change significantly, with hotel operating revenues decreasing and sale of hotel revenues, hotel development revenues and development incentive and royalty sharing fee revenues increasing. We believe this shift will help us increase profit margins and provide a greater return on capital. In summary, we are pursuing four major initiatives as follows: - Sell 35 - 40% of our existing owned hotel portfolio over a two year period. - Improve hotel operational results through revenue enhancement initiatives, including Internet initiatives, and local, regional, and national marketing programs, and through aggressive cost control. - Increase hotel development for joint ventures and third parties. - Increase and accelerate fees under the Cendant agreement. In addition, as part of the strategic plan, we implemented a plan to reduce our hotel management and other corporate staff in 2003 by approximately 20%, or 13 positions. This move is expected to result in annual savings of approximately $580,000 in labor and related costs and has resulted in a reduction of office space needs at our corporate headquarters. Since we own our office building, it gives us the ability to lease out additional space to third parties. However, to assist us in expanding our hotel development activity and increasing hotel revenue, we subsequently added or enhanced five positions in the hotel development, hotel marketing/revenue management, and finance areas, offsetting a portion of the projected savings. Hotel sales The sale of existing hotels is an integral part of funding our growth plan. During 2003, we conducted a comprehensive assessment of each of our hotel properties and in July 2003, adopted a formal plan to sell 25 to 30 hotels over a two-year period. The assessment of each hotel property included such factors as operating cash flow, market penetration, age of property, Revenue Per Available Room ("RevPAR") growth, demographics of the local market, individual hotel capitalization, and new competition, among others. We determined that the sale of a significant number of hotel properties would assist us in achieving our financial and growth objectives. In particular, our hotel operating expenses will decrease as we sell existing hotels and shift towards more hotel development activity, which we believe will generate higher returns than hotel operations activity. In addition, we determined that all of our owned non-AmeriHost Inn hotels would be sold as part of this plan, subject to market conditions. We anticipate using the proceeds from the sale of hotels to: 3 - provide liquidity for operational needs, both corporate and hotel; - reduce outstanding debt; - provide capital for future hotel development; and - provide capital to repurchase common stock. When the plan for hotel disposition was adopted, we expected that the sale of the identified hotels would generate net cash of approximately $11.5 million to $14.7 million, after the repayment of the related mortgage debt secured by the individual properties. In 2003, after the adoption of this plan in July, we sold six hotels, generating net cash proceeds of approximately $5.4 million, after the payoff of the related mortgage debt of approximately $9.9 million. In an effort to enhance the hotel disposition plan and maximize the activity from potential buyers, we conducted a recent assessment of the timing, expected sales prices, and brokerage groups to be used. As a result, we have slightly changed the mix of hotels being offered for sale, identified and/or engaged three additional brokers, in addition to the national broker used thus far, to market and sell the hotels, and reevaluated the listing prices of certain hotels for sale, or to be marketed for sale, based on current market conditions, resulting in offering price reductions on certain hotels. As a result of this reevaluation, we anticipate that the plan for hotel disposition, will now generate total net proceeds toward the lower end of the range as originally estimated, or approximately $11.9 million to $12.3 million. Annual hotel sales activity is summarized as follows, including the number of properties sold, the net cash proceeds to us upon sale, after the repayment of the related mortgage debt, and exclusive of the Cendant incentive fees:
2003 2002 2001 ---- ---- ---- Hotels Sold: Consolidated hotels: AmeriHost Inn hotels 8 5 9 Other brand hotels 2 - - ------- ------ ------ 10 5 9 ------- ------- ------ Unconsolidated hotels: AmeriHost Inn hotels 1 2 - Other brand hotels - 1 - ------- ------ ------ 1 3 - ------- ------ ------ 11 8 9 ======= ====== ====== Net Proceeds from the sale of consolidated hotels (in thousands): AmeriHost Inn hotels $ 8,631 $2,531 $6,172 Other brand hotels 137 - - -------- ------ ------ $ 8,768 $2,531 $6,172 ======= ====== ====== Debt paid off from the sale of consolidated hotels (in thousands): AmeriHost Inn hotels $14,200 $7,187 $7,198 Other brand hotels 2,267 - - ------- ------ ------ $16,467 $7,187 $7,198 ======= ====== ======
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. By selling the hotels, we hope to re-deploy 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. Improve Hotel Operating Results The lodging industry has been negatively impacted since 2001, due to the economic downturn and its impact on both leisure and corporate travel patterns, as well as other geopolitical events. The lodging industry experienced declining revenues for 4 all of 2001, 2002 and the first three quarters of 2003. According to industry analysts, such a prolonged downturn in revenues has not happened in the industry in the past thirty years. During the latter part of 2003, and the beginning of 2004, the industry analysts have reported increased revenues for the lodging industry, including the limited-service segment of the industry. These same industry analysts forecast that revenues will continue to increase in 2004. During the last several months of 2003 and the first part of 2004, our hotels have been lagging behind industry results. We believe this is due primarily to our hotel locations' concentration in the Midwest, where we believe the regional economy has lagged the national averages. We believe our hotel operating results have historically trended with this region's economic activity, and should benefit from an upturn in the Midwestern U.S. economy. We have initiated a multifaceted program designed to increase revenues at the hotel properties we operate through a series of initiatives. This program, which is aimed at maximizing market penetration and revenue on an individual and aggregate basis, includes aggressive Internet initiatives, the fastest growing distribution channel for the lodging industry. Our Internet marketing programs are designed to link to more search engines and travel related web sites such as Expedia and Hotels.com. We believe that further penetration of the Internet market is critical to maximizing future hotel revenues. We added a revenue manager in 2003 to assist in these initiatives, and to work with global distribution and reservation systems to increase bookings from travel agent groups. We are also providing significant training to our hotel management staff to generate more local marketing activity and business from other traditional distribution channels and market segments. In addition, in 2004 Cendant began implementation of a frequent guest stay rewards program, called "TripRewards," which includes the AmeriHost Inn brand as well as Cendant's other hotel brands. These reward programs have become very prevalent in the lodging industry, including the limited service segment, and have usually proven, over time, to significantly increase brand awareness and guest loyalty. We believe that, over time, this program will help all AmeriHost Inn hotels, including ours, increase revenue. We have implemented a number of initiatives to control costs at our hotels, especially in the areas of labor, insurance, utilities, and maintenance. For example, we have reduced our housekeeping labor hours, and were successful in significantly reducing property and other commercial insurance. We have also started to implement energy control systems at a few hotels and are exploring the expansion of this program. In addition, we have entered into discussions with PMC Commercial Trust ("PMC") (AMEX: PCC), regarding 21 AmeriHost Inn hotels owned by PMC which are leased and operated by one of our wholly owned subsidiaries. Due to numerous economic and market-driven factors relating to these 21 hotels, we have entered into discussions with the objective of improving operating results with respect to these hotels through a reduction in the lease payments, and agreeing on a plan for the sale of the hotels to third parties. See "Leased Hotel Properties" below. There can be no assurance that the leases will be restructured on terms and conditions acceptable to us, if at all, or that a restructuring will improve operating results and cash flow. Increase hotel development Over the last two years, we have developed three AmeriHost Inn hotels for joint ventures in which we have an ownership interest and we currently are approaching finalization of two new joint ventures. We believe we can achieve a higher return on our investment by developing hotels for third parties and joint venture projects, compared to developing and operating hotels for our own account. In addition, we intend to selectively acquire hotels where the opportunity exists to convert them to the AmeriHost Inn brand, again primarily on a joint venture basis. Our goal is to increase the development activity for third parties and joint ventures to reach a pace of developing or acquiring and converting 10 to 15 hotels annually by the end of 2005. We anticipate that these new developments will be larger hotels, with 80 to 90 rooms, compared to the average of 60 to 65 rooms in our current portfolio, and will be located in larger markets with multiple demand generators. Our focus will continue to be on the Midwest United States, and California. We are also exploring the Southeastern part of the United States where we feel there is significant opportunity for limited-service hotels. Developing hotels through joint ventures requires less capital from the Company, compared to a wholly owned project, allowing us the capital to build more hotels through joint ventures in a given period. In addition, the Company intends to develop larger hotels, which is expected to create development and operational efficiencies, and increase the cash flow from the Cendant agreements as described below. 5 In 2003, we added to our business and hotel development team to assist in expanding new hotel development, primarily through joint ventures, and to identify other business opportunities. We enhanced and replaced the roles of two executive hotel development and construction positions vacated earlier in 2003, we added one individual in the market analysis area, and we added one position in the corporate finance area. We believe these new and enhanced positions have brought additional depth and knowledge in hotel development, acquisitions, finance and capital markets. Increase Cendant fee streams 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: - for the 25-year term of a royalty-sharing agreement, favorable reduced 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; - 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 - 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, subject to certain limitations. We also received $5.2 million from Cendant in 2000 upon the sale of the AmeriHost Inn brand and franchising rights, net of closing costs, and three installment payments of $400,000 each in 2001 through 2003. In conjunction with this transaction, we changed our name to Arlington Hospitality, Inc. from Amerihost Properties, Inc. in May 2001. As such, the sale of existing AmeriHost Inn hotels, as well as the development and ultimate sale of additional AmeriHost Inn hotels to third parties allows us to generate fees under the Cendant agreement, a significant component of the strategic plan. In addition, the development of larger hotels is also expected to result in larger fees from Cendant, since these hotels are expected to generate greater revenues (which is the basis for the fees) than our existing hotels. As the AmeriHost Inn brand grows, we will also benefit from increased royalty sharing fees when they add hotels not owned by us to the AmeriHost Inn franchise system. Per the terms of our Development Agreement with Cendant, we are restricted from developing or acquiring non-Cendant brands for our own account, or developing for unaffiliated third parties over certain annual limits. There are certain other limitations pertaining to our acquisition of hotel management companies or hotel management contracts. Many of the restrictions related to the development, acquisition or management of non-Cendant brands, but not all, terminate in September 2005. While there are many reasons outlined herein for us to focus on growing the AmeriHost brand, such restrictions could result in our inability to participate in other potentially profitable opportunities or diversification strategies, especially until September 2005. LEASED HOTEL PROPERTIES In 1998 and 1999, we, through various subsidiaries, completed the sale of 30 AmeriHost Inn hotels to PMC Commercial Trust ("PMC"), a real estate investment trust ("REIT") for approximately $73.0 million. Upon the respective sales to PMC, our wholly owned subsidiary entered into agreements to lease back the hotels for an initial term of 10 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 were subject to a CPI increase with a 2% annual maximum. We have guaranteed the lease payments of our subsidiary under the terms of the master lease. In January 2001, the master lease with PMC was amended to provide for the sale of eight unidentified hotels under specified terms, and to extend the initial lease term by five years. The amendment provides for four increases in rent payments of 0.25% each, if these hotels are not sold to a third party or purchased by us by the dates specified. As of December 31, 2003, the first three scheduled rent increases were avoided due to the sale of hotels by PMC to us. The third scheduled increase was avoided in September 2003, when we purchased a hotel from PMC, using cash of approximately $556,000 and mortgage financing provided by PMC of approximately $1.7 million. The fourth 0.25% increase of approximately 6 $127,000 on an annual basis becomes effective if we do not either facilitate the sale to a third party, or purchase from PMC, one specified hotel at a price of approximately $2.6 million by June 5, 2004. If we decide to purchase this hotel by June 5, 2004, we intend to fund the $2.6 million purchase price with a combination of mortgage debt, the source of which has not yet been identified, and cash from operations or working capital. However, there can be no assurance that we will have the liquidity and/or acceptable financing available to purchase this hotel at that time, and the rent increase may therefore become effective under the existing agreements. In addition to the hotels sold pursuant to this amendment, PMC has also sold three other hotels to third parties. We facilitated all of the sales of hotels by PMC to third parties, and have received a commission from PMC for this service. Due to numerous economic and market-driven factors relating to these 21 remaining hotels, we have had to fund, on behalf of our subsidiary, a significant portion of the approximate $5.3 million annual lease obligation, as the aggregate operating cash flow from these hotels in 2003 was insufficient to meet the lease obligation. We have entered into discussions with PMC, on behalf of our subsidiary, with the objective to restructure these long-term lease agreements. On March 12, 2004, we entered into a temporary letter agreement with PMC that expires on April 30, 2004. The temporary letter agreement provides that base rent will continue to accrue at the rate of approximately $445,000 per month, as set forth in the lease agreements; however the base rent payments required to be paid on March 1, 2004 and April 1, 2004 were reduced to approximately $360,000 per month, with the March 1, 2004 payment being due and payable upon the execution of the temporary letter agreement. In addition, we were allowed to utilize $200,000 of our security deposit held with PMC to partially fund these payments. Upon the expiration of the temporary letter agreement on April 30, 2004, the deferred portion of the base rent (approximately $170,000) will be payable and the security deposit is to be restored to its March 12, 2004 balance. Our objective of the contemplated restructuring is to improve our operating results and cash flow with respect to these hotels, and to agree on a plan that would transfer these hotels to third party operators through the sale of the properties. The sale of these hotels is consistent with our strategic objectives, as discussed above. While our objective is to reach a restructured agreement prior to the expiration of the temporary letter agreement, there can be no assurance that the leases will be restructured on terms and conditions acceptable to us, if at all, or that a restructuring will improve operating results and cash flow, or provide for the sale of the hotels to third party operators. HOTEL PROPERTIES At December 31, 2003, the Company owned or managed 64 hotels in 17 states, primarily concentrated in the Midwestern United States. The Company had one additional hotel under construction in West Virginia. The following is a list of hotel properties under the Company's management at December 31, 2003, by state:
Date State Hotel (1) Rooms Operations Began ----- --------- ------ ---------------- California AmeriHost Inn & Suites Redding 84 06/27/03 ------ Florida Howard Johnson Express Inn Ft. Myers 124 09/30/92 ------ Georgia AmeriHost Inn Lagrange 59 03/01/95 AmeriHost Inn Eagles Landing, Stockbridge 60 08/08/95 AmeriHost Inn Smyrna 60 12/21/95 Days Inn Northwest, Atlanta (3) 104 11/01/91 ------ 283 ------
7 Illinois AmeriHost Inn Macomb 60 05/19/95 AmeriHost Inn Players Riverboat Hotel, Metropolis 120 02/25/94 AmeriHost Inn Rochelle 61 03/07/97 AmeriHost Inn Sycamore 58 05/31/96 Days Inn Niles 150 01/01/90 ------ 449 ------ Indiana AmeriHost Inn & Suites Columbia City 60 03/05/99 AmeriHost Inn & Suites Decatur 60 08/30/98 AmeriHost Inn Hammond 86 03/29/96 AmeriHost Inn & Suites Huntington 62 08/21/98 AmeriHost Inn Plainfield 60 09/01/92 Days Inn Plainfield 64 05/01/90 ------ 392 ------ Iowa AmeriHost Inn & Suites Boone 60 08/21/98 AmeriHost Inn & Suites Le Mars 63 01/07/98 AmeriHost Inn & Suites Mt. Pleasant 63 07/02/97 AmeriHost Inn & Suites Pella 60 11/02/01 AmeriHost Inn Storm Lake 61 08/13/97 ------ 307 ------ Kentucky AmeriHost Inn Murray 60 11/01/96 ------ Michigan AmeriHost Inn Coopersville 60 12/31/95 AmeriHost Inn & Suites Dewitt 75 01/24/03 AmeriHost Inn & Suites Dowagiac 64 09/28/01 AmeriHost Inn Grand Rapids North, Walker 60 07/05/95 AmeriHost Inn Grand Rapids South 61 06/11/97 AmeriHost Inn & Suites Howell 75 01/18/02 AmeriHost Inn Hudsonville 61 11/24/97 AmeriHost Inn & Suites Monroe 63 09/19/97 AmeriHost Inn Port Huron 61 07/01/97 ------ 580 ------
Date State Hotel (1) Rooms Operations Began ----- --------- ------ ---------------- Mississippi AmeriHost Inn Batesville 60 04/26/96 AmeriHost Inn Tupelo 61 07/25/97 Howard Johnson Express Inn Tupelo 124 12/31/01 ------ 245 ------ Missouri AmeriHost Inn Fulton 62 01/21/99 AmeriHost Inn Mexico 61 12/06/97 AmeriHost Inn Warrenton 63 11/07/97 ------ 186 ------
8 Ohio AmeriHost Inn Ashland 62 08/09/96 AmeriHost Inn & Suites Athens (2) 100 11/04/89 AmeriHost Inn & Suites Cambridge 71 02/06/98 AmeriHost Inn & Suites Columbus Southeast (2) 60 04/17/98 AmeriHost Inn & Suites East Liverpool (3) 66 10/20/00 AmeriHost Inn Jeffersonville North 61 07/20/96 AmeriHost Inn Jeffersonville South 60 10/14/94 AmeriHost Inn Lancaster 60 09/04/92 AmeriHost Inn Logan 60 04/16/93 AmeriHost Inn Marysville 78 06/01/90 AmeriHost Inn & Suites Oxford (3) 61 12/04/00 AmeriHost Inn & Suites Rickenbacker (3) 96 04/18/03 AmeriHost Inn St. Marys 61 11/25/97 AmeriHost Inn & Suites Toledo/Maumee (3) 85 07/24/02 AmeriHost Inn Upper Sandusky (4) 60 04/12/95 AmeriHost Inn & Suites Wilmington 61 02/21/97 AmeriHost Inn Wooster East 57 01/18/94 AmeriHost Inn Wooster North 60 10/20/95 Ramada Inn Dayton Mall 215 01/20/92 ------ 1434 ------ Oklahoma AmeriHost Inn & Suites Enid 60 06/11/98 ------ Pennsylvania Days Inn Altoona 139 08/31/92 ------ Tennessee AmeriHost Inn Jackson 60 04/01/98 ------ Texas AmeriHost Inn McKinney 61 01/07/97 ------ West Virginia AmeriHost Inn Parkersburg North 78 06/26/95 ------ Wisconsin AmeriHost Inn & Suites Lomira 60 06/08/01 AmeriHost Inn Mosinee 53 04/30/93 ------ 113 ------ TOTAL ROOMS 4655 TOTAL PROPERTIES 64
(1) Unless otherwise noted, the Company owns a direct or indirect equity or leasehold interest in the hotel. (2) Indicates properties that are currently co-managed with an unaffiliated third party. (3) Indicates properties that are currently managed by an unaffiliated third party. (4) Indicates properties that were sold subsequent to December 31, 2003. AmeriHost Inn Hotels All of our AmeriHost Inn hotels are operated pursuant to 20-year franchise agreements with Cendant. Pursuant to these agreements, we have access to the franchise system's reservation system, Internet and global distribution systems, marketing plans and trademarks, and we are a participant in the brand's frequent guest loyalty program, "TripRewards." The franchise agreements require us to maintain both the quality and condition of the hotel, as well as specific operating procedures, in accordance with brand standards and inspections. Our AmeriHost Inn hotels have typically been designed and constructed using a two- or three-story prototype, featuring 60 to 120 rooms, interior corridors and an indoor pool area. The AmeriHost Inn hotel's amenities and services include a whirlpool in 9 the indoor pool area, exercise room, meeting room and extensive exterior lighting for added security. The standard AmeriHost Inn guest room features an electronic card-key lock, in-room safe, in-room coffee maker, telephone with data port for personal computer, a work area and a 25" color television with premium cable service or movies on demand. In addition, each AmeriHost Inn hotel typically contains two to 12 whirlpool suites which provide extra amenities, such as in-room whirlpools, microwave ovens, compact refrigerators and an expanded sitting area. These whirlpool suites generate higher rates than those of a standard room. AmeriHost Inn hotels do not contain food and beverage facilities normally associated with full-service hotels. Food service for hotel guests is generally available from adjacent or nearby free-standing restaurants which are independently owned and operated. However, our hotels do provide a continental breakfast. Our AmeriHost Inn hotels are operated or managed in accordance with guidelines we established over the past 15 years, as well as by Cendant, which are designed to provide guests with a consistent lodging experience. We believe the quality and consistency of the amenities and services provided by the AmeriHost Inn hotels increase guest satisfaction and repeat business. In addition, the AmeriHost Inn brand maintains a Commitment Plus 100% guest satisfaction guarantee program. This program guarantees that every guest will leave satisfied. All AmeriHost Inn employees have the authority to correct any oversight to the guest's satisfaction, or the guest's money will be refunded, up to 100%. This 100% satisfaction guarantee assists the brand in maintaining its quality and consistency. We have historically targeted smaller town markets for new development. Currently, we are focused on larger, secondary markets, with established, multiple demand generators such as major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions, as the principal location for the development and construction of AmeriHost Inn hotels. An AmeriHost Inn hotel typically is positioned to attract both business and leisure travelers seeking consistent amenities and quality rooms at reasonable rates, generally ranging from $50 to $80 per night, depending on general economic and local market conditions and seasonality. We believe our in-house design staff, centralized purchasing program, strict cost controls and experience gained with the construction of more than 100 hotels all contribute to a favorable cost structure for developing and constructing new AmeriHost Inn hotels. Furthermore, due to the centralization of all accounting, purchasing, payroll and other administrative functions, we believe each hotel is operated with reduced on-site staff. Of our 57 existing AmeriHost Inn hotels, 36 are either wholly owned by us or we participate in as joint venture partner while a wholly owned subsidiary leases the other 21 hotels from PMC pursuant to a long-term lease agreements. The Company has guaranteed such lease payments. The terms of such lease, which were entered into in 1998 and 1999 for 30 hotels initially, are currently being discussed with PMC for possibly restructuring, as the Operational cash flow from the 21 hotels is significantly less than the approximate $5.3 million annual lease obligations.[See "Leased Hotel Properties" above]. Other Owned Hotels We primarily acquired our non-AmeriHost Inn hotels through joint ventures prior to 1993. These hotels are owned, operated and managed principally as part of national franchise systems under such brands as Days Inn, Howard Johnson Express or Ramada Inn. Cendant also owns these brands. We believe that maintaining a national franchise is important for these hotels in order to maintain their occupancy levels, which are supported by the franchisor's national reservation systems, marketing efforts and brand name recognition. Our non-AmeriHost Inn hotels generally are located in smaller town markets, with nearby demand generators. The non-AmeriHost Inn hotels contain 64 to 215 rooms, generate average daily rates ranging from $40 to $65 per night and offer a variety of amenities and services. The non-AmeriHost Inn hotels include limited- and full-service hotels. The full-service hotels primarily contain food and beverage facilities, many of which are operated through lease arrangements with non-affiliated restaurant operators. These hotels have generally underperformed our AmeriHost Inn hotels. 10 As part of our strategy to focus on development and ownership of AmeriHost Inn hotels, we intend to sell all our owned, non-AmeriHost Inn hotels as market conditions warrant. The net proceeds from the sales of these hotels, will be used for working capital purposes or the development of additional AmeriHost Inn hotels. Hotel Revenue Results 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.
Three Months Ended Twelve Months Ended December 31 December 31 ------------------ ------------------- Occupancy - 2003 51.5% 56.7% Occupancy - 2002 51.1% 56.7% Increase (decrease) 0.8% (0.0%) Average Daily Rate - 2003 $56.49 $57.15 Average Daily Rate - 2002 $56.15 $57.25 Increase (decrease) 0.6% (0.2%) Revenue per Available Room - 2003 $29.08 $32.40 Revenue per Available Room - 2002 $28.71 $32.48 Increase (decrease) 1.2% (0.3%)
The table below shows our same room average occupancy, ADR and RevPAR in 2003 for our AmeriHost Inn hotels and for our other branded hotels. These statistics include the AmeriHost Inn hotels and other branded hotels open and operating for a period of more than 13 months as of December 31, 2003.
Average Average Revenue Per Occupancy Daily Rate Available Room --------- ---------- -------------- AmeriHost Inn (54 hotels) 56.4% $56.89 $32.10 Other Brand (7 hotels) 44.2% $49.26 $21.79 All hotels (61) 53.9% $55.57 $29.93
The table below shows our AmeriHost Inn hotel averages for occupancy percentage, average daily rate ("ADR") and RevPAR in 2003, broken down by various locations. These statistics include all of our AmeriHost Inn hotels open and operating for a period of more than 13 months as of December 31, 2003.
Average Average Revenue Per Occupancy Daily Rate Available Room --------- ---------- -------------- Ohio (17 hotels) 54.3% $62.76 $34.10 Illinois, Iowa and Wisconsin (11 hotels) 61.3 52.93 32.45 Michigan and Pennsylvania (8 hotels) 49.8 57.37 28.56 Georgia, Mississippi and West Virginia (6 hotels) 60.2 54.21 32.61 Indiana and Kentucky (6 hotels) 55.1 56.05 30.86 Texas (1 hotel) 56.2 50.41 28.34 Other hotels (5 hotels located in Tennessee, Florida, Missouri and Oklahoma) 60.3 52.61 31.71 All hotels (54 hotels) 56.4% $56.89 $32.10
LODGING INDUSTRY The United States lodging industry's performance is strongly correlated to the general economic trends and activity, with changes in gross national product affecting both room supply and demand. These fluctuations result in cyclical changes in average occupancy rates, average daily rates, and revenue per available room. After the recession of the early 1990's, the United States lodging industry showed significant improvement throughout the mid and late 1990s in terms of aggregate 11 RevPAR and profitability results. In 2000, the industry had its most profitable year ever, and the growth in hotel room demand peaked. In 2001, the United States lodging industry was severely impacted by the economic downturn, the September 11th terrorist attacks and excess supply. Although, the rate of industry-wide decline slowed in 2002 versus 2001, the industry remained in a stagnant-to-downward trend during most of 2003 with minor increases for the year, as indicated by the following statistics reported by PricewaterhouseCoopers, a leading industry analyst:
2003 2002 2001 ---- ---- ---- Change in industry-wide occupancy +0.2% -1.0% -5.8% from prior year Change in industry-wide RevPAR +0.2% -2.6% -6.9% from prior year
Our hotel operating results have been affected by the downward economic and industry trends in 2001 and 2002 and for most of 2003, although in 2002 our hotels were impacted to a lesser degree than its competitors with respect to RevPAR results. For 2002, same room RevPar for our AmeriHost Inn hotels increased 3.7%, significantly outpacing the overall lodging industry and the 0.6% decrease in the limited-service sector according to Smith Travel Research, another industry analyst. In 2003, RevPAR increased 0.5% for the mid-scale without food and beverage segment for the lodging industry, according to Smith Travel Research. Same room RevPAR for our AmeriHost Inn hotels decreased 0.3% in 2003, underperforming the mid-scale without food and beverage segment of the lodging industry. This industry segment increase was primarily achieved in the last quarter of 2003. While the RevPAR results for our AmeriHost Inn hotels improved during the fourth quarter of 2003 compared to the prior year and compared to the results of the prior quarters in 2003, they did not increase at the same rate as the industry segment. We believe our hotels were negatively impacted in 2003 by the following trends: a continuing stagnation in business travel primarily due to a weak economy, and new hotel room supply in several of our markets, even though overall industry construction of new units continued to decrease versus 2002. The industry outlook for 2004 is more optimistic. Historically, as mentioned above, lodging demand in the United States correlates to changes in U.S. Gross Domestic Product (GDP) growth, with typically a two to three quarter lag period. Therefore, given the relatively strong U.S. GDP growth in the past six months and the projections for the balance of 2004, an improvement in 2004 in lodging demand is predicted by industry analysts. Such improvement, and its continuation beyond 2004 will be dependent upon several factors including: the strength of the economy; the correlation of hotel demand to new hotel supply, which is expected to improve in 2005; and the impact of global or domestic events on travel and the hotel industry. As shown in the chart below, PricewaterhouseCoopers predicts that the industry's results will improve in 2004 and 2005, after three difficult years. As discussed above, we expect our hotels to participate in such industry upturn, however there can be no assurance that any improvement will be realized.
2001 2002 2003 2004 2005 ----- ----- ----- ----- ----- Occupancy % 59.7% 59.1% 59.3% 61.2% 61.7% Percentage change in -5.7% -1.1% 0.4% 3.2% 0.8% occupancy from prior year Percentage change in average -1.0% -1.4% -0.1% 1.9% 3.0% daily rate from prior year Percentage change in RevPAR -6.6% -2.5% 0.3% 5.2% 3.9% from prior year
12 Source: PricewaterhouseCoopers forecasts for 2004 and 2005; Smith Travel Research statistics for 2001-2003 Most analysts predict, consistent with historical industry results, that the mid-scale without food and beverage segment, should outperform the industry trends outlined above. There can be no assurance that such mid-scale without food and beverage segment will outperform the industry, or that our hotels will achieve industry or sector wide increases in line with such forecasts. DEVELOPMENT AND CONSTRUCTION We pursue new business utilizing an interdisciplinary staff composed of architects, interior designer, purchasing, an escrow agent, and construction professionals to perform many tasks in-house, thereby reducing costly outsourced services and the length of time needed to construct our hotels. By administering the building process with our own staff, we believe we are often able to offer a competitive advantage in terms of pricing, and length of time for construction, compared to other developers. We build for ourselves and for joint venture entities in which we retain an equity position in the hotel. We also offer turnkey services to unaffiliated third parties under a general contractor agreement, which includes development, construction, architectural/engineering, interior design and FF&E (furniture, fixtures and equipment) purchasing. To control costs and reduce risk, we require bids on substantially all construction related contracts, and obtain pricing from other vendors, prior to purchasing the land, to verify the accuracy of the development budget. Then we either hire a general contractor to construct the hotel for a fixed price, or act as the general contractor and enter into all subcontracts directly. In either case, we purchase directly many of the materials and FF&E installed in the hotel to control costs. Our project superintendents and project managers oversee each phase of construction in order to assure the quality and timing of the construction. Each AmeriHost Inn hotel is built using one of our prototypical designs, which means that, except for the interior color scheme, our AmeriHost Inn hotels are consistent in nearly every detail, including the overall layout, room sizes and indoor pool area. The replication of our prototype designs, with as few changes as possible, allows for accurate budgeting of construction and overhead costs. We recently concluded an in-depth analysis and assessment of the furniture, fixtures & equipment, and other amenities used in our AmeriHost Inn hotels, and have incorporated several changes and upgrades into our pending new developments. We are also designing a slightly upgraded facility, at minor incremental cost, meant for larger markets. This hotel will include amenities such as a sundry shop, guest laundry, a business center, a larger exercise room, and a game room. We expect to utilize the upgraded version in one or more of our new developments in 2004, subject to Cendant's approval as franchisor. Development and Construction Growth Strategy Having developed more than 100 hotels throughout the continental United States, we believe we have a strong reputation in construction and development that enables us to effectively market these services to unaffiliated entities. The association with Cendant in franchise development and brand growth affords us an opportunity to offer and provide these services for a fee to potential Cendant franchisees. We anticipate increasing our efforts to grow such third-party income streams. Hotel development activity is summarized as follows:
2003 2002 2001 ---------------------------- ---------------------------- ---------------------------- Unaffiliated & Unaffiliated & Unaffiliated & Unconsolidated Consolidated Unconsolidated Consolidated Unconsolidated Consolidated Hotels (1) Hotels (2) Hotels (1) Hotels (2) Hotels (1) Hotels (2) -------------- ------------ -------------- ------------ -------------- ------------ Under construction at beginning of year 1 3 2 3 - 2 Starts 1 - 1 2 2 4
13 Completions 1 3 2 2 - 3 --- ---- ---- ---- --- --- Under construction at end of year 1 0 1 3 2 3 === ==== ==== ==== === ===
(1) hotels developed/constructed for unaffiliated third parties and entities in which the Company holds a non-controlling, minority ownership interest (2) hotels developed/constructed for the Company's own account and for entities in which the Company has a controlling ownership interest During 2003, we completed construction on four AmeriHost Inn hotels, which were started in 2002 and began construction on one additional AmeriHost Inn hotel. For several internal and industry factors described herein, the pace of new developments slowed in 2003. The one AmeriHost Inn hotel currently under construction is scheduled to open in the second quarter of 2004. In addition, we currently have two land sites under contract to purchase for potential hotel developments located in Michigan and Ohio. Several additional potential AmeriHost Inn sites have been identified in California, and the Midwest and Southeastern United States. We believe that additional hotel developments in California and the Midwest will build on our historical development success and brand awareness in those regions. The Southeast has been identified as a third region for possible expansion due to its positive population and employment growth trends, availability of reasonably priced land sites, and supply of existing older hotel product which are deemed to be competitively at risk to the introduction of more modern and physically attractive hotel facilities. An increase in the pace of our hotel development activity is essential to our strategic business plan. We are also assessing a strategy involving the acquisition of existing hotels with the conversion to the AmeriHost Inn brand. In 2004, we will place renewed emphasis on working with existing and new joint venture partners, and with non-affiliated parties in developing and providing "turnkey" completed AmeriHost Inn hotels. Under our franchise agreements with Cendant, we can claim exclusive rights to certain geographic markets for a period of time, allowing us to build a strong presence in that market to achieve economies of scale and competitive advantages. Historically, we have financed our hotel development and construction through a combination of equity and debt or lease financing, with the equity typically provided by us and/or our joint venture partners, debt financing typically provided by local or regional banks, and leasing arrangements provided by PMC, a real estate investment trust. The AmeriHost Inn hotel under construction at December 31, 2003, is being financed by a joint venture ownership entity through a combination of debt and equity. We believe that we can develop and operate additional AmeriHost Inn hotels in larger, secondary markets that will achieve occupancies and average daily rates similar to those achieved by its local mid-market, limited-service hotel competition. Moreover, we believe that the development of additional AmeriHost Inn hotels, through the Company as well as through additional AmeriHost Inn franchise sales by Cendant, and the resulting expanded geographic diversity will continue to enhance the awareness of the AmeriHost Inn brand, improving revenues and market penetration at existing, as well as future, AmeriHost Inn hotels. We believe that leveraging our expertise in hotel development and management by providing these services to unaffiliated parties, including other and Cendant franchisees, will also assist us in reaching our financial objectives. Joint Venture Hotel Development As of December 31, 2003, we had 15 projects (including one vacant parcel holding and one hotel under construction) with joint venture partners, including multiple projects with certain joint venture partners, and two additional joint venture projects that are in the final stages of the development process. Our joint ventures have taken various forms, including general partnerships, limited partnerships, and limited liability companies. Each joint venture has been formed with respect to a particular hotel project and reflects the characteristics of that project, including the relative contributions, in cash, property or services, of its partners. In most instances, the joint venture has taken the form of a limited partnership or a limited liability company, with a wholly-owned subsidiary of the Company as a general partner or managing member with sole or joint management authority. Our subsidiary, as general partner or managing member, has typically received an ownership interest ranging from 1% to 30% for contributing our expertise. In certain cases, the subsidiary also has contributed a minimal amount of cash. The limited partners or members (which may include the Company or its affiliates in some instances) have typically contributed the cash equity required to fund the project and have received interests proportionate to their contributions. A typical joint venture agreement provides that the profits and losses of the entity will be allocated among the partners in proportion to their respective interests. However, the distribution of operating cash flow and asset sale proceeds to us in proportion to our ownership interest 14 is often subordinate to the prior return of capital and other distributions payable to the other joint venture partners. As the general partner or managing member, our subsidiary generally has significant management authority with respect to the day-to-day operations of the joint venture. In certain instances, the joint venture agreement or applicable law provides to the other joint venture partners the right to amend the joint venture agreement, approve or prevent a transfer of the general partner's partnership interest, remove the general partner for cause, approve significant transactions or dissolve the joint venture. Furthermore, in certain cases, we are obligated and/or have funded operating shortfalls on behalf of the joint ventures, usually in the form of interest-bearing loans. The joint venture agreements do not typically restrict our right to engage in related or competitive business activities. As part of our strategic plan, we intend to pursue additional joint venture arrangements for the development of new AmeriHost Inn hotels. 15 HOTEL OPERATIONS Our operating goal is to provide its customers with a consistent lodging experience by offering a set of amenities and services that meet or exceed the customer's expectations. We developed a set of standards and procedures for all aspects of operating an AmeriHost Inn hotel, including management, accounting, marketing, quality control, housekeeping, human resource administration, training, auditing, and purchasing. The Senior Vice President of Operations is responsible for establishing strategic objectives for all hotel operations with a goal of maximizing RevPAR and profitability. In pursuit of such goals, the Senior Vice President of Operations supervises the Regional Directors of Operations, who in turn oversee the General Managers of the hotels. The General Managers, in turn, train, develop and oversee their hotel's operational teams. Each Regional Director of Operations is responsible for ten to 15 hotels, depending on size and the geographic dispersion of the properties. Regional Support Managers report to the Regional Directors of Operations and provide training and sales support to the region. We also have corporate sales, marketing and revenue management personnel who provide support for national, regional and local marketing efforts, as directed by the Vice President of Sales and Marketing. Our internal auditors perform operational audits of each hotel, at least once a year. Their responsibilities include a review of financial reports, cash, receivables, operational standards, cleanliness, security and federal and state compliance matters. This department also provides on-site training for General Managers and other on-site personnel. During the last quarter of 2003, and the early part of 2004, we implemented our "Heads in Beds" room revenue enhancement initiative. This program is focused on increasing revenues with the reorganization of the sales and marketing department. We have also pursued additional third party Internet booking sites that offer incremental revenue opportunities, and have built web pages for many of the hotels in an effort to improve placement on Internet search engines. We created a Revenue Manager position in 2003, which is responsible for the optimization of room rate opportunities and the growth of the reservation distribution channels. We use a marketing strategy, which seeks active involvement in the local community in which the hotels are located. The local business and residential community is often the hotels' best referral source. Visitors to these communities often seek hotel referrals from family, friends and business associates. The General Managers are expected to devote time to participate in activities with local businesses and the community. The General Managers are expected to be involved in local civic groups and sponsor special events in an effort to promote community awareness and build relationships with business leaders and local residents. The hotels sponsor local social and community events and open their facilities to local clubs and civic organizations. The community involvement and local and regional marketing programs showcase the hotel to both the corporate and leisure markets. Our corporate and regional sales/marketing personnel, and our general managers, also will continue to utilize Cendant's reservation system, the Internet and other distribution channels in their efforts to increase hotel revenues. The franchisor, Cendant, maintains a toll-free reservation number for the AmeriHost Inn system, which allows guests to make reservations at any one of the AmeriHost Inn hotels nationwide. In addition, the AmeriHost Inn web site is capable of accepting reservations on-line, further improving guests' ability to easily reserve rooms. We also participate in the Global Distribution System (GDS) and Cendant's Internet distribution channels. GDS is the airline reservation system utilized by travel agents to make hotel bookings. The franchise system also periodically implements local and regional marketing campaigns using radio, newspaper, direct mail and other marketing/sales initiatives. As part of its franchise agreements with Cendant, all franchisees, including the Company, contribute to the marketing fund used to promote the brand on a national level. In addition, Cendant has recently implemented a frequent guest stay rewards program, called "TripRewards," which includes the AmeriHost Inn brand as well as Cendant's other hotel brands. These reward programs have become very prevalent in the lodging industry, and have proven to substantially increase brand awareness and guest loyalty. We believe that this program, over time, will help all AmeriHost Inn hotels, including ours, increase revenue. We have developed a centralized financial management system, which includes cash management, accounts payable, the generation of daily financial and operational information and monthly financial statements. This reporting system allows property, regional and senior management to closely monitor operating results. We provide standard operating procedures to maximize uniform and efficient financial reporting. These efficiencies allow the property management to focus on the 16 operation and marketing of the hotel. The centralized financial management reporting system also enhances the quality and reporting of internal financial reports. In addition, since our employee leasing subsidiary employs all of the approximately 1,200 hotel personnel, the costs of certain payroll and related expense are lower than if each hotel maintained its own employees. Similarly, this system allows us to offer more attractive health insurance programs to our employees. Hotel Management and Employee Leasing Expertise We offer complete operational and financial management services, including sales, marketing, quality control, training, purchasing and accounting. This expertise is used for our own account, as well as for joint ventures pursuant to written management contracts. However, under certain management contracts, our joint venture partners or co-managers are responsible for the day-to-day operational management, while we provide full financial management and operational consulting and assistance. As of December 31, 2003 we managed, co-managed, or provided accounting services for all of the hotels in which we had an ownership interest. Company-managed hotels in which we have a minority ownership interest are managed under contracts ranging from one to 10 years, with optional renewal periods of equal length, and which contain provisions under which we are paid fees equal to a percentage of total gross revenues for our services. We have developed centralized systems and procedures, which we intend to continue to improve as needed, allowing us to manage the hotels effectively and efficiently. We may pursue management contracts with additional third parties, including Cendant franchisees, while continuing to manage hotels for current, as well as future, joint ventures. We provide employee leasing services to hotels in which we have a minority ownership interest. Under its employee leasing program, we employ all of the personnel working at the participating hotels and lease them to the hotel owners pursuant to written agreements. Employee leasing allows individual hotel owners with minimal employees to benefit from economies of scale on personnel-related costs that result from our employee population of approximately 1,200 hotel employees. Our employee leasing agreements typically provide for one-year terms, with automatic one-year renewals. We generally receive fees from each participating hotel in an amount equal to the gross payroll costs for the leased employees, including all related taxes and benefits, plus a percentage of the gross payroll. COMPETITION There is significant competition in the mid-price, limited- and full-service segments of the lodging industry. There are numerous hotel chains that operate on a national or regional basis, as well as other hotels, motor inns and other independent lodging establishments throughout the United States. Several of these chains or franchisors have a much larger inventory of hotels within their franchise system than the AmeriHost Inn brand. Competition is primarily in the areas of price, location, age and quality of product, services, amenities, and the ability of the franchisor's marketing efforts, reservation system, and other distribution channels, to bring guests to the hotel. Many of our competitors have recognized trade names, greater resources and longer operating histories than our hotels and their franchise systems. There are a number of companies that develop, construct and renovate hotels. Some of these companies perform these services only for their own account, while others actively pursue contracts for these services with third-party owners. There are also many hotel management companies that provide management services to hotels similar to the services we provided. We believe that the relationship between the development and construction costs and the average daily rates achieved by the AmeriHost Inn hotels is favorable compared to many of the Company's competitors. In addition, a significant portion of the purchasing and accounting functions related to the hotels is handled centrally, thus enabling the local general managers and their staff to focus their efforts on marketing and sales. The centralization of many functions also assists in controlling costs through economies of scale. FRANCHISE AGREEMENTS At December 31, 2003, we had franchise agreements (collectively, the "Franchise Agreements") with AmeriHost Inn Franchise Systems, Inc. for our AmeriHost Inn hotels, and with Days Inn of America, Inc., Howard Johnsons Franchise Systems, Inc. and 17 Ramada Franchise Systems, Inc. for our other branded hotels. Although the terms of the various Franchise Agreements differ, each requires us to pay a monthly fee for the right to operate the hotel under the "flag" of that Franchisor and to have access to the other benefits provided by such Franchisor, including access to reservation systems, marketing plans and use of trademarks. Pursuant to the sale of the AmeriHost Inn brand and franchising rights to Cendant, we operate our AmeriHost Inn hotels under favorable terms with respect to the monthly franchise fees. The fees, including the marketing and reservation system assessments, typically range between 4% and 10% of gross room rental revenue. In addition, we and/or the joint venture which owns a hotel operated pursuant to a Franchise Agreement, will have ongoing obligations to maintain the quality and condition of the hotel to the standards required by the Franchisor. The term of a Franchise Agreement typically is between 10 and 20 years, with a substantial penalty for early termination by the joint venture entity or us. We believe that we are in compliance with our Franchise Agreements, and the loss of any one of the Franchise Agreements would not have a material impact on us. Our AmeriHost Inn franchise agreements expire in 2020 through 2023. Our other brand franchise agreements expire 2009 through 2017. EMPLOYEES As of December 31, 2003, the Company and its subsidiaries had 1,239 full and part-time employees: Hotel Management: Operations 21 Accounting and finance 11 Property general managers 64 Hotel Development: 10 Hotel Operations: 933 Corporate: General and administrative 6 Executive officers 4 Employee Leasing: General and administrative 2 Operations 188 ----- 1,239 =====
To date, we have not experienced any work stoppages or significant employee-related problems. CORPORATE CONTACT INFORMATION, WEB SITE, AND SEC REPORTS Our corporate headquarters is located at 2355 South Arlington Heights Road, Suite 400, Arlington Heights, Illinois 60005, and its phone number is (847) 228-5400. Our Web site is located at http://www.arlingtonhospitality.com. On our Web site, you can obtain a copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (the "SEC"). Our Internet web site and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K. CORPORATE GOVERNANCE In 2002, we began implementing various corporate governance initiatives in response to the Sarbanes-Oxley Act of 2002, as well as the recently adopted corporate governance listing standards: - We added four independent directors in 2002 (Messrs. Fell, Shapiro, LaFlamme, and Belmonte), and eliminated related party relationships with two existing directors. In addition, we have mandated that a super majority of two-thirds of the Board and 100% of its key committees be composed of independent directors. 18 - The Chairman of the Board position was made independent and separate from the Chief Executive Officer. - An independent Vice Chairman position was created to improve Board succession and functioning. - Our Board of Directors determined that Gerald T. LaFlamme, the Chairman of the Audit Committee, as well as Thomas J. Romano, each qualify as "audit committee financial experts" as such term is defined under Item 401 of Regulation S-K. Both Mr. LaFlamme and Mr. Romano are "independent" as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. - Our Audit Committee adopted our Audit and Non-Audit Services Pre-Approval Policy, which sets forth the procedures and the conditions pursuant to which permissible services to be performed by our independent public accountants must be pre-approved. - Our Audit Committee established "Audit Committee Complaint Procedures" for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including the anonymous submission by employees of concerns regarding questionable accounting or auditing matters. - Our Board of Directors adopted a Code of Business Conduct and Ethics, which governs business decisions made and actions taken by our directors, officers, and employees. - Our Board of Directors established and adopted new charters for each of its Audit, Compensation and Corporate Governance/Nominating Committees. Each committee is required to be comprised solely of independent directors. A copy of the Code of Business Conduct and Ethics is available on our website at http://www.arlingtonhospitality.com under the heading of "About Us" and subheading "Corporate Governance" and we intend to disclose on this website any amendment to, or waiver of, any provision of this Code applicable to our directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or NASDAQ Committee. A copy of each of the committee charters is also available on our website under the heading "About Us" and subheading "Corporate Governance" and further subheading "Board Committees and Charters". A copy of the Code of Business Conduct and Ethics and the committee charters are also available in print to any stockholder upon written request addressed to Investor Relations, Arlington Hospitality, Inc., 2355 S. Arlington Heights Road, Suite 400, Arlington Heights, Illinois 60005.For purposes of shareholder communication directly with our board or suggestions of qualified director candidates for consideration by the Corporate Governance/Nominating Committee, the website also contains an email link to independent director Mr. Andrew E. Shapiro, Chairman of the Corporate Governance/Nominating Committee. ENVIRONMENTAL LAWS We review and monitor compliance with federal, state and local provisions, which have been enacted or adopted regulating the discharge of material into the environment, or otherwise relating to the protection of the environment. For the year ended December 31, 2003, we did not incur any material capital expenditures for environmental control facilities nor do we anticipate incurring material amounts during the year ending December 31, 2004. [See also, Item 6 - Management's Discussion and Analysis of Financial Condition and Results of Operations, under the heading, "Government Regulation."] ITEM 2. PROPERTIES. The Company owns the office building in which its corporate offices and the offices of its wholly-owned subsidiaries are located at 2355 South Arlington Heights Road, Suite 400, Arlington Heights, Illinois 60005. The five-story building contains approximately 53,000 rentable square feet, of which the Company occupies approximately 14,000 square feet. Approximately 77% of the space is occupied, including the space leased to various tenants under long-term agreements, and we have engaged a broker to assist us in leasing the remainder of the available space. This office building is pledged to secure related long-term mortgage debt. We intend to monitor alternatives with respect to ownership and operation of this office building, including a sale of the building. At December 31, 2003, we had a 100% or controlling ownership or leasehold interest in 51 operating hotels located in 17 states. The land, building, furniture, fixtures and equipment and construction in progress for these hotels are reflected in our Consolidated Balance Sheet at December 31, 2003. These assets were substantially pledged to secure related long-term mortgage debt. See Item 1 and Notes 6 and 7 to the Consolidated Financial Statements under Item 15. In addition to the foregoing, we have an equity interest in partnerships that own and/or lease property. See Note 4 to the Consolidated Financial Statements under Item 15. 19 ITEM 3. LEGAL PROCEEDINGS. We are subject to claims and suits in the ordinary course of business. In management's opinion, currently pending legal proceedings and claims against the Company will not, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The annual shareholders' meeting was held on October 29, 2003. Five matters were voted with the following results: Matter 1: Election of Directors
Director For Authority Withheld - ------------------ --------- ------------------ Kenneth M. Fell 3,786,563 332,269 Andrew E. Shapiro 3,804,908 313,924 Jerry H. Herman 3,785,333 333,499 Salomon J. Dayan 3,805,343 313,589 Thomas J. Romano 3,786,543 332,289 Gerald T. LaFlamme 3,786,718 332,114 Steven J. Belmonte 3,786,743 332,089
Matter 2: Ratify Appointment of KPMG LLP as Independent Auditors
For Against Abstain --- ------- ------- Total Shares Voted 4,095,345 21,242 2,245
Matter 3: Approve the 2003 Non-Employee Director Restricted Stock Plan
For Against Abstain --- ------- ------- Total Shares Voted 2,763,033 275,106 79,188
Matter 4: Approve the 2003 Long-Term Incentive Plan
For Against Abstain --- ------- ------- Total Shares Voted 2,277,894 753,891 80,542
Matter 5: Approve 1-for-100 Reverse Split, Followed By 100-for-1 Forward Split
For Against Abstain --- ------- ------- Total Shares Voted 2,683,240 430,053 4,034
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is included for quotation on the Nasdaq National Market under the symbol HOST. As of March 26, 2004, there were 527 holders of record of the Company's common stock. The following table shows the range of reported high and low closing prices per share. 20
High($) Low($) ------- ------ FISCAL 2002 First quarter 3.00 1.92 Second quarter 4.80 2.74 Third quarter 4.30 3.30 Fourth quarter 4.00 2.90 FISCAL 2003 First quarter 3.53 3.00 Second quarter 3.35 2.56 Third quarter 3.66 3.09 Fourth quarter 4.14 3.48 FISCAL 2004 First quarter (through March 26, 2004) 3.98 3.47
We have not declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for use in our business and, therefore, do not anticipate paying any cash dividends in 2004. However, from time to time, we may utilize cash to purchase our common stock. Currently, the Board of Directors has authorized the Company to buy back, at any time and without notice, up to 1,000,000 shares of its common stock under certain conditions. Under this authorization we have repurchased 36,800 shares. In addition, in 2003 we executed a reverse-forward stock split whereby approximately 33,000 shares held by shareholders owning less than 100 shares each were redeemed and converted into a right to receive cash. Any future determination to pay cash dividends or to purchase common stock will be made in light of our earnings, financial position, capital requirements and such other factors as the board of directors deems relevant. We have not granted or issued any unregistered securities during the last three years, except as follows:
Date Shares Security Issued Issued Exemption -------- ------ ------ --------- Common stock (2) 2001 4,812 4(2) Common stock (2) 2002 4,736 4(2) Common stock (1) 2003 40,000 4(2)
(1) On January 17, 2003, our President and CEO exercised a purchase option pursuant to his employment agreement whereby we issued 40,000 shares of restricted common stock at an exercise price of $3.16 per share. (2) Represents shares of restricted common stock issued in lieu of monthly director cash retainer fees. The following table sets forth information, as of December 31, 2003, with respect to compensation plans under which equity securities of the Company are authorized for issuance, aggregated by (i) all compensation plans previously approved by the shareholders, and (ii) all compensation plans not previously approved by the shareholders: 21
Number of shares remaining available (a) for future issuance Number of shares Weighted average under equity to be issued upon exercise price of compensation plans exercise of outstanding (excluding shares outstanding options, options, warrants reflected in warrants and rights and rights column (a)) ------------------- ---------- ----------- Equity compensation plans approved by shareholders 327,500 $4.39 706,782 Equity compensation plans not approved by shareholders 1,107,458 $4.19 - --------- ----- ------- Total 1,434,958 $4.23 706,782 ========= ===== =======
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% vested on December 31, 2003. The Company expensed approximately $156,000 in the fourth quarter of 2003 in connection with these restricted stock grants. 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, including restricted shares of common stock, stock options, and other stock based awards. The Plan features the following: - The plan has a stated term of 10 years. - The maximum number of shares that may be issued under the Plan is 550,000, with certain annual limitations on an individual basis. - The Plan prohibits the re-pricing of options. - Actions cannot be taken that would otherwise require stockholder approval. To date, 2,718 restricted shares of common stock have been granted pursuant to this plan. ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial data presented below has been derived from the Company's consolidated financial statements. The consolidated financial statements for all years presented have been audited by the Company's independent certified public accountants, whose report on such consolidated financial statements for each year of the three-year period ended December 31, 2003, is included herein under Item 15. The information set forth below should be read in conjunction with the consolidated financial statements and notes thereto under Item 15 and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 22 (in thousands, except per share data) (this presentation not covered by independent auditors' report)
Fiscal Year Ended December 31, ----------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Revenue $ 72,517 $ 68,172 $ 68,124 $ 76,151 $ 76,058 Operating costs and expenses 58,842 53,060 51,187 58,736 57,868 Depreciation and amortization expense 3,602 4,339 3,899 4,542 4,567 Leasehold rents - hotels 5,033 5,112 5,833 6,525 7,307 Corporate general and administrative 2,420 2,199 1,908 1,695 1,537 Impairment provision 5,070 542 - - - Operating income (loss) (2,449) 2,921 5,297 4,653 4,780 Interest expense, net 3,620 4,273 3,790 4,819 5,155 Gain on sale of fixed assets 400 727 1,286 6,663 553 Net income (loss) before discontinued operations $ (4,163) $ (656) $ 971 $ 4,010 $ 201 Discontinued operations (1,456) (1,054) (215) - - --------- --------- --------- --------- --------- Net income (loss) $ (5,619) $ (1,710) $ 755 $ 4,010 $ 201 ========= ========= ========= ========= ========= Net income (loss) per share - basic: From continuing operations $ (0.83) $ (0.13) $ 0.19 $ 0.74 $ 0.02 From discontinued operations (0.29) (0.21) (0.04) - - --------- --------- --------- --------- --------- $ (1.12) $ (0.34) $ 0.15 $ 0.81 $ 0.04 ========= ========= ========= ========= ========= Net income (loss) per share-diluted: From continuing operations $ (0.83) $ (0.13) $ 0.17 $ 0.81 $ 0.04 From discontinued operations (0.29) (0.21) (0.04) - - --------- --------- --------- --------- --------- $ (1.12) $ (0.34) $ 0.13 $ 0.74 $ 0.02 ========= ========= ========= ========= ========= Weighted average shares outstanding: Basic 5,011 4,963 4,975 4,976 5,567 ========= ========= ========= ========= ========= Diluted 5,011 4,963 5,182 5,272 5,857 ========= ========= ========= ========= ========= BALANCE SHEET DATA: Total assets $ 99,713 $ 119,934 $ 114,888 $ 98,143 $ 103,108 Long-term debt, including current portion 27,708 76,242 72,199 58,604 60,349 Liabilities of assets held for sale 38,126 - - - - Working capital (deficiency) (2,500) (8,995) (4,575) (4,172) (6,817) Shareholders' equity 11,787 17,370 19,067 18,266 14,181 Deferred income 11,362 10,867 10,715 12,196 14,001 OTHER DATA: Cash provided by (used in) operating activities 20,366 14,330 15,507 1,218 (885) Cash (used in) provided by investing activities (6,013) (17,073) (27,105) 2,728 12,344 Cash provided by (used in) financing activities (14,699) 1,964 14,617 (5,983) (12,187) Capital expenditures (7,088) (18,583) (25,400) (10,434) (2,103) AMERIHOST INN HOTEL OPERATING STATISTICS: Hotels operated/managed at December 31 57 62 66 72 74 Hotel rooms operated/managed at December 31 3,735 3,995 4,229 4,590 4,705 Average occupancy 55.7% 57.4% 56.1% 59.1% 57.3% Average daily rate $ 57.36 $ 57.48 $ 58.53 $ 56.75 $ 56.95
23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD LOOKING STATEMENTS Information both included and incorporated by reference in this Annual Report on Form 10-K may 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, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on various assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words such as "intent," "plan," "may," "should," "will," "project," "estimate," "anticipate," "believe," "expect," "continue," "potential," "opportunity," and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. All statements regarding our expected financial position, business and financing plans are forward-looking statements. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to: - a downturn or sluggishness in the national economy in general, and the real estate market specifically; - the effect of threats or acts of terrorism and increased security precautions on travel patterns and demand for hotels; - governmental actions and other legislative/regulatory changes, including changes to tax laws; - level of proceeds from asset sales; - ability of our hotel buyers to obtain adequate financing; - cash available for operating expenses and ongoing capital expenditures; - availability of capital for new development/acquisition growth; - ability to refinance debt; - rising interest rates; - rising insurance premiums; - competition; - supply and demand for hotel rooms in our current and proposed market areas, including the existing and continuing weakness in business travel and lower-than-expected daily room rates; and - other factors that may influence the travel industry, including health, safety and economic factors. These risks and uncertainties, along with the risk factors discussed under "Risk factors" in this Annual Report on Form 10-K, should be considered in evaluating any forward-looking statements contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report. EXECUTIVE OVERVIEW We are engaged primarily in developing, selling, owning, operating and managing limited service hotels, without food and beverage facilities, primarily AmeriHost Inn hotels. Our hotels are concentrated primarily in the Midwestern and South Central United States, however we have developed a number of hotel properties in California and the South Central U.S. over the past several years. Our portfolio, as well as the changes in 2003 are summarized as follows: 24
Hotels at Hotels Hotels Hotels at 12/31/02 Sold/Disposed (2) Opened/Acquired 12/31/03 ------------- ----------------- --------------- ------------- Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms ------ ----- ------ ----- ------ ----- ------ ----- Consolidated (1): AmeriHost Inn hotel 53 3,385 (8) (514) 4 290 49 3,161 Other brands 8 1,045 (3) (353) - - 5 692 -- ----- --- ---- --- --- -- ----- 61 4,430 (11) (867) 4 290 54 3,853 -- ----- --- ---- --- --- -- ----- Unconsolidated: AmeriHost Inn hotels 9 610 (2) (132) 1 96 8 574 Other brands 2 228 - - - - 2 228 -- ----- --- ---- --- --- -- ----- 11 838 (2) (132) 1 96 10 802 -- ----- --- ---- --- --- -- ----- Totals: AmeriHost Inn hotels 62 3,995 (10) (646) 5 386 57 3,735 Other brands 10 1,273 (3) (353) - - 7 920 -- ----- --- ---- --- --- -- ----- 72 5,268 (13) (999) 5 386 64 4,655 == ===== === ==== === === == =====
(1) Consolidated hotels are those in which we have a 100% or controlling ownership interest or a leasehold interest. (2) Includes one leased consolidated other branded hotel, which lease had expired in 2003 without renewal. Also includes one unconsolidated AmeriHost Inn hotel that we acquired, and consolidated in 2003. Our AmeriHost Inn hotels operate under franchise agreements with Cendant. Our other brand hotels are those hotels operated under other national franchise affiliations, such as Days Inn, Ramada Inn, and Howard Johnson Express. These brands are also owned by Cendant. Sources of Revenue We generate revenue from the following primary sources: - Hotel operations consisting of the revenues from all hotels in which we have a 100% or controlling ownership or leasehold interest (consolidated hotels). Unconsolidated hotels are those hotels in which we have a minority or non-controlling ownership or leasehold interest, and which are accounted for by the equity method. - Development and construction revenues consisting of fees for new development, construction and renovation activities. - Commissions and revenue from selling of our consolidated AmeriHost Inn hotels. - Incentive and royalty sharing fees consisting of the amortization of one-time development incentive fees received from Cendant, and our portion of the AmeriHost Inn franchise royalty fees Cendant receives from all other AmeriHost Inn franchisees and pays to us. We generate revenue from additional secondary sources; - Management and employee leasing revenues consisting of fees for hotel management and employee leasing services. - Rental revenue from the third-party tenants in our office building. Operating Expenses Operating expenses consist of the following: 25 - Operating expenses from hotel operations consisting of all costs associated with operating our consolidated hotels including front desk, housekeeping, utilities, marketing, maintenance, insurance, real estate taxes, and other general and administrative expenses. - Operating expenses from hotel development including all direct costs of development and construction activities, such as site work, zoning costs, the cost of all materials, construction contracts, and furniture, fixtures and equipment, as well as indirect internal costs such as architectural, design, purchasing and legal expenses. - Operating expenses from hotel sales equal to the net book value of consolidated AmeriHost Inn hotels we sell. - Operating expenses from hotel management including the direct and indirect costs of management services, including sales, marketing, quality control, training, purchasing and accounting. - Operating expenses from employee leasing including the actual payroll cost for hotel employees. - Operating expenses for the office building including all costs associated with managing and owning the office building, such as maintenance, repairs, security, real estates taxes, and other direct and indirect administrative expenses. Hotel and corporate level financing Our company-owned and operated hotels have been financed historically through either a combination of debt and equity, or lease financing. Our lenders are typically local or regional banks, or other financial institutions, that provide mortgage debt based on a percentage of cost or value, as determined by each individual lender. The loan to value ratios have typically ranged from 60%-75%. The equity requirement has been funded through our operating cash flow or other corporate financing resources, such as our operating line-of-credit with LaSalle Bank NA. Our joint ventures have also historically been financed through a combination of debt and equity, similar to the terms discussed above, and in one case, through a long-term lease. We have also typically made an equity contribution of up to 30% of the total equity as a minority partner. In addition, we have guaranteed the mortgage debt of the joint venture in most instances. We paid off approximately $16.5 million in mortgage debt in 2003, in connection with the sale of hotels. We expect to decrease our mortgage debt further as we sell additional hotels. Total debt service for 2004, excluding mortgages which mature in 2004, is approximately $6.0 million for all of our consolidated hotels. Total debt service for our unconsolidated joint ventures in 2004, excluding mortgages which mature in 2004, is approximately $1.9 million. However, if certain anticipated hotel sales occur, these obligations would decrease as the related mortgage debt would be paid off with the proceeds therefrom. In 1998 and 1999, our subsidiary completed a sale and lease back transaction with PMC (a REIT) for 30 AmeriHost Inn hotels. Since then, PMC has sold, or we have repurchased, nine hotels, leaving 21 hotels currently leased from PMC. The leases expire in 2008, subject to an automatic five-year extension by either our subsidiary or PMC, plus additional renewals through 2020. Our subsidiary's current lease obligation for these 21 hotels is approximately $5.3 million on an annual basis. We have guaranteed our subsidiary's obligation under the leases. At the corporate level, our sole financing source is our operating line-of-credit with LaSalle Bank NA. This line-of-credit is a revolving facility, allowing us to take advances when needed, up to the allowed maximum, and to repay any advances without penalty. This facility also requires us to satisfy financial covenants such as minimum net worth, maximum debt to net worth, minimum net income, and minimum debt service ratio. Our current maximum availability under the line-of-credit is $5.5 million, subject to adjustments discussed below. Overall industry and economic factors The lodging industry's performance, and the related travel patterns of both business and leisure travelers, generally follows the trends of the overall U.S. economy. Both the U.S. economy and the lodging industry began to decline in 2001. The 26 performances of our hotels have followed this same trend. As the U.S. economy began to show signs of improvement in 2003, the lodging industry has followed in the latter part of 2003. However, historically we have seen that lodging demand trends will typically lag six to nine months behind these economic trends. Based on the economic forecasts such as the GDP growth forecast, our industry outlook for 2004 is optimistic. The downturn in the lodging industry has also negatively impacted the values of hotel assets. In an environment with declining revenues and margins, the prices at which hotels are sold have generally been relatively lower than prior to the economic downturn. Fluctuations in values could have a material impact on our plan to sell a significant number of hotels on an accelerated basis in 2004 and 2005, and the net cash proceeds that we receive. Key business trends and developments We have several key indicators that we use to evaluate the performance of our business. These indicators include room revenue per available room, or RevPAR, and RevPAR penetration index. RevPAR is a commonly used measure within the hotel industry to evaluate hotel operations. RevPAR is defined as the product of the average daily room rate charged and the average daily occupancy achieved. RevPAR does not include revenues from telephone and other guest services generated by the property. RevPAR is generally considered the leading indicator of core revenues for many hotels, and we use RevPAR to compare the results of our hotels between periods and to compare results of our comparable hotels. The table below shows our same room AmeriHost Inn hotel RevPAR results versus the mid-scale without food and beverage segment of the limited service hotel industry over the past eight years. Consistent with overall lodging industry performance, our AmeriHost Inn RevPAR results have ranged from a 14.5% increase in 1996, to a 2.1% decrease in 2001. Although our AmeriHost Inn hotels did not outperform their segment in 2001 and 2003, they have outperformed their industry segment's performance in six of the last eight years.
RevPAR Growth 1996 1997 1998 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- ---- ---- ---- AmeriHost Inn Hotels (1) 14.5% 3.9% 9.4% 7.2% 5.9% (2.1%) 3.7% (0.3%) Limited service segment, without food and beverage (2) 3.5% 3.2% 3.1% 2.2% 4.4% (1.6%) (0.6%) 0.5%
(1) Includes all AmeriHost Inn hotels we owned and operated, including unconsolidated minority-owned hotels, operating for at least 13 full months during the periods presented. (2) According to Smith Travel Research, a leading industry analyst. 27 A related revenue measure for our hotels is the RevPAR penetration index. The RevPAR penetration index reflects each property's RevPAR in relation to the RevPAR for that property's competitive set. We use the measure as an indicator of a property's market share. For example, a RevPAR penetration index of 100 would indicate that a hotel's RevPAR is, on average, the same as its competitors. A RevPAR penetration index exceeding 100 would indicate that a hotel maintains a RevPAR premium in relation to its competitive set, while a RevPAR penetration index below 100 would be an indicator that a hotel is underperforming its competitive set. One critical component in this calculation is the determination of a hotel's competitive set. Factors that we consider include geographic proximity, as well as the level of service provided at the property. Our methodology for determining a hotel's competitive set, however, may differ for those used by other owners and/or managers. From a market penetration standpoint, in the aggregate, our AmeriHost Inn hotels were at an index of 97.3 for 2003. We believe that many factors contribute to our AmeriHost Inn hotels which underperform their competitive set with regard to RevPAR penetration, including: - the relatively smaller size of the AmeriHost Inn brand compared to many other hotel brands with significant critical mass and market penetration, - a lower contribution rate from the AmeriHost Inn reservation system compared to many other hotel brands, and - the level of new competition in the local markets which compete directly with our hotels. Despite some positive trends with regard to same room revenue, the cash flow from the operations of many of our hotels in 2003, was not sufficient to pay their related mortgage debt service, lease obligations, and ongoing capital expenditures. Our operating margins declined significantly in 2003 as many expenses increased substantially, including employee wages and benefits, insurance, maintenance, utilities, and property taxes. We have a significant amount of debt and obligations under long-term leases, such as the leases with PMC, requiring us to dedicate a substantial portion of our cash flow from our overall operations, including our business activities other than hotel operations, to make these required payments. While we believe the combination of improved demand for hotel rooms and our cost control initiatives create the possibility of improvements in our hotel operations in 2004, there can be no assurance that any increases in hotel revenues, or improvement in earnings will be achieved. The trends discussed above may not occur for any number of reasons, including slower than anticipated growth in the economy, changes in travel patterns of both business and leisure travelers and the continued threat of terrorist attacks, all of which may result in lower revenues or higher operating costs and declining operating margins. LaSalle Bank NA, the lender for our corporate line-of-credit has decreased the availability under this facility over the past two years, from $8.5 million to the current maximum of $5.5 million. We have recently executed a commitment from LaSalle Bank to renew this facility through April 30, 2005. The revised terms require that the maximum availability under the facility be reduced to $5.0 million on June 30, 2004, further reduced to $4.0 million on August 31, 2004, and further reduced to $3.5 million on February 28, 2005. Furthermore, the majority of the proceeds from the sale of any hotel properties must be used to reduce the outstanding balance of the line-of-credit until it is at or below $4.0 million, at which time the maximum availability on the line will be reduced to $4.0 million, even if prior to the August, 31, 2004 scheduled reduction date. The renewed facility will bear interest at the rate of 10% per annum. Our $20 million new construction loan facility expired October 31, 2003 without renewal. We are seeking a renewal of this facility, however we do not know when, or if, the lender will approve this or any similar facility. We used this facility to finance the combined construction and long-term mortgage debt required for many of our wholly owned new construction AmeriHost Inn hotel projects during the past few years. Mortgage financing is a critical component of the hotel development process and we intend to seek additional financing sources. If we, or the hotel joint ventures in which we are a partner, are unable to obtain adequate mortgage financing on acceptable terms, our ability to develop new hotels will be significantly limited. Management's priorities Based on our primary business objectives and anticipated operating conditions, our key priorities, and focus in 2004 and the next several years include the following: - Divest up to 40% of our existing hotel portfolio, which hotels in many instances have operated with cash flow that is insufficient to pay their debt service and ongoing capital expenditures during the past year; 28 - Expand our hotel development activities to be developing and/or acquiring and converting hotels at a pace of 10 - 15 hotels per year by the end of 2005. We intend for this development to primarily be the new construction of larger AmeriHost Inn hotels, or selective acquisition of existing hotels and their conversion to AmeriHost Inn, in larger markets, primarily through joint ventures where we can earn significant development fees, with the intention of selling these hotels after a shorter holding period than we have historically; - Grow our relationships with existing and new joint venture partners in connection with the development of new AmeriHost Inn hotels; - Improve hotel operation results through a combination of selling hotels, revenue generation initiatives, and cost control measures; - Increase the fees we receive from Cendant, including the one-time development incentive fee and the recurring royalty sharing fees, from selling of our hotels to third parties, and as a result of Cendant's efforts from growing the number of AmeriHost Inn franchises through their own sales; - Restructure our lease agreements with PMC; - Obtain longer term corporate level financing than our historical one-year operating line-of-credit, to better match our financing sources with our business plan of developing, building and selling AmeriHost Inn hotels; and - Obtain growth capital to finance both the equity and debt required for the anticipated development projects. SUMMARY OF YEAR-END RESULTS. Total revenues increased 6.4% in 2003, due primarily to increases in hotel sales and commissions and incentive and royalty sharing fees. Total revenues from Consolidated AmeriHost Inn hotels decreased from $43.2 million to $39.8 million during 2003, due primarily to the sale of hotels and a 1.0% decrease in same room revenue for these hotels. Revenues from the development segment decreased during 2003, as we were developing two AmeriHost Inn hotels for joint ventures in 2003, versus three hotels for joint ventures in 2002. Revenues from hotel sales and commissions increased during 2003, as a result of the sale of eight AmeriHost Inn hotels during 2003, versus the sale of five wholly owned AmeriHost Inn hotels in 2002. Revenues from hotel management and employee leasing segments decreased during 2003, due primarily to termination of management contracts for five hotels effective January 1, 2003. We received the final $400,000 installment in 2003 in connection with the sale of the AmeriHost Inn brand names and franchising rights. We recorded a net loss of $5.6 million for 2003, compared to a net loss of $1.7 in 2002. These results include non-cash hotel impairment provisions in 2003 and 2002 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 2003, 2002 and 2001 are summarized as follows:
(In thousands) 2003 2002 2001 ---- ---- ---- Net income (loss) from continuing operations, before impairment $(1,123) $ (336) $ 971 Impairment provision, net of tax (3,040) (32) - ------- ------- ------- Net income (loss) from continuing operations (4,163) (656) 971 Discontinued operations, net of tax (1,456) (1,054) (215) ------- ------- ------- Net income (loss) $(5,619) $(1,710) $ 755 ======= ======= ======= Net income (loss) per share - Diluted: From continuing operations $ (0.83) $ (0.13) $ 0.17 From discontinued operations (0.29) (0.21) $ (.04) ------- ------- ------- $ (1.12) $ (0.34) $ 0.13 ======= ======= =======
CRITICAL ACCOUNTING POLICIES 29 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstance relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain. Consolidation Policy The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and entities in which we have a majority or controlling interest. All significant intercompany accounts and transactions have been eliminated. A joint venture project will be consolidated if we have a majority (i.e., greater than 50%) ownership interest, or when we have a minority ownership interest (i.e., less than 50%) and can exercise control over the critical decisions of the joint venture. We will evaluate several factors in determining whether or not we have control over the joint venture to warrant consolidation. These factors include the nature of our ownership (for example, the sole general partner in a limited partnership, the sole managing member of a limited liability company, etc.), oversight of the daily operations, and the ability to make major decisions such as to refinance or sell the hotel asset without the consent of the other partners, among others. Minority-owned joint ventures in which we maintain a non-controlling ownership interest are accounted for by the equity method. Under this method, we maintain an investment account, which is increased by contributions made and our share of the joint venture's income, and decreased by distributions received and our share of the joint venture's losses, in accordance with the terms of the joint venture agreement. Our share of each joint venture's income or loss, including gains and losses from capital transactions, is reflected on our consolidated statement of operations as "Equity in income and (losses) from unconsolidated joint ventures." In December 2003, the FASB issued Interpretation No. 46R (FIN 46R), "Consolidation of Variable Interest Entities," which addresses how a business enterprise should evaluate whether or not it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of Variable Interest Entities", which was issued in January 2003. The Company is required to adopt the requirements of FIN 46R for interim periods beginning after March 31, 2004. This Interpretation 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. The Company currently anticipates consolidating four variable interest entities upon the application of FIN 46R, 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. The consolidation of these four joint ventures is expected to add approximately $9.7 million in assets and $7.8 million in liabilities to the Company's consolidated balance sheet. As of December 31, 2003, the Company had investments in, and advances to, these joint ventures of approximately $2.3 million, 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. Revenue Recognition We provide hotel development, management, and staffing services to unrelated third parties and unconsolidated, minority-owned joint ventures. Revenues can be generated in three ways: (i) we will record revenue from the development and construction of the hotel, (ii) if we enter into a hotel management agreement with the owner, we will recognize revenue in accordance with the terms of the agreement, and (iii) if we enter into a hotel staffing agreement with the owner, we will 30 recognize revenue in accordance with the terms of the agreement as services are performed. An unrelated third party or an unconsolidated minority-owned joint venture may contract with us for any or all three services. However, we will not provide employee leasing services unless we also provide hotel management services pursuant to a written agreement. Hotel operations The revenue from the operation of a Consolidated hotel is recognized as part of the hotel operations segment when earned. Typically, cash is collected from the guest at the time of check-in or checkout, however we also extend credit to selected corporate customers. The reserve for doubtful accounts is reviewed periodically for reasonableness and is considered appropriate as of December 31, 2003. Hotel sales and commissions Our intention is to operate the consolidated AmeriHost Inn hotels until a buyer is found at an appropriate price. We may actively try to sell the hotel during the construction period, upon opening, or anytime thereafter. Unless specifically identified as held for sale, we will depreciate the hotel assets and classify them as investment assets while we operate the hotel, since it is not assured that a sale will ultimately be consummated. When a sale is consummated, we record the hotel sale price as revenue and the net cost basis of the hotel asset as expense, as part of our ongoing operational activity. From time to time, PMC, a REIT which owns certain of our leased hotels, has sold its hotels. We have earned a commission from PMC for our services in facilitating these sales to third parties. This commission is recorded as revenue when the sale is consummated. Hotel development and construction We recognize revenue from the development and construction of hotels for third parties and unconsolidated minority-owned entities pursuant to development and construction contracts with the hotel ownership entity. All contracts must be fully executed prior to the start of construction. In addition, typically we will not begin construction on a hotel for a joint venture or third party until it is assured that both the equity and debt financing are in place. We record the total contract price as development and construction revenue over the relevant development and construction period, and all development and construction costs as operating expenses in the hotel development segment. Development fee revenue from construction/renovation projects with unaffiliated third parties and unconsolidated joint ventures is recognized using the percentage-of-completion method. However development fee revenue is not recognized until certain development hurdles are met; such as the execution of a land purchase contract and the debt and equity financing commitments. Construction fee revenue from construction/renovation projects with unaffiliated third parties and unconsolidated joint ventures is recognized on the percentage-of-completion method, generally based on the ratio of costs incurred to estimated total contract costs. Revenue from contract change orders is recognized to the extent costs incurred are recoverable. Profit recognition begins when construction reaches a progress level sufficient to estimate the probable outcome. Provision is made for anticipated future losses in full at the time they are identified. When we build a hotel for an unconsolidated joint venture, a portion of the profit is deferred and included on our consolidated balance sheet as deferred income. The deferral is computed based on our ownership percentage in the joint venture and the construction profit (as it is recognized on the percentage of completion basis). We recognize the deferred income over the estimated useful life of the related hotel asset. A portion of the deferral is amortized over the same life the joint venture is depreciating the hotel asset (generally 39 years), and the remaining portion is amortized over the same life the joint venture is depreciating the furniture, fixtures & equipment (generally 7 years). Upon the sale of a hotel by the joint venture to an unaffiliated third party, the remaining unamortized deferred income is recognized as equity in income and (loss) of affiliates in our consolidated financial statements. Hotel management services We recognize management fee revenue when we perform hotel management services for unrelated third parties and unconsolidated joint ventures. The management fees are computed based upon a percentage of total hotel revenues, ranging 31 from 4% to 8%, plus incentive fees in certain instances, in accordance with the terms of the individual written management agreements. We recognize the management fee revenue in the hotel management segment as the related hotel revenue is earned. Employee leasing We recognize employee leasing revenue when we staff hotels, and perform related services, for unrelated third parties and unconsolidated joint ventures. Employee leasing revenues are generally computed as the actual payroll costs plus an administrative fee ranging from 2% to 3%, in accordance with the terms of the individual written staffing agreements. We recognize the employee leasing revenue in the employee leasing segment as the related payroll cost is incurred. Although we maintain employee leasing agreements with the hotel ownership entities, we are still ultimately responsible for its employees. In addition, we are responsible for maintaining and determining staffing levels, scheduling, hiring, firing, performance reviews, etc. through our managers who are our direct employees. Moreover, we are at risk with regard to personnel issues and lawsuits. As such, we have recorded employee leasing revenues primarily as the gross payroll cost, plus the administrative fee. Incentive and royalty sharing We seek not only to generate profit from the sale of a hotel, but also to generate an additional development incentive fee and long-term, ongoing royalty sharing revenues from Cendant Corporation. Cendant has agreed to pay us a development incentive fee every time we sell one of our 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 us for new hotels that we develop which are then sold to a franchisee of Cendant. This fee applies to the first 370 hotels we sell during the 15-year term of the agreement, expiring in 2015. The fee is computed based on the most recent twelve months revenue, or a stipulated per room amount if the hotel has been open less than eighteen months. Since the Cendant agreement provides for the potential reimbursement of this fee, 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. Cendant has agreed to pay us a portion of all royalty fees Cendant receives from all of its AmeriHost Inn franchisees through September 2025. Generally, Cendant receives royalty fees from each of their franchisees based upon a percentage of guest room revenue, ranging from 4% to 5%. In turn, Cendant will pay us a portion of this fee as stipulated in the agreement. We include this royalty sharing fee as incentive and royalty sharing fee revenue in the accompanying consolidated financial statements. Guarantees 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 we are 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, we 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. We have recorded an additional investment in this joint venture, and a liability for its share of this guarantee at the time of issuances, less accumulated amortization of approximately $39,000, as of December 31, 2003, its estimated fair value. Sale and Leaseback of Hotels During 1998 and 1999, we sold 30 hotels to PMC Commercial Trust, a Real Estate Investment Trust ("REIT") for approximately $73 million. Upon the sale of the hotels, our subsidiary simultaneously entered into agreements to lease back each of the hotels from the PMC. The leases are for an initial term of 15 years, as amended, and provide for rent in the amount of 10% of the original sale price, increased annually after year three by the lesser of 2% or the CPI adjustment. The gains from the sale of the hotels in 1998 and 1999 were deferred for financial statement reporting purposes, due to the continuing 32 involvement with the long-term lease agreement, and are being amortized on a straight line basis into income as a reduction of leasehold rent expense over the 15-year initial term. Upon the sale of a hotel, which is owned by PMC to an unaffiliated third party, the remaining unamortized deferred income is recognized as gain on sale of fixed assets in our consolidated financial statements. We are currently in discussions with PMC to restructure the lease agreements and provide for the sale of all the leased hotels (See Item 1. - Business under the heading, "Leased hotel Properties"). Impairment of Long-Lived Assets We periodically review the carrying value of certain long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, we would estimate the undiscounted sum of the expected cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if an impairment exists. If an impairment exists, we would determine the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, we would discount the expected future cash flows of such assets. In July 2003, we implemented a plan to sell approximately 25 to 30 hotels over the next two years. 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," we have recorded $6.0 million in pre-tax, non-cash impairment charges during 2003, related to 18 of the hotels targeted for sale. Approximately $909,000 pre-tax of the non-cash impairment charges relates to three consolidated non-AmeriHost Inn hotels anticipated to be sold, and has been included in "discontinued operations". 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. 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 December 31, 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 that is expected to be paid off 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 our ongoing operations. Accordingly, the disposition of non-AmeriHost Inn hotels have been treated as discontinued operations. 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 us after their disposition. In addition, in accordance with this literature, we have ceased depreciating the hotel assets that have been classified as "held for sale." If the Company determines that a property is no longer for sale, or if a property does not sell, after a certain period of time, under certain conditions, a depreciation expense adjustment may be recorded at that time, up to the amount of depreciation that would have been recorded during the period that the asset was classified as "held for sale." During the fourth quarter of 2003, two AmeriHost Inn hotels previously classified as "held for sale" were reclassified back to operating assets since we no longer were actively marketing these properties for sale. In accordance with SFAS 144, depreciation was recorded through December 31, 2003, as if the hotels were never classified as "held for sale". We anticipate reviewing the market status of the hotels "held for sale" at some time later in 2004, which assessment may result in additional depreciation adjustments if any hotels are removed from the "held for sale" classification. HOTEL DISPOSITION PLAN AND RESTRUCTURING In 2001 and 2002, we sold, or have facilitated the sale for joint ventures for a landlord, 17 hotel properties. However, during 2003, senior management, and the board of directors, determined that the sale of a significant number of hotel properties would assist us achieving our financial and growth objectives, as well as support our liquidity. The sale of the hotels is expected to: - provide liquidity for operational and ongoing capital expenditure needs; - reduce outstanding debt; - increase operating cash flow of the hotel operations segment; 33 - accelerate the generation and realization of development incentive and royalty-sharing fees from our agreements with Cendant; - provide capital for future new hotel development and/or acquisition and conversion of existing hotels; and - provide capital to repurchase common stock. In July 2003, we adopted a strategic plan to sell approximately 25 to 30 hotel properties over a two year period. The properties to be sold include 20 to 25 AmeriHost Inns and six non-AmeriHost hotels that are wholly or partially-owned. The decision to recommend the sale of a hotel property is made by our senior management team and approved by a majority of the board of directors or a committee thereof. We sold 11 hotels (including six hotels as part of this disposition plan) in 2003, more than any other year in our history.The financial impact is summarized as follows:
(in thousands) Net cash Number proceeds Mortgage Cendant of after mortgage debt Incentive hotels Payoff reduction Fees ------ ------ --------- ---- Consolidated hotels: AmeriHost Inn hotels 8 $ 8,631 $14,200 $ 1,730 Other brand hotels 2 137 2,267 - Unconsolidated hotels: AmeriHost Inn hotels 1 5 - 229 -- ------- ------- ------- Total 11 $ 8,773 $16,467 $ 1,959 == ======= ======= =======
An integral part of our growth plan, profitability, and liquidity is our ability to sell hotels, including those under the plan for disposition, as well as our other existing hotels, and hotels we develop in the future. In addition, in connection with our asset disposition plan, we undertook certain hotel regional management, hotel development, and other corporate-level restructuring actions in 2003, including: - we have not replaced several corporate positions which had been vacated as a result of normal attrition during 2003; - we did not fill several positions which had been budgeted for in 2003; and - we reduced our corporate office space needs, giving us the ability to lease more space to third parties. The restructuring including a reduction in our existing corporate and hotel regional management staff by approximately 20%, or 13 positions. However, we subsequently added or enhanced five positions in the hotel development, hotel marketing/revenue management, and finance areas, to assist us in expanding our hotel development activity and increasing hotel revenue, offsetting a portion of the projected savings. We expect to incur total non-recurring restructuring charges of approximately $140,000 through the second 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 2003 and recorded as operating expenses in the accompanying consolidated financial statements. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003, COMPARED TO THE YEAR ENDED DECEMBER 31, 2002 The following tables set forth our selected operations data for the 2003 and 2002. This data should be read in conjunction with our financial statements in Item 8 on this Form 10-K. 34
Year Ended Year Ended December 31, 2003 December 31, 2002 ----------------------- -------------------- % Amount % of Amount % of Increase (thousands) Revenues (thousands) Revenues (Decrease) ----------- -------- ----------- -------- ---------- Revenue: Hotel operations: AmeriHost Inn hotels 39,824 54.9% 43,217 63.4% (7.9%) Other hotels 1,639 2.3% 2,274 3.3% (27.9%) Development and construction 4,197 5.8% 7,180 10.5% (41.6%) Hotel sales and commissions 22,831 31.5% 10,017 14.7% 127.9% Management services 446 0.6% 958 1.4% (53.4%) Employee leasing 1,858 2.6% 3,267 4.8% (43.1%) Incentive and royalty sharing 972 1.3% 589 0.9% 65.1% Office building rental 750 1.0% 670 1.0% 11.9% ------ ----- ------ ----- ----- 72,517 100.0% 68,172 100.0% 6.4% ------ ----- ------ ----- ----- Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 30,625 76.9% 31,570 73.1% (3.0%) Other hotels 1,856 113.2% 2,145 94.3% (13.5%) Development and construction 4,739 112.9% 7,205 100.3% (34.2%) Hotel sales and commissions 19,328 84.7% 8,159 81.5% 136.9% Management services 280 62.9% 715 74.6% (60.8%) Employee leasing 1,799 96.8% 3,209 98.2% (43.9%) Office building rental 214 28.6% 57 8.5% 277.5% ------ ----- ------ ----- ----- 58,842 81.1% 53,060 77.8% 10.9% ------ ----- ------ ----- ----- 13,675 18.9% 15,112 22.2% (9.5%) ====== ===== ====== ===== ===== Depreciation and amortization 3,602 5.0% 4,339 6.4% (17.0%) Leasehold rents - hotels 5,033 6.9% 5,112 7.5% (1.5%) Corporate general & administrative 2,419 3.3% 2,199 3.2% 10.0% Impairment provision 5,070 7.0% 542 .8% 835.4% ------ ----- ------ ----- ----- Operating income (loss) (2,449) (3.4%) 2,921 4.3% (183.9%) ====== ===== ====== ===== ======
Segment Data:
Year Ended Year Ended December 31, 2003 December 31, 2002 --------------------- -------------------- % Amount % of Amount % of Increase (thousands) Revenues (thousands) Revenues (Decrease) ----------- -------- ----------- -------- ---------- Operating Income (Loss) by Segment: Hotel operations: AmeriHost Inn hotels 1,353 1.9% 3,169 4.6% (57.3%) Other hotels (731) (1.0%) (463) (0.7%) 57.8% Non-cash impairment provision (5,070) (7.0%) (542) (0.8%) 835.4% Development and construction (546) (0.7%) (31) 0.0% 1,673.0% Hotel sales and commissions 3,503 4.8% 1,858 2.7% 88.6% Management services 121 0.2% 191 0.3% (36.9%) Employee leasing 57 0.1% 56 0.1% 1.5% Incentive and royalty sharing 972 1.3% 589 0.9% 65.1% Office building rental 374 0.5% 454 0.7% (17.7%) Corporate general & administrative (2,482) (3.5%) (2,361) (3.5%) 5.1% ------- ---- ------- ---- ------- Operating income (loss) $(2,449) (3.4%) $ 2,921 4.3% (183.9%) ======= ==== ======= ==== =======
35
Year Ended Year Ended December 31, 2003 December 31, 2002 ----------------- ----------------- Operating Income (Loss) as a percentage of Segment Revenue: Hotel operations: AmeriHost Inn hotels 3.4% 7.3 Other hotels (44.6%) (20.4%) Non-cash impairment provision N/A N/A Development and construction (13.0%) (0.4%) Hotel sales and commissions 15.3% 18.5% Management services 27.0% 20.0% Employee leasing 3.1% 1.7% Incentive and royalty sharing 100.0% 100.0% Office building rental 49.9% 67.8% Corporate general & administrative N/A N/A ----- ----- Total operating income (loss) (3.4%) 4.3% ===== =====
36 REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the sale of eight Consolidated AmeriHost Inn hotels in 2003, whereby the operations of these hotels were included in our hotel operations segment during all or part of 2002; however such hotels were not included during all or part of the 2003 period. In addition, same room revenues for the Consolidated AmeriHost Inn hotels, including those that we sold, through the date of sale, decreased 1.0%. 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, we experienced increased downward pressure on occupancy levels and average daily rates. We believe that as the total number of AmeriHost Inn hotels in the brand increases, the greater the benefits will be at all AmeriHost locations from marketplace recognition and repeat business. In addition, we are now focused on building new hotels in larger, growing markets where many of our competitors already exist or where we factor in 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 2003, compared to two minority-owned hotels and one unrelated third party hotel during 2002. Hotel sales revenue increased as a result of the sales of eight wholly owned AmeriHost Inn hotels during 2003, compared to the sale of four wholly owned AmeriHost Inn hotels during 2002. In addition, we facilitated the sale of one AmeriHost Inn hotel leased to us by PMC during 2002. The sale of the eight wholly owned AmeriHost Inn hotels in 2003 generated net hotel revenues of approximately $22.8 million compared to $10.0 million in 2002 from the sale of the five hotels in 2002, plus a commission earned on the PMC sale. We intend to continue to build and sell AmeriHost Inn hotels in order to generate increased fees under the agreement with Cendant while enhancing our operating results and cash flow. Hotel management revenue decreased, due primarily to the termination of five management contracts with joint ventures effective January 1, 2003. Employee leasing revenue decreased, due primarily to the reduction in rooms managed for minority-owned entities and unrelated third parties as described above, and a concerted effort to decrease hotel employee payroll costs which is the basis for the employee leasing revenue. In addition, during 2002, we began treating our workers compensation insurance cost as a pass-through cost, whereby the hotels reimburse us for the insurance cost, however it is not shown as part of our employee leasing operating cost and revenue (since the revenue is based on employee leasing cost). The workers compensation insurance cost has never been included for purposes of computing our administrative fee. 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 $1,960,000 and $1,754,000 during 2003 and 2002, respectively, in development incentive fees from the sale of AmeriHost Inn hotels. Approximately $673,000 and $367,000 was recognized during 2003 and 2002, respectively, from the amortization of this deferred income. We also recorded approximately $299,000 and $222,000 in royalty sharing revenue during 2003 and 2002, respectively. 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 2003 versus 2002. We occupy approximately 27% of the rentable square feet, as reduced as part of the restructuring activities discussed in Part 1 above. Approximately 50% of the 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 the greater number of hotel sales, and the higher aggregate net book value of these hotels upon their sale, 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 -- 54 hotels at December 31, 2003, as compared to 61 hotels at December 31, 2002. Operating costs and expenses as a percentage of revenues for the consolidated AmeriHost Inn hotels increased due primarily to the costs of insurance, real estate taxes, energy, general and administrative, and ongoing maintenance and 37 secondarily due to several hotels operating during their initial stabilization period when revenues are typically lower and significant start-up costs are incurred. Operating costs and expenses for the hotel development segment decreased, consistent with the decrease in hotel development activity for 2003, compared to 2002. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased during 2003 due to the greater level of projects from third parties and joint ventures, in the construction phase of the total development process in 2003, which construction phase activity has a higher ratio of operating costs to revenues, compared to the ratio of operating costs to revenues during the pre-construction, development phase. 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 2003, compared to 2002, consistent with the decrease in segment revenue for 2003 as noted above. Office building rental operating costs and expenses consisted primarily of expenses related to the management of our office building. The increase in operating expenses from 2002 to 2003 was due primarily to a change in the allocation of certain of the office building costs among the other operating segments. The new allocation method was adopted based on an internal review to more accurately reflect the segment occupancy expense. Depreciation and amortization expense decreased, primarily due to the classification of certain assets as "held for sale," which properties were not depreciated beginning in July 2003, the date of this determination, in accordance with the relevant accounting literature, and 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. Consequently, the hotels classified as "held for sale" were depreciated for all of 2002, if open, and only partially in 2003. Leasehold rents - hotels decreased slightly during 2003 compared to the 2002, due to the disposition of one leased hotel during the first quarter of 2002, 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 annual rent increases pursuant to the lease agreements. Corporate general and administrative expense increased due primarily to increases in professional fees, directors and officers liability insurance, and director expenses. Director expenses include director fees, which were revised in 2003 to be competitive with other public companies of a similar size, including non-cash compensation in the form of equity, and increases in travel costs associated with a greater number of directors residing outside the Chicago metropolitan area. In addition, the increase in corporate general and administrative expense for 2003 also includes 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 $5.1 million, pre-tax, related to AmeriHost Inn hotels to be sold which has been included in operating income. An additional $909,000, 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: - increases in certain expenses, including insurance, real estate taxes, energy, general and administrative, and maintenance, - a decrease in same room revenues, and 38 - certain new hotels operating during their ramping up stage when revenues are typically lower. Operating income from the hotel 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 2003, compared with 2002. Operating income from hotel sales and commissions increased due to the sale of more AmeriHost Inn hotels and at a greater total profit during 2003, versus the sale of AmeriHost Inn hotels during 2002. The decrease in hotel management segment operating income during 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 among our other business segments. Operating income from hotel operations, and the related cash flow, has declined significantly over the past two years. Operating income from hotel operations, excluding impairment provision, declined approximately $262,000, from $3.0 million in 2001 to $2.7 million in 2002, or 8.8%, and declined further by $2.0 million to approximately $622,000 in 2003, or 77%. This two-year total decline of $2.3 million can be attributed to many factors, including (i) the overall downturn in the economy, (ii) significant increases in several operating costs such as labor, utilities, insurance and maintenance, (iii) additional supply of hotel rooms in the markets in which our hotels are located, (iv) geopolitical events, including terrorism and the conflict in Iraq, (v) the elimination of hotels with positive operating cash flow, upon their sale, and (vi) a significant decline in the operating margins for the one non-AmeriHost Inn hotel not classified under discontinued operations since we operate the hotel under a long-term lease. We believe that aggregate hotel revenue growth is critical to improving the results of our hotel operations. As such, if our revenue enhancement programs are not successful, or if the economy does not improve, or if the economy improves without a corresponding improvement in the lodging industry, it could have a significant, negative impact on our results of operation and financial condition. INTEREST EXPENSE. The decrease in interest expense during 2003 compared to 2002 was attributable to the reduction in our overall level of debt as a result primarily of i.) the sale of consolidated hotels and the use of proceeds to payoff the related mortgage debt and a portion of our operating line-of-credit, and ii.) interest rate reductions on floating rate debt, partially offset by the mortgage financing of newly constructed or acquired consolidated hotels, and a higher interest rate on our operating line-of-credit. 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, we were due three annual installments of $400,000 each, on September 30, 2001, 2002, and 2003. The Company received each of the $400,000 payments as scheduled, including the final installment in 2003. These payments have been classified as gain on sale of assets in the consolidated financial statements. As part of our strategy to focus primarily on the development and sale of new AmeriHost Inn hotels, we intend to sell all our owned, non-AmeriHost Inn hotels. During 2003, two joint ventures in which we were a partner sold their non-AmeriHost Inn hotels, including one subsequent to the adoption of the formal plan to sell hotels, and the lease for one non-AmeriHost Inn hotel expired without renewal. The net proceeds from these sales were minimal. Any gain or loss on the sale of these hotels will be reported as "discontinued operations". CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during 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 $24,232 during the twelve months ended December 31, 2003, compared to $22,685 during the twelve months ended December 31, 2002. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002, COMPARED TO THE YEAR ENDED DECEMBER 31, 2001 The following tables set forth our selected operations data for the twelve month periods ended December 31, 2002 and 2001. This data should be read in conjunction with our financial statements in Item 15 on this Form 10-K. 39
Year Ended Year Ended December 31, 2002 December 31, 2001 ------------------------- ------------------------ % Amount % of Amount % of Increase (thousands) Revenues (thousands) Revenue (Decrease) ----------- -------- ----------- ------- ---------- Revenue: Hotel operations: AmeriHost Inn hotels 43,217 63.4% 45,081 66.2% (4.1%) Other hotels 2,274 3.3% 2,272 3.3% 0.1% Development and construction 7,180 10.5% 1,724 2.5% 316.4% Hotel sales and commissions 10,017 14.7% 12,922 19.0% (22.5%) Management services 958 1.4% 1,067 1.6% (10.2%) Employee leasing 3,267 4.8% 4,678 6.9% (30.2%) Incentive and royalty sharing 589 0.9% 210 0.3% 180.9% Office building rental 670 1.0% 170 0.2% 294.9% ------ ------- ------ ------ ------ 68,172 100.0% 68,124 100.0% 0.1% ------ ------- ------ ------ ------ Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 31,570 73.1% 32,920 76.2% (4.1%) Other hotels 2,145 94.3% 1,881 82.7% 14.0% Development and construction 7,205 100.3% 1,480 20.6% 386.9% Hotel sales and commissions 8,159 81.5% 9,622 96.1% (15.2%) Management services 715 74.6% 717 74.8% (0.3%) Employee leasing 3,209 98.2% 4,564 139.7% (29.7%) Office building rental 57 8.5% 3 0.4% (1818.8%) ------ ------- ------ ------ ------ 53,060 77.8% 51,187 75.1% 3.7% ------ ------- ------ ------ ------ 15,112 22.2% 16,937 24.8% (10.8%) Depreciation and amortization 4,339 6.4% 3,899 5.7% 11.3% Leasehold rents - hotels 5,112 7.5% 5,833 8.6% (12.4%) Corporate general & administrative 2,199 3.2% 1,908 2.8% 15.2% Impairment provision 542 0.8% 0 - - ------ ------- ------ ------ ------ Operating income (loss) 2,920 4.3% 5,297 7.8% (44.9%) ====== ======= ====== ====== ======
40
Year Ended Year Ended December 31, 2002 December 31, 2001 ------------------------- ------------------------ % Amount % of Amount % of Increase (thousands) Revenues (thousands) Revenues (Decrease) ----------- -------- ----------- -------- ---------- Operating Income (Loss) by Segment: Hotel operations: AmeriHost Inn hotels 3,169 4.6% 3,100 4.6% 2.2% Other hotels (463) (0.7%) (132) (0.2%) 249.9% Non-cash impairment provision (542) (0.8%) 0 0.0% N/A Development and construction (31) 0.0% 236 0.3% (113.0%) Hotel sales and commissions 1,858 2.7% 3,301 4.8% (43.7%) Management services 191 0.3% 295 0.4% (35.3%) Employee leasing 56 0.1% 110 0.2% (49.0%) Incentive and royalty sharing 589 0.9% 210 0.3% 180.9% Office building rental 454 0.7% 131 0.2% 247.3% Corporate general & administrative (2,361) (3.5%) (1,954) (2.9%) 20.8% ------ ------ ------ ------ ------ Operating income (loss) 2,920 4.3% 5,297 7.8% (44.9%) ====== ====== ====== ====== ======
Year Ended Year Ended December 31, 2002 December 31, 2001 ----------------- ----------------- Operating Income (Loss) as a percentage of Segment Revenue: Hotel operations: AmeriHost Inn hotels 7.3% 6.9% Other hotels (20.4%) (5.8%) Non-cash impairment provision N/A N/A Development and construction (0.4%) 13.7% Hotel sales and commissions 18.5% 25.5% Management services 20.0% 27.7% Employee leasing 1.7% 2.4% Incentive and royalty sharing 100.0% 100.0% Office building rental 67.8% 77.1% Corporate general & administrative N/A N/A ----- ----- Total operating income (loss) 4.3% 7.8% ===== =====
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the sale of five 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 2001; however, such hotels were not included during all or part of 2002. In addition, same room revenues for all Consolidated AmeriHost Inn hotels, including the sold hotels prior to their sale date, increased approximately 2.9%. The decrease in revenues from Consolidated AmeriHost Inn hotels was partially offset by this same room revenue increase and the opening of two newly constructed AmeriHost Inn hotels. Our hotel revenues were impacted by general economic and industry conditions, and an increase in competition in certain markets, primarily from newly constructed hotels. As a result, we experienced increased downward pressure on occupancy levels and average daily rates. 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 constructed two hotels for minority-owned entities during 2002 and one for an unrelated third party, compared to two minority-owned hotels during 2001. We closed on the sale of four wholly owned AmeriHost Inn hotels during 2002, and four wholly owned AmeriHost Inn hotels during 2001. In addition, we facilitated the sales of one AmeriHost Inn hotel leased to us by PMC during 2002 and five hotels during 2001. These sales generated hotel sales revenues and commissions of approximately $10.0 million in 2002 and approximately $12.9 million in 2001. 41 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. In addition, during 2002, we began treating our workers compensation insurance cost as a pass-through cost, whereby the hotels reimburse us for the insurance cost, however it is not shown as part of our employee leasing operating cost and revenue (since the revenue is based on employee leasing cost). The workers compensation insurance cost has never been included for purposes of computing our administrative fee. 42 Development incentive and royalty sharing revenue increased as a result of our 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 $1.8 million and $1.6 million during 2002 and 2001, respectively, in development incentive fees from the sale of AmeriHost Inn hotels. Approximately $367,000 and $148,000 were recognized during 2002 and 2001, respectively, from the amortization of this deferred income. We also recorded approximately $222,000 and $62,000 in royalty sharing revenue during 2002 and 2001, respectively. Office building rental consisting of leasing activities from our office building, increased due to a full year of ownership in 2002 compared to three months in 2001. We occupied approximately 34% of the rentable square feet in the building in 2002. OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased, primarily due to an increase in operating costs from hotel development, partially offset by decreases in operating costs from hotel operations, sale of hotels and commissions, and employee leasing 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 -- 61 hotels at December 31, 2002, as compared to 63 hotels at December 31, 2001. Operating costs and expenses as a percentage of revenues for the consolidated AmeriHost Inn hotels decreased due to the increase in some room revenues and the minimization of certain operating expenses by hotel personnel. Operating costs and expenses for the hotel development segment increased, consistent with the increase in hotel development revenues for 2002. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased during 2002 due to the higher level of projects for third parties and joint ventures, in the hotel construction phase of the overall process, which has a higher ratio of operating costs to revenues, compared to the ratio of operating costs to revenues for pre-construction, hotel development activity. The results for 2001 consisted of a greater amount of pre-construction, hotel development activity, which resulted in lower operating costs in relation to the revenue recognized. 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 2002, compared to 2001, consistent with the decrease in segment revenue for 2002 and 2001. Office building rental operating costs and expenses consisted primarily of expenses related to the management of our office building. On October 1, 2001, the company purchased the office building in which its headquarters is located and assumed the landlord duties for the other tenants. Certain of the office building costs were allocated to the other operating segments. Depreciation and amortization expense increased, primarily due to the sale of consolidated AmeriHost Inn hotels during the last twelve months, offset by the opening of newly constructed hotels, the acquisition or consolidation of existing hotels, and the depreciation of the office building in the fourth quarter of 2001. Leasehold rents - hotels decreased slightly during 2002 compared to 2001, due to the disposition of six leased hotels during 2001 and 2002, partially offset by annual rent increases. Corporate general and administrative expense increased approximately $683,000 in expenses related to the resignation and replacement of the Company's President/CEO in 2002. The results for 2001 reflect the recognition of $167,000 in one-time expenses related to the issuance of stock options in 2000 to joint venture partners, including a director of the Company, pursuant to the variable accounting rules of Financial Accounting Standard Board Statement No. 123, in connection with the sale of the AmeriHost Inn brand and franchising rights. The hotel impairment provision was recorded primarily in connection with the anticipated disposition of certain hotel assets, and as a result of our internal hotel asset impairment analysis. The amount represents an adjustment for certain hotel assets to decrease the carrying value of the assets to the anticipated fair market value, net of closing costs. 43 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 increased slightly due to an increase in same room revenues, and decreases in certain expenses. Operating income from the hotel development segment in 2001 decreased to an operating loss in 2002 due to the decrease in hotels developed and constructed for third parties and minority-owned entities during 2002, compared with 2001. Operating income from hotel sales and commissions decreased due to the sale of five AmeriHost Inn hotels during 2002 versus the sale of nine AmeriHost Inn hotels during 2001. The decrease in hotel management segment operating income during the year of 2002 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 increased, attributable to a full year of ownership in 2002 compared to three months in 2001. INTEREST EXPENSE. The decrease in interest expense during 2002 compared to 2001 was attributable to the reduction in our overall level of debt in connection with the sale of AmeriHost Inn hotels and the use of proceeds to payoff the related mortgage debt, and the interest rate reductions on floating rate debt, was offset by the mortgage financing of newly constructed or acquired consolidated hotels. 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 the first and second installments of $400,000 each as scheduled in 2001 and 2002. 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 2002, compared to 2001, was primarily attributable to the sale of two unconsolidated minority-owned properties in 2002 at a significant gain, offset by an impairment provision on a non-AmeriHost Inn hotel of $100,000 during the second quarter of 2002 and the recognition of 100% of the net operating losses from two additional unconsolidated joint ventures during 2002. The Company exchanged a note receivable from the principals of Diversified Innkeepers, Inc. in the amount of approximately $1.2 million on September 30, 2002, for a 50% ownership interest in a hotel joint venture. This exchange was accounted for at fair value and resulted in no gain or loss. The Company had previously managed this hotel for Diversified Innkeepers, Inc. pursuant to a management contract. Since the Company does not control the major decisions of this joint venture, this investment has been accounted for by the equity method. Distributions from affiliates were $172,685 during 2002, including a $150,000 note receivable pursuant to the sale of a hotel, compared to $19,220 during 2001. OFF-BALANCE SHEET ARRANGEMENTS Through wholly-owned subsidiaries, we are a general partner or managing member in 15 joint ventures as of December 31, 2003. As a general partner, we are secondarily liable for the obligations and liabilities of these joint venture partnerships. As of December 31, 2003, these joint ventures had $26.7 million outstanding under mortgage loan agreements, compared to $24.0 million as of December 31, 2002. Approximately $4.9 million of this amount has been included in our consolidated financial statements as of December 31, 2003, reflecting the debt owed by joint ventures in which we have a majority or controlling ownership interest, leaving approximately $21.8 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 $21.8 million of financing, we also have provided approximately $16.9 million in guarantees to the lenders. Other partners have also guaranteed $10.7 million of these financings, which may ultimately impact the exposure on our guarantees. One unconsolidated joint venture mortgage loan in the amount of approximately $1.7 million at December 31, 2003 matured on November 1, 2003, however the lender has extended the maturity of the loan to November 1, 2004, and waived the minimum debt service coverage ratio covenant violation for 2003. Unless the properties collateralizing the debt are sold, the remaining joint venture mortgage loans mature after 2004. [See also "Liquidity and Capital Resources" below.] In connection with our plan to increase hotel development through joint ventures, we anticipate that the total off-balance sheet mortgage debt on joint ventures in which we have an ownership interest, will increase. The level of guarantees we provide on this debt may also increase accordingly, however this will be determined on a project by project basis, and provided only if deemed appropriate. 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. Interest is accrued in all loans, and paid to us periodically. The advances totaled $2.4 million at December 31, 2003, and are included in investments in and 44 advances to unconsolidated hotel joint ventures in our consolidated financial statements. We expect the joint ventures to repay these advances primarily from the sale of the related hotels, and cash flow generated from hotel operations, however there is no guarantee that we will recover the entire amounts advanced or any interest accrued. 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 and to amortize the guarantee over the term of the guarantee. During 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. We have recorded as an additional investment in this joint venture, and a liability for our share of this guarantee of approximately $39,000 as of December 31, 2003, its estimated fair value at the time of issuance, less accumulated amortization. In December 2003, the FASB issued Interpretation No. 46R (FIN 46R), "Consolidation of Variable Interest Entities," which addresses how a business enterprise should evaluate whether or not it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of Variable Interest Entities", which was issued in January 2003. We are required to adopt the requirements of FIN 46R for interim periods beginning after March 31, 2004. This Interpretation requires that we present any variable interest entities in which it has 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 upon additional analysis. Due to the adoption of this Interpretation, we expect that we will begin to present our investments in four 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 June 30, 2004. The consolidation of these joint ventures is expected to add approximately $9.7 million in assets and $7.8 million in liabilities to our consolidated balance sheet. As of December 31, 2003, we had investments in, and advances to, these joint ventures of approximately $2.0 million, which was presented as such under the equity method of accounting in our consolidated financial statements. We expect that we will continue to present all of our other unconsolidated investments under the equity method. CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS We currently lease 21 hotels from PMC Commercial Trust pursuant to an Amended and Restated Master Agreement dated January 24, 2001. In January 2001, we amended the master lease with PMC to provide for the purchase of eight unidentified hotels from the lessor under specified terms, and to extend the initial lease term by five years. The amendment provides for four increases in rent payments if these hotels are not sold to a third party or purchased by us by the dates specified. As of December 31, 2003, the first three scheduled rent increases were not effective due to the sale of hotels by PMC to us. The third scheduled increase was avoided in September 2003, when we purchased a hotel from PMC, using cash of approximately $556,000 and mortgage financing provided by PMC of approximately $1.7 million. If we do not either facilitate the sale to a third party, or purchase from PMC, one hotel at a price of approximately $2.6 million by June 5, 2004, the fourth rent increase becomes effective computed as 0.25% of the original sales values, or approximately $127,000 on an annual basis. If we decide to purchase this hotel by June 5, 2004, we intend to fund the $2.6 million purchase price with a combination of mortgage debt, the source of which has not yet been identified, and cash from operations or working capital. However, there can be no assurance that we will have the liquidity and/or acceptable financing available to purchase this hotel at that time, and the rent increase would become effective. We have entered into discussions with PMC to restructure the lease agreements, including our potential obligation for the purchase of the hotel by June 5, 2004 [see also Part 1 - Business, under the heading "Leased Hotel Properties", and below, under the heading "Subsequent Events."]. However, there can be no assurance that we will be successful in restructuring the lease agreements, or that such restructuring will eliminate this purchase obligation or alternatively, the scheduled rent increase without the required purchase. The following table summarizes our contractual obligations, including off-balance sheet mortgage loan guarantees provided for certain joint ventures: 45
Payments due by period ---------------------- Less than 1 - 3 3 - 5 More than Total 1 year years years 5 years ------------ ------------ ------------ ------------ ------------ Long-term debt - consolidated $ 27,708,448 $ 1,195,051 $ 8,935,677 $ 1,968,604 $ 15,609,116 Long-term debt of assets held for sale - non-AmeriHost Inn hotels 8,928,906 361,850 3,164,841 4,279,005 1,123,210 Long-term debt of assets held for sale - AmeriHost Inn hotels 28,540,561 2,567,358 5,017,854 3,364,031 17,591,317 Corporate line of credit 3,850,000 3,850,000 - - - Operating leases - consolidated 58,672,162 5,629,370 11,581,479 12,026,262 29,435,052 Construction contracts 837,472 837,472 - - - ------------ ------------ ------------ ------------ ------------ Total $128,537,549 $ 14,436,101 $ 28,699,851 $ 21,637,902 $ 63,758,695 ============ ============ ============ ============ ============ Long-term debt - unconsolidated joint ventures (at 100%) 21,809,941 2,507,102 1,727,094 3,658,979 13,916,766 Operating leases - unconsolidated - - - - - ------------ ------------ ------------ ------------ ------------ Total $ 21,809,941 $ 2,507,102 $ 1,727,094 $ 3,658,979 $ 13,916,766 ============ ============ ============ ============ ============
We expect these obligations to be funded through operations, including the sale of hotels, or refinanced/extended prior to maturity. Currently, the sale of the remaining hotels as part of our hotel disposition plan, is expected to generate net cash of approximately $3.8 million to $4.4 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. LIQUIDITY AND CAPITAL RESOURCES General Our principal liquidity needs for the next twelve months are to: - fund normal recurring expenses; - meet debt service requirements including the repayment or refinancing of approximately $4.1 million of hotel mortgage indebtedness that matures within the twelve month period; - meet the obligations under our operating line-of-credit, including the $2.0 million reduction on its maximum availability over the next 12 months; - meet lease payment obligations of approximately $5.6 million, primarily to PMC Commercial Trust, subject to ongoing discussions as described herein; - fund capital expenditures, primarily hotel and office building improvements of approximately $1.5 million to $2.1 million; To the extent available, we also need funds for the following growth activities: - fund equity contributions on joint venture development projects; and - for wholly-owned hotel development projects, if any, fund development costs not covered under construction loans. In addition, we are obligated to purchase a hotel from PMC for a total purchase price of $2.6 million by June 5, 2004. We are currently in discussions with PMC, regarding several of the specific terms within the lease agreements, however there can be no assurance that this obligation will be terminated. If we choose not to purchase this hotel from PMC, our rent on the entire 21 hotel portfolio will increase by approximately $127,000 per year. 46 We expect to fund these liquidity needs and obligations using cash flows generated by operations, particularly from hotel sales, and by financing activities. Hotel revenue, hotel development fees, proceeds from the sale of hotels, including fees received from Cendant, and other income from operations are our principal sources of cash flow used to pay the hotel and corporate operating expenses and obligations mentioned above. We also have a corporate line-of-credit, however the availability under this facility is decreasing significantly, from its current maximum of $5.5 million to $3.5 million by the end of February 2005. We intend to pursue alternative sources of debt and equity financing, including longer-term alternatives to our corporate line-of-credit, as discussed below. During 2003, the cash flow from hotel operations continued to decline, due to many factors such as downturn in the hotel industry for most of 2003 and its effect on hotel room demand, increased competition in our markets, and increasing operating costs such as labor, maintenance, utilities and insurance. The net cash flow from the operations of many of our hotels has been insufficient to support their related mortgage debt payments, or lease payments, primarily to PMC, as well as necessary and ongoing capital expenditures. There can be no assurance that these costs will not increase further at rates greater than our revenues. In addition, our hotel development activity for joint ventures has also decreased over the past two years, with only one joint venture project completed in 2003. As a result, the cash flow from all of our business segments, with the largest amount funded by the sale of hotel properties, has been utilized to maintain liquidity and meet the line-of-credit availability reductions. A smaller amount has been used for investment in new hotel development. The factors impacting us in 2003, as well as the reduction in the availability of our corporate line of credit, have at times created liquidity issues. We have been able to maintain our liquidity primarily through the sale of hotels. We believe that during the next twelve months, in order to maintain our liquidity, it is critical for us to continue to sell hotel properties. In addition, we seek to increase income from our existing hotel properties by focusing on new revenue enhancement opportunities, and aggressive cost controls. We believe that an upturn in the economy will result in increased demand for hotel rooms, including ours, and such upturn could result in significantly improved hotel operating results. However, historically we have seen that lodging demand trends will typically lag six to nine months behind any such economic trends. We have also been in discussions with PMC requesting a reduction in our subsidiary's monthly lease payment and other modifications. Our principal liquidity needs for periods beyond twelve months are for the cost of new developments, property acquisitions, scheduled debt maturities, major renovations, expansions and other non-recurring capital improvements. We expect to satisfy these needs using one or more of the following: - construction loans; - long-term secured and unsecured indebtedness; - income from operations, including the development and sales of real estate; - joint ventures; - issuances of additional common stock and/or other equity securities; and - our unsecured revolving line of credit. In addition to our normal operational and growth oriented liquidity needs, other contingencies may also have a significant impact on us, including the impact of seasonality on our hotel operations and hotels sales, and the inability to pay off mortgage loans when maturing. See "Risk Factors" below. Our hotels are seasonal in nature, with the second and third calendar quarters being the strongest from a cash flow standpoint, and the fourth and first calendar quarters being the weakest. In addition, the buyers of our hotels tend to purchase hotels on a seasonal basis, wanting to acquire the property just in time for the stronger summer season. As the sale of hotel properties is a critical part of our liquidity, our inability to sell during the winter months could have a negative impact on our liquidity, if we do not generate strong cash flow from our other segments, or if we do not have adequate financing sources. We believe our revenues, together with proceeds from financing activities will continue to provide the necessary funds for our short-term liquidity needs. However, material changes in these factors, including factors that could inhibit our ability to sell hotels under acceptable terms and within certain time frames, may adversely affect net cash flows. Such changes, in turn, would adversely affect our ability to fund debt service, lease obligations, capital expenditures, and other liquidity 47 needs. In addition, a material adverse change in our cash provided by operations may affect the financial performance covenants under our unsecured line of credit and certain mortgage notes. Cash Flow Summary The following summary discussion of our cash flows is based on the consolidated statements of cash flows in "Item 8. Financial Statements and Supplementary Data". Cash and cash equivalents were $3.6 million and $4.0 million at December 31, 2003 and December 31, 2002, respectively, or a decrease of approximately $346,000. The decrease was a result of the following increases and decreases in cash flows: 48
Years ended December 31, (in thousands) ------------------------------------------- Increase 2003 2002 (Decrease) -------- -------- ---------- Net cash provided by operating activities $ 20,366 $ 14,331 $ 6,035 Net cash provided by (used in) investing activities (6,013) (17,073) 11,060 Net cash provided by (used in) financing activities (14,699) 1,964 (16,663) -------- -------- -------- Increase (decrease) in cash $ (346) $ (778) $ 432 ======== ======== ========
Cash provided by operating activities We have four main sources of cash from operating activities: - revenues from hotel operations; - revenues from the sale of hotel assets; - fees from development, construction and renovation projects, and - hotel development incentive fees and royalty sharing pursuant to the Cendant transaction. To a lesser extent, we have these additional sources of cash from operating activities: - fees from management contracts, - fees from employee leasing services, - rental income from the ownership of an office building. Hotel operations 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. We have implemented a number of initiatives to control costs at our hotels, especially in the areas of labor, insurance, utilities, and maintenance. For example, we have reduced our housekeeping labor hours significantly, and were successful in reducing property and workers compensation insurance costs. We have also started to implement energy control systems at a few hotels and are exploring the expansion of this program. We have entered into discussions with PMC with the objective to restructure the long-term lease agreements with our subsidiary. One of the objectives of such restructuring is to improve the operating results and cash flow generated by these hotels through a permanent reduction in the monthly lease payment. Currently, our subsidiary's lease obligation for these 21 hotels is approximately $5.3 million per year, significantly greater than the operating cash flow generated from these hotels before the rent payment. However, there can be no assurance that we will be successful in any such restructuring, or that a restructuring will result in improved operational results for these hotels. Sale of hotels 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. However, in certain instances, we have provided seller financing in the form of a note to the buyer with specified interest and repayment terms. 49 The decrease in cash flow from operations from 2001 to 2003, due primarily to the decrease in cash flow from hotel operations, has been offset by the net cash proceeds generated from the sale of hotels. The fluctuations in cash flow from the sale of hotels are directly related to number, size and value of the AmeriHost Inn hotels sold. On a cash basis, the net proceeds from the sale of wholly owned AmeriHost Inn hotels, after the payoff of the related mortgage debt, and including commissions, was $6.2 million in 2001, $2.5 million in 2002, and $8.7 million in 2003. In addition, net cash proceeds after the payoff of the related mortgage debt from the sale of non-AmeriHost Inn hotels, an activity which is included in discontinued operations rather than operating income, was $125,000 in 2003. We also received $400,000 per year in 2001, 2002, and 2003 from Cendant, in connection with the sale of the AmeriHost Inn brand name in 2000. The amount received in 2003 was the last installment of the initial fees. We intend to continue to sell hotels, as discussed above under "Hotel Disposition Plan and Restructuring." However, there can be no assurance that we will be able to sell hotel assets under terms acceptable to us, and the timing and estimated proceeds from any such sales could differ materially from that anticipated. Historically, we have experienced greater activity in hotels for sale from prospective buyers during the second and third calendar quarters, versus the first and fourth quarters, consistent with the seasonality of the hotel operations. We have had a few hotels under contract for sale scheduled to close during the fourth quarter of 2003 or first quarter of 2004 that have been delayed or fallen out of contract. The timing of hotel sales can be affected by numerous factors, many of which are beyond our control. For example, many of our historical buyers obtain debt financing under various U.S. Small Business Administration ("SBA") loan guarantee programs. Due to the recent federal budget issues, certain SBA programs, and all loans currently being underwritten and documented under this program, were significantly delayed. In fact, one hotel which was under contract for sale and scheduled to close in December 2003, was delayed by SBA financing issues and the sale was not consummated until the end of March 2004. The seasonality of the hotel sales, as well as the delays from numerous factors, including buyer financing, can create significant liquidity issues for us, especially at times when our hotel operations cash flow may be minimal or negative, after debt service and lease obligations, as during the winter months. Currently, we expect to realize net cash proceeds of approximately $3.8 to $4.4 million from the sale of the remaining hotels in the plan for hotel disposition, after the payoff of the related mortgage debt, and exclusive of any Cendant fees. Five hotels are currently under contract for sale, which are expected to be consummated within the next six (6) months. Under the terms of the contracts, these anticipated sales are expected to generate approximately $11.1 million in gross proceeds and the reduction of mortgage debt of approximately $8.0 million. However, there can be no assurance that these hotel sales will be consummated as anticipated. Any forecasted amounts from these sales could differ from the final amounts included in the company's quarterly and annual financial statements when issued. Hotel development 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. Developing hotels for joint ventures in which we have an ownership interest, and third parties, has historically provided stronger returns and cash flow, compared to the longer term returns from developing and operating hotels for our own account. In addition, our equity contribution is much less for a joint venture development project, as most of the cash equity is contributed by our partners. However, many of the same factors affecting hotel operations, as discussed above, have also had an impact on our ability to develop hotels for third parties and for joint ventures, and as a result, this development activity has declined from 2001 to 2003. We currently have several projects under development for joint ventures, or which will be marketed to joint venture partners, and our goal is to significantly increase this activity in the future, provided that we can find acceptable sites to locate the hotels, find acceptable joint venture partners with sufficient equity, maintain sufficient liquidity to make our share of capital contributions, as needed, and that the joint venture can obtain the necessary mortgage debt financing on acceptable terms. Fees from Cendant The development incentive fee from Cendant is a one-time fee 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, and subject to certain conditions. Royalty sharing payments from Cendant are received monthly, 50 based on the actual royalty payments received by Cendant from all AmeriHost Inn hotel franchisees, except those operated by us. We received $2.0 million, $1.8 million, and $1.6 million during 2003, 2002, and 2001, respectively, in development incentive fees. These fees may be refundable to Cendant if the buyer of our AmeriHost Inn hotel defaults under their franchise agreement with Cendant during the first 76 months. However, any such amounts due would be reduced by a portion of any damages recovered by Cendant and would only be paid by us an offset against future fees earned. To date, there have been no defaults, and we have not had to repay any incentive fees. We received royalty sharing fees from Cendant in the amount of $299,000 in 2003, which is based on the royalty fees Cendant receives for all non-Arlington Hospitality AmeriHost Inn hotels in their franchise system. We will receive royalty sharing payments through 2025 under the terms of the agreement with Cendant, including fees from AmeriHost Inn hotels that are not developed or operated by us. While we expect this cash flow to increase as the AmeriHost Inn brand is expanded, there can be no assurance that Cendant will be able to sell additional AmeriHost Inn franchises, or that we will be able to sell existing or newly developed AmeriHost Inn hotels to third party operators. Cendant must approve the franchise applications of the buyers of our AmeriHost Inn hotels, which approval is based solely on Cendant's evaluation of the buyers' experience and ability to effectively operate the hotels, the physical condition of the hotels, and other factors. If we choose to sell an AmeriHost Inn hotel, where the buyer does not execute an AmeriHost Inn franchise agreement, we may be subject to liquidated damages to Cendant under our franchise agreements, which is computed as a percentage of room revenue or a fixed amount per room, and their would be no incentive fee nor ongoing revenue sharing fees paid to us by Cendant. Other sources We receive management fees and employee leasing fees which result in a relatively smaller amount of cash flow, after the payment of related expenses in comparison to the activities discussed above. These fees and cash flow could increase as we develop and manage more hotels for joint ventures, as anticipated. In addition, we receive rental income from the other tenants in our office building. Owning our office building assists us in minimizing our own corporate headquarter occupancy costs. Cash used in investing activities Cash is used in investing activities to fund acquisitions, invest in joint ventures, to make loans to affiliated hotels for the purpose of construction, renovation and working capital, for new hotel development, for recurring and nonrecurring capital expenditures, and from time to time, for the purchase of our own common stock. We selectively invest in new projects that meet our investment criteria and enable us to take advantage of our development and property management skills. Cash used in investing activities for the twelve months ended December 31, 2003 and 2002, consisted of the following:
(in thousands) 2003 2002 ---- ---- Investments in unconsolidated joint ventures, net of distributions and collections on advances from affiliates $ (821) $ 878 Purchase of property and equipment (7,088) (18,583) Acquisitions of partnership interests (777) (797) Issuance of notes receivable, net of collections (131) (151) The cash used in investing was partially offset by: Proceeds from the sales of real estate 2,804 1,444 -------- -------- Total $ (6,013) $(17,073) ======== ========
The purchase of property and equipment includes all construction, furniture and fixtures costs for three new hotel projects, which opened in 2003, and two new hotels opened in 2002. However, two of the three hotels opened in 2003, opened 51 during the first quarter, and most of the project cost was incurred in 2002. We spent $3.9 million on new construction in 2003, versus $8.6 million in 2002. We expect these costs to be lower than historically, as we focus on new development for joint ventures and others. In addition, the amounts for 2002 and 2003 include the acquisition of AmeriHost Inn hotels from joint ventures. From time to time, we advance funds to these joint ventures for working capital and renovation projects. In 2003, we advanced $408,000 to joint ventures in which we are a partner, net of repayments, primarily for working capital purposes. We expect the joint ventures to repay these advances primarily through the sale of the hotel, and cash flow generated from hotel operations, however in certain cases, we may not realize the entire amounts advanced. In all cases, these advances will be repaid to us prior to any distributions to our partners. In 2004, we expect to continue advancing funds to certain joint ventures for working capital purposes. If we do not continue to support these joint ventures for working capital needs and debt service, it may create defaults under their mortgage agreements, which in most cases have been guaranteed by us. In addition, in 2003 we invested approximately $442,000 in new and existing joint ventures, net of approximately $24,000 in distributions received from joint ventures. This amount included approximately $365,000 for a new development project expected to open in 2004, and approximately $101,000 that was used for working capital purposes. Cash used in financing activities Cash used in financing activities was $14.7 million during 2003, compared to cash provided by financing activities of $2.0 million during 2002, summarized as follows:
(in thousands) 2003 2002 -------- -------- Principal Payments on long-term debt (19,095) (10,440) Net repayments on operating line of credit (2,534) (409) Common stock repurchases (144) - Distributions to minority interests (90) (203) The cash used in financing activities was partially offset by: Proceeds from issuance of long-term debt 6,888 13,017 Issuance of common stock 277 - -------- -------- $(14,699) $ 1,964 ======== ========
Principal payments on long-term debt include the payoffs of mortgages upon the sale of hotel properties of approximately $16.5 million in 2003, and $7.2 million in 2002. We paid off 10 hotel mortgages in 2003, compared to five hotel mortgages in 2002. Proceeds from the issuance of long-term debt includes approximately $6.9 million in 2003 and $13.0 million in 2002, as a result of opening five newly constructed consolidated AmeriHost Inn hotels during 2002 and 2003. Future hotel development is dependent upon our ability to attain mortgage debt financing. Lenders typically advance mortgage debt at the rate of 60% - 75% of total project value. Assuming the total value of a new hotel development is $5.0 million, the typical mortgage loan amount would range from $3.0 million to $3.75 million. There can be no assurance that we will be able to obtain such mortgage financing on terms acceptable to us, to support our growth objectives. 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, in 2003 we repurchased 36,800 shares for a total of approximately $122,000. In addition, in 2003 we executed a reverse-forward stock split whereby the shares held by shareholders owning less than 100 shares on the effective date were redeemed and converted into the right to receive cash from the Company. The shareholders owning at least 100 shares were not impacted. As a result of the reverse-forward split, approximately 33,000 shares were converted to the right to receive $3.83 per share, or a total of approximately $128,000, of which approximately $22,000 was funded through December 31, 2003. We consider the reverse-forward split a one-time transaction, and we do not anticipate a similar transaction in the foreseeable 52 future. All shares that we have repurchased or redeemed have been retired. In addition, 37,000 options to purchase stock were exercised during 2003 resulting in proceeds to us of approximately $130,000. Construction line-of-credit We had a $20 million loan facility, which provided for new construction financing that automatically converted to permanent financing upon opening. We utilized this facility primarily for the construction of wholly-owned AmeriHost Inn properties, as approved by the lender on a project-by-project basis. We still have three outstanding hotel mortgages which were originated through this facility, with a total outstanding balance of $8.1 million at December 31, 2003. However, the lender's commitment to review and underwrite new construction projects under this facility expired on October 31, 2003. Under this facility, we had availability, up to $20 million, less any loans outstanding, for new hotel development projects, subject to lender approval. To the extent a hotel was sold which had been financed with the facility, and the related mortgage is paid off, it would create availability for the lender to review new hotel development financing. We are currently seeking to renew this construction line of credit facility, however we do not know when, or if, the lender will approve, and there can be no assurance that this facility, or a version of this facility, will be available for future development projects. In the meantime, this lender continues to review and underwrite the debt financing for some of our current development projects on a per project basis, and has approved a pre-commitment for the construction and long term mortgage loan for one joint venture project where we have an active land purchase contract. As an alternative to, or in addition to this facility, we intend to explore alternative financing sources for new construction and long term permanent mortgage financing to assist us in the development of AmeriHost Inn hotels. Mortgage Debt The table below summarizes our mortgage notes payable as of December 31, 2003 and 2002:
(in thousands) 2003 2002 ---------- ---------- Outstanding Balance: Fixed rate $ 22,678 $ 29,001 Variable rate 42,500 47,242 ---------- ---------- Total $ 65,178 $ 76,243 ========== ========== Percent of total debt: Fixed rate 34.79% 38.04% Variable rate 65.21% 61.96% ---------- ---------- Total 100.00% 100.00% ========== ========== Weighted average interest rate at end of period: Fixed rate 7.60% 7.52% Variable rate 5.64% 6.17% ---------- ---------- Total 6.24% 6.66% ========== ==========
The variable rate debt shown above bears interest based on various spreads over the Prime Rate or the London Interbank Offered Rate. The Company's plan to sell certain hotel assets is expected to result in the payoff of the related mortgage debt in the amount of approximately $37.5 million, which has been classified in current liabilities in the accompanying consolidated balance sheet as of December 31, 2003. This amount includes (i) one hotel mortgage in the amount of approximately $1.6 million which was extended subsequent to December 31, 2003 for a two year period, (ii) one hotel loan in the amount of $1.5 million which matures in August 2004, and (iii) approximately $1.4 million in principal payments which are contractually due within the next twelve months regardless of the plan for hotel disposition. We have received notice from the lender on the loan which matures in August 2004 indicating that they will not be extending or renewing the loan. We expect this hotel to be sold prior to its maturity, as it is currently being actively marketed for sale as part of our plan for hotel disposition, with the proceeds to be used to payoff the mortgage loan. However, based on our current estimates, we anticipate that the net proceeds from the sale of this hotel will be less than the outstanding mortgage balance by approximately $200,000 - $300,000. This shortfall will need to be funded by us upon the sale of the property, or it 53 could be an event of default, absent any other agreement with this lender. Although not contractually due in 2004, another hotel mortgage loan matures on January 1, 2005 in the amount of approximately $1.0 million. We also expect this loan to be repaid prior to maturity with proceeds from the sale of the hotel, as it is also being actively marketed. If these hotels are not sold by their maturity dates, we are currently obligated to payoff the mortgage notes using funds from other sources, if available, including mortgage refinancings with other lenders, or if not paid off, we would be in default of the mortgage agreements, absent any other agreement with these lenders. However, there can be no assurance that these hotels will be sold by their loan maturity dates, or that alternative financing will be available if needed. If these hotels are not sold prior to their loan maturity dates, and absent an extension by the current lenders, or a refinancing with another lender, it could have a significant impact on our liquidity. With respect to mortgages on hotels which are not held for sale, approximately $1.2 million is classified in current liabilities, which is the principal amortization due within the next twelve months. 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 office building loan bears interest at the floating rate of either prime minus 0.25% or LIBOR plus 2.25%, as determined by us. 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. At December 31, 2003, we were not in compliance with the minimum debt service coverage ratio contained in two hotel mortgage loans aggregating approximately $4.5 million. The lender for one of these mortgage loans which matures in August 2004 has indicated they will not be extending or renewing the loan, as discussed above. With respect to the other mortgage loan, we have obtained a waiver from the lender. Other Mortgage debt guaranteed by the Company We are a general partner or managing member in 15 joint ventures as of December 31, 2003, 13 of which had mortgage debt. The following is a summary of the mortgage debt held by the various types of joint ventures:
No. of hotels Balance Outstanding Guarantee Balance ------------- ------------------- ----------------- Consolidated joint ventures in which we have a majority or controlling interest 2 $ 4,864 $ 976 Unconsolidated joint ventures in which we are a general partner 2 3,674 3,674 Unconsolidated joint ventures in which we are a managing member of a limited liability company 9 18,136 13,194 -- ------------- ------------ 13 $ 26,674 $ 17,844 == ============= ============
The mortgage balances for the two consolidated joint ventures have been included in our financial statements at December 31, 2003. The aggregate maturities on this long-term mortgage debt, excluding consolidated joint ventures, regardless of the plan for hotel disposition, are approximately as follows, including that portion related to our guarantees: 54
(in thousands) Year Ending December 31, Amount Guaranteed - ------------------------ ------ ---------- 2004 $ 2,507 $ 1,926 2005 845 669 2006 882 694 2007 1,601 1,398 2008 2,058 988 Thereafter 13,917 11,193 --------- --------- $ 21,810 $ 16,868 ========= =========
The mortgage balances for the unconsolidated joint ventures has not been included in our consolidated balance sheet. Other partners have also guaranteed a portion of these financings, which may ultimately reduce the exposure on our guarantees. Approximately $8.9 million of the mortgage debt with unconsolidated joint ventures relates to five properties that have been identified to be sold as part of our strategic hotel disposition plan. One mortgage in the amount of approximately $1.7 million matures in November 2004. This mortgage had matured on November 1, 2003, however the lender extended the maturity for one year, and waived a covenant violation for the minimum debt service coverage ratio for 2003. This hotel is included in the hotel disposition plan, and we expect this hotel to be sold prior to the loan maturity, with the net proceeds being used to pay off the mortgage. However, if the joint venture is unable to sell the hotel prior to the loan maturity, on acceptable terms, and the lender is unwilling to extend the maturity date of the loan, or if acceptable alternative financing is not available, it could create a default on behalf of the joint venture whereby the lender would look to us for repayment of the loan under our guarantee, possibly creating significant liquidity issues for us. [see also, "Off Balance Sheet Arrangements"] Operating line-of-credit At December 31, 2003, we had $3.9 million outstanding under its operating line-of-credit with LaSalle Bank NA. The operating line-of-credit has a limit of $5.5 million, as reduced from $6.0 million on February 27, 2004, 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, and was scheduled to mature on April 30, 2004. The credit line provides for the maintenance of certain financial covenants, including minimum tangible net worth, a maximum leverage ratio, minimum debt service coverage ratio, and minimum net income. We were not in compliance with the minimum tangible net worth requirement, and the minimum net income requirement as of December 31, 2003. However, the lender has waived these violations in connection with the renewal of the line-of-credit set forth below. In March 2004, we accepted a commitment from this lender, to renew the line-of-credit through April 30, 2005, with a maximum available of $5.5 million, reducing to $5.0 million on June 30, 2004, reducing further to $4.0 million on August 31, 2004, and to $3.5 million on February 28, 2005. Notwithstanding the scheduled reductions, the lender has required that the majority of the proceeds from the sale of hotel properties must be used to reduce the line-of-credit balance until the balance is at or below $4.0 million, at which time the maximum available will be reduced to $4.0 million, even if prior to the August 31, 2004 scheduled reduction date, above. The commitment is subject to the closing of the renewed loan by April 30, 2004. In addition, the terms of the agreement were revised to provide for interest at the fixed rate of 10.0% per annum. The renewed credit line provides for the maintenance of certain types of financial covenants, similar to those in the previous credit line. We intend to pursue longer term financing options with other lenders that is consistent with our business plan of developing, building and selling AmeriHost Inn hotels and expect to engage an investment/financial advisor in the near future to assist us in this undertaking. 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. Lease Purchase Obligation Under the terms of our existing arrangement with PMC, if we do not either facilitate the sale to a third party, or purchase from PMC, one of our leased hotels at a price of approximately $2.6 million by to June 5, 2004, a rent increase of approximately $127,000 on an annual basis, becomes effective. If we decide to purchase this hotel by to June 5, 2004, we intend to fund the $2.6 million purchase price with a combination of mortgage debt, the source of which has not yet been 55 identified, and cash from operations or working capital. However, there can be no assurance that we will have the liquidity and/or acceptable financing available to purchase this hotel at that time, and the rent increase could become effective. As discussed above, we intend to address this purchase obligation as part of our ongoing discussions with PMC, however there can be no assurance that an alternative agreement will be in place prior to June 5, 2004. 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. We have also experienced greater interest in hotel sales from prospective buyers during the second and third calendar quarters, consistent with the seasonality of hotel operations. GOVERNMENTAL REGULATION Americans with Disabilities Act Under the Americans with Disabilities Act, or ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been invested in ADA-required upgrades to our hotels, a determination that our hotels are not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. We are likely to incur additional costs in complying with the ADA; however, such costs are not expected to have a material adverse effect on our results of operations or financial condition. Environmental Laws Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in property. Laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly remediate a contaminated property, may adversely affect the owner's ability to sell or rent real property or to borrow funds using real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of these substances at the disposal or treatment facility, whether or not the facility is or ever was owned or operated by those persons. Federal and state laws also regulate the operation and removal of underground storage tanks. In connection with the ownership and operation of hotels, we could be held liable for the costs of remedial action with respect to the regulated substances and storage tanks and claims related thereto. We do not use underground storage tanks at our hotels. In the few instances where we have had an underground storage tank, activities were undertaken to remove the underground storage tanks and fully remediate the site. We are not aware of any underground storage tanks at any of the properties in our current portfolio, however there can be no assurance that such underground storage tanks do not exist, particularly at our older properties that we acquired as existing structures. Most of our hotels have undergone Phase I environmental site assessments, which generally provide a non-intrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental engineer. The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotels may be responsible and to assess the status of environmental regulatory compliance. The Phase I assessments have not revealed any environmental liability or compliance concerns that we believe would have a material adverse effect on our results of operations or financial condition, nor are we aware of any material environmental liability or concerns. Nevertheless, it is 56 possible that these environmental site assessments did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware. Federal, state and local environmental laws, ordinances and regulations require abatement or removal of asbestos-containing materials and govern emissions of and exposure to asbestos fibers in the air. Asbestos-containing materials may be present in various building materials such as sprayed-on ceiling treatments, roofing materials, pipe insulation or floor tiles at some of our older hotels. In instances where we became aware of such asbestos-containing materials, such materials were contained or removed and abated. To the best of our knowledge, we have not used any asbestos-containing materials, which are not in compliance with the applicable laws and regulations, in our new hotel development projects. Any liability resulting from non-compliance or other claims relating to environmental matters could have a material adverse effect on our results of operations or financial condition. In recent years there has been a widely publicized proliferation of mold-related claims by tenants, employees and other occupants of buildings against the owners of those buildings. To date, we have experienced a few instances where mold was detected, however no such claims have been filed against us. Mold-related claims are not covered by our insurance programs. In every hotel where we have identified a measurable presence of mold, we have undertaken remediation we believe to be appropriate for the circumstances encountered. Unfortunately, there is little in the way of government standards, insurance industry specifications or otherwise generally accepted guidelines dealing with mold propagation. Although considerable research into mold toxicity and exposure levels is underway, it may be several years before definitive standards are available to property owners against which to evaluate risk and design appropriate remediation practices. We cannot predict the outcome of any future regulatory requirements to deal with mold-related matters. We also do not believe that, currently, any potential mold-related liabilities, either individually or in the aggregate, will have a material adverse effect on our results of operations or financial condition. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2002, the FASB issued 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. In December 2003, the FASB issued Interpretation No. 46R (FIN 46R), "Consolidation of Variable Interest Entities," which addresses how a business enterprise should evaluate whether or not it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of Variable Interest Entities", which was issued in January 2003. The Company is required to adopt the requirements of FIN 46R for interim periods beginning after March 31, 2004. This Interpretation 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 four 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 June 30, 2004. The consolidation of these joint ventures is expected to add approximately $9.7 million in assets and $7.8 million in liabilities to the Company's consolidated balance sheet. As of December 31, 2003, the Company had investments in, and advances to, these joint ventures of approximately $2.0 million, 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. 57 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. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The effective date of a portion of the statement has been indefinitely postponed by the FASB. The Company does not expect that the implementation of SFAS No. 150 will result in a material financial statement impact. SUBSEQUENT EVENTS In 2004, we entered into discussions with PMC Commercial Trust, regarding 21 AmeriHost Inn hotels PMC owns which are leased and operated by our subsidiary. Due to numerous economic and market-driven factors relating to these 21 hotels, including the factors mentioned above, we have entered into discussions with PMC with the objective to restructure these long-term lease agreements. The objective of such restructuring is to improve our operating results and cash flow with respect to these hotels, and to agree on a plan that would transfer these hotels to third party operators through the sale of the properties. On March 12, 2004, we entered into a temporary letter agreement with PMC that expires on April 30, 2004. The temporary letter agreement provides that base rent will continue to accrue at the rate of approximately $445,000 per month, as set forth in the lease agreements; however the base rent payments required to be paid on March 1, 2004 and April 1, 2004 were reduced to approximately $360,000 per month, with the March 1, 2004 payment being due and payable upon the execution of the temporary letter agreement. In addition, our subsidiary was allowed to utilize $200,000 of its security deposit held with PMC to partially fund these payments. Upon the expiration of the temporary letter agreement on April 30, 2004, the deferred portion of the base rent (approximately $170,000) will be payable and the security deposit is to be restored to its March 12, 2004 balance. While the objective is to reach a restructured agreement prior to the expiration of the temporary letter agreement, there can be no assurance that the leases will be restructured on terms and conditions acceptable to us, if at all, or that a restructuring will improve operating results and cash flow, or provide for the sale of the hotels to third party operators. In March 2004, we accepted a commitment to renew our operating line-of-credit from the existing lender, LaSalle Bank N.A., through April 30, 2005, which we accepted and executed. The revised terms require that the maximum availability under the facility from its current $5.5 million level be reduced to $5.0 million on June 30, 2004, further reduced to $4.0 million on August 31, 2004, and further reduced to $3.5 million on February 28, 2005. Notwithstanding these scheduled reductions, the lender has required that the majority of the proceeds from the sale of hotel properties must be used to reduce the outstanding balance of the line-of-credit until the balance it at or below $4.0 million, at which time the maximum availability on the line will be reduced to $4.0 million, even if prior to the August 31, 2004 scheduled reduction date, above. The terms of the agreement were further revised to provide for interest at the fixed rate of 10.0% per annum. The renewed credit line provides for the maintenance of certain types of financial covenants, as in the previous credit line. In March 2004, we sold two wholly owned AmeriHost Inn hotels, generating gross proceeds of approximately $7.1 million, and simultaneously paid off the related mortgage loans of approximately $3.9 million. RISK FACTORS 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. 58 DEBT, CAPITAL, AND LIQUIDITY We have substantial 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, such as the leases with PMC, requiring us, or our subsidiaries, to dedicate a substantial portion of our, or their, cash flow from operations to make these required payments. These payments reduce the cash flow otherwise available to fund capital expenditures, expansion efforts and other general corporate needs. For the last three years our cash flow from hotel operations, after the payment of mortgage debt service, lease obligations, and ongoing capital expenditures, has been negative and we have used the proceeds from the sale of hotels to primarily fund these payments and other operational expenses. There is no assurance that we will generate positive cash flow from hotel operations. If our hotel operating cash flow or other sources of cash is not sufficient to fund our expenditures or to make our debt and lease payments, we will have to raise additional funds through: - the sale of capital stock; - additional borrowings; or - selling a greater number of assets and sooner than planned. 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 operating or capital needs, including our debt and lease payments, would have a material adverse effect on our results of operations and financial condition. Further, pursuant to a commitment letter from our existing line-of-credit provider to extend the facility for a one-year period, we will be required to use the proceeds from the sale of hotel properties to repay draws on the line. The maximum availability on this credit facility will decrease to $4.0 million from its current $5.5 million by August 31, 2004, and further to $3.5 million by February 28, 2005, however the majority of net proceeds from the sale of hotels must be used to reduce the outstanding balance under the line-of-credit until our balance is at or below $4.0 million, at which time the reduction of the line of credit availability to $4.0 million will be accelerated. There is no assurance that this line will be sufficient to meet our needs or that we would be able to obtain a replacement line on terms and conditions acceptable to us, if at all. Additionally, our loan facility for new construction expired on October 31, 2003, and we are currently attempting to renew the facility. There is no assurance that we will be able to renew this facility. If we are unable to renew this facility, or if we are unable to obtain an alternative new construction credit facility, or other hotel debt arrangements, on acceptable terms, our ability to develop new hotels will be significantly limited and our future prospects will be adversely effected. We require significant amounts of capital in our business. Our business model requires us to have, or be able to obtain, significant amounts of capital. We rely on the availability of debt or equity capital, including joint venture sources, or the sale of hotels, to fund hotel development and capital improvements. We may not, however, be able to raise sufficient monies, or sell hotels, on acceptable terms, if at all. In addition, geopolitical or global or regional trends and events deemed negative by debt and equity providers could adversely affect the availability and cost of capital for our business. Failure to adequately fund our business would have a material adverse effect on our results of operations, financial condition and prospects. 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 have a material adverse effect on our results of operations and financial condition including our ability to pay increased interest costs. We have restrictive debt covenants that could adversely affect our ability to run our business. The agreement governing our corporate line of credit contains various restrictive covenants including, among others, provisions that could restrict our ability to: 59 - borrow additional money; - make common and preferred distributions; - make capital expenditures or acquire or develop hotels in excess of certain amounts; - engage in transactions with affiliates; - make investments, including repurchasing our common stock; - merge or consolidate with another person; and - 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 accelerated payment of amounts outstanding under our line of credit. We may not be able to refinance or repay our debt in full under those circumstances. REAL ESTATE AND GROWTH Our development activities may be more costly and take longer than we have anticipated. As part of our strategy, we plan to develop hotels for third parties and joint ventures in which we have an ownership interest. Development involves many substantial risks, including: - actual development costs may exceed budgeted or contracted amounts; - construction delays may prevent us from opening hotels on schedule; - we may not be able to obtain all necessary zoning, land use, building, occupancy and construction permits; - the properties may not achieve our desired revenue, operating profit, and profit on sale goals; and - 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 existing hotels, or hotels that we develop, at favorable prices. The price and timing of each sale is affected by numerous factors, such as the 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 and our buyer's ability to obtain sufficient financing. In addition, our cash flow needs may dictate, to a certain extent, the timing of attempted sales. For example, the sales price we can obtain for a hotel may be adversely affected because we may accelerate sale of a hotel to generate cash flow to fund other needs. Further, even if we do not accelerate the sale of any particular hotel or hotels, actual sales prices may be materially less than we expect. There is no assurance, for example, that we will generate the expected proceeds from our formal plan for hotel disposition. If we are not able to sell the hotels we develop in a timely manner and at favorable prices, our ability to find future growth, our ability to retire maturing debt, our revenues and our ability to operate profitably will be significantly impaired. 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: - adverse changes in general or local economic or real estate market conditions; - changes in zoning laws; - changes in traffic patterns and neighborhood characteristics; - increases in assessed valuation and real estate tax rates; - increases in the cost of property insurance; 60 - governmental regulations and fiscal policies; - the potential for uninsured or underinsured property losses; - the impact of environmental laws and regulations; and - 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. OPERATIONAL RISKS Insufficient cash flow from many of our existing hotels. The net cash flow from the operations of many of our hotels has been insufficient to support their related mortgage debt payments or long-term lease obligations, as well as their necessary and ongoing capital expenditures. This negative cash flow at many of our hotels affects several aspects of our business, including our ability to raise capital whether through debt or equity sources, our ability to purchase and/or develop hotels, and our ability to make capital improvements to our existing hotels. As described in the "Executive Overview" above, we have implemented strategies and programs to improve hotel operation results, and while the improvement in the economy and industry is expected to have a positive impact, there can be no assurance that such initiatives or expected positive impact from the economy will occur or will have a material position impact on our hotel operations. If we are not able to restructure our lease agreements with PMC Commercial Trust, our financial results may suffer. One of our wholly-owned subsidiaries is the lessee for 21 hotels with PMC. We have guaranteed the obligations under these leases. To date, we have been making a significant portion of the lease payments for our subsidiary, since the cash flow generated by these hotels has been insufficient to cover the annual lease payment obligation of approximately $5.3 million. On March 12, 2004, we and our subsidiary entered into an interim agreement with PMC. This interim agreement temporarily deferred a portion of the March and April 2004 payments required under the leases. This interim agreement expires on April 30, 2004 at which time the deferred portion is due. If this interim agreement is not renewed or extended, or a revised agreement not entered into, the terms of the original agreement will return in effect. Thus, if the operations of the hotels subject to the leases do not improve sufficiently, we will either have to continue subsidizing the lease payments or take other actions to restructure the leases. Any such actions could cause us to default under other credit agreements or our agreement with Cendant. Any such default would have a material adverse effect on our results of operations, financial condition and prospects. Our financial performance depends in part on Cendant promoting and supporting the AmeriHost Inn 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 do not control what Cendant spends on brand promotion or franchisee support. Cendant's failure or inability to promote the AmeriHost brand or to provide adequate support to franchisees would have a material adverse effect on our results of operations, financial condition and prospects. Further, if we sold an AmeriHost Inn hotel and received a development incentive fee from Cendant, since the hotel remained an AmeriHost Inn hotel, and subsequently the buyer of the hotel defaults under the franchise agreement within the first 76 months, under certain circumstances, we may be required to refund back to Cendant, from future fees, a portion of the development incentive fee. To date, we have not been required to refund any development incentive fees; however, there can be no assurance that we will not be required to refund development incentive fees in the future. We may be adversely affected by the requirements contained in our franchise and licensing agreements. 61 As of December 31, 2003, all of our hotels were operated pursuant to existing franchise or licensing agreements with nationally recognized hotel brands. The franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. Standards are often subject to change over time, in some cases at the discretion of the franchisor, and may restrict a franchisee's ability to make improvements or modifications to a hotel without the consent of the franchisor. In addition, compliance with standards could require us to incur significant expenses or capital expenditures. Action or inaction on our part could result in a breach of standards or other terms and conditions of the franchise agreements, and could result in the loss or cancellation of a franchise license. Loss of franchise licenses without replacement would likely have an adverse effect on our hotel revenues. Typically, the buyers of our hotels maintain the existing brand affiliation and enter into a franchise agreement with the franchisor upon the sale. Part of our strategic plan is to sell AmeriHost Inn hotels to buyers who continue to operate the hotels as AmeriHost Inn hotels. As a result, Cendant must approve the franchise application of the buyer, which is based solely on their evaluation of the buyer's experience and ability to effectively operate the hotel, the physical condition of the hotel, and other factors. If we choose to sell an AmeriHost Inn hotel, or other brand hotel, where the buyer does not execute an AmeriHost Inn, or other, franchise agreement, we may be subject to liquidated damages under our franchise agreements, which is computed as a percentage of room revenue or a fixed amount per room. 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 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 own, or lease and operate. We must also make periodic capital improvements to comply with standards established by Cendant, 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: - cost overruns and delays; - the disruption to operations and potential lost room revenue associated with renovations; - the cost of funding renovations and the possibility that financing for these renovations may not be available on attractive terms; and - the return on our investment in these capital improvements may not be adequate. In the past, we have generally funded capital improvements from cash flow from operations and, to a lesser degree, by borrowing. Our future cash flow may not be sufficient to fund future capital improvements and there is no assurance that we will be able to borrow any needed monies on acceptable terms, if at all. Thus, we may not be able to fund required capital improvements, which could cause us to default on certain agreements which would have a material adverse effect on our results of operations, financial condition and prospects. 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. 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. Downturns in business or leisure travel could have a material adverse effect on our results of operations, financial condition and prospects. 62 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 number of hotels in their brands, greater contributions from their central reservation system, greater name recognition, and greater marketing and financial resources. New hotels are continually being constructed and opened, in some cases without corresponding increases in demand for hotel rooms. There is no assurance that we will be able to compete effectively, which could have a material adverse effect on our results of operations, financial condition and prospects. We are subject to the risks of hotel operations. We are subject to the risk of fluctuating hotel operating expenses at our hotels, including but not limited to: - wage and benefit costs; - repair and maintenance expenses; - gas and electricity costs; - insurance costs, including health, general liability and workers compensation; and - other operating expenses. Increases in operating expenses could have a material adverse effect on our results of operations and financial condition. 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 2003, more than two-thirds of our hotel 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 where growth may be weaker than that in other regions, and a decline in economic conditions in this region could have a material adverse affect on us. 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. Travel and leisure spending in the lodging industry is seasonal in nature. Our hotel revenues are generally greater in the second and third calendar quarters than in the first and fourth calendar quarters. Similarly, both hotel sales and construction activity are also seasonal. Thus, our quarterly revenues and earnings vary from quarter to quarter and may be adversely affected by events beyond our control, such as extreme weather conditions, economic and other factors affecting travel. Our revenues and the value of our properties are subject to conditions affecting the lodging industry. The lodging industry has experienced a difficult period, and operations have generally been declining for the past several years, which has caused declines in our revenue per available room, or RevPAR, and profit margins. The decline in the lodging industry has been attributed to a number of factors including a weak economy, and the effect of potential terrorist activity in the United States which have changed the travel patterns of both business and leisure travelers. It is not clear whether these changes are permanent or whether they will continue to evolve creating new opportunities or difficulties for the industry. Our results of operations may be affected and can change based on the following risks: - changes in the national, regional and local economic climate - changes in business and leisure travel patterns; 63 - local market conditions such as an oversupply of hotel rooms or a reduction in lodging demand; - the attractiveness of our hotels to consumers relative to our competitors; - the performance of the managers of our hotels; and - changes in room rates and increases in operation costs due to inflation and other factors. Our expenses may not decrease if our revenue drops. Many of the expenses associated with owning and operating hotels, such as debt payments, property taxes, insurance, utilities, and employee wages and benefits, are relatively inflexible and do not necessarily decrease in tandem with a reduction in revenue at the property. Because of weak economic conditions over the last several years, particularly in the lodging industry, we have been working with our managers to reduce the operating costs of our hotels. While we have achieved reductions in some operating costs as a result of these efforts, further cost reductions would be difficult to achieve if operating levels continue to decline. Some of the cost reduction efforts undertaken may eventually need to be reversed even if operations remain at reduced levels. Regardless of these efforts to reduce costs, our expenses will be affected by inflationary increases, and in the case of certain costs, such as wages, benefits and insurance, may exceed the rate of inflation in any given period. Our managers may be unable to offset any such increased expenses with higher room rates. Any of our efforts to reduce operating costs or failure to make scheduled capital expenditures could adversely affect the growth of our business and the value of our hotel properties. OTHER RISKS 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. Cendant has the right to terminate our development agreement upon a change in control of our company, as defined, if, after the change in control, the company (or successor company) fails to begin construction on a certain specified number of new AmeriHost Inn hotels within a specified period of time. In addition, the provision which allows for any refunds on development incentive fees, as a result of terminated franchise agreements by the buyers of our AmeriHost Inn hotels within the first 76 months, to be offset against future fees payable by Cendant is terminated, and any such refunds would be payable to Cendant immediately. We depend on our key personnel. Our success depends on the efforts of our executive officers and other key personnel. We cannot assure you that these key personnel will remain employed by us. While we believe that we could find replacements for these key personnel, the loss of their services could have a significant adverse effect on our financial performance. ITEM 7A. 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. 64 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 December 31, 2003. As the table incorporates only those exposures that existed as of December 31, 2003, it does not consider those exposures or positions that 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 $ 3,850,000 6.75% Mortgage debt - fixed rate $ 22,677,787 7.60% Mortgage debt - variable rate $ 42,500,127 5.64%
If market rates of interest on our variable debt increased by 10%, the increase in interest expense on the variable rate debt would be approximately $240,000 annually. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements filed as part of this Form 10-K are included under "Exhibits, Financial Statements and Reports on Form 8-K" under Item 15. Selected quarterly financial data is presented in Note 17 to the consolidated financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements with KPMG LLP on accounting and financial disclosure matters which are required to be described by Item 304 of Regulation S-K. ITEM 9A. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. 65 [THE FOLLOWING ITEM HAS NOT YET BEEN FULLY UPDATED] PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Company's executive officers and directors are:
Name Age Position ---- --- -------- Kenneth M. Fell 46 Chairman of the Board of Directors Andrew E. Shapiro 42 Vice Chairman of the Board of Directors Jerry H. Herman 50 President, Chief Executive Officer and Director James B. Dale 40 Senior Vice President of Finance, Secretary, Treasurer and Chief Financial Officer Steven J. Belmonte 51 Director Salomon J. Dayan 58 Director Gerald T. LaFlamme 64 Director Thomas J. Romano 51 Director
Kenneth M. Fell has been a member of the Board of Directors since August 2002. In December 2002, Mr. Fell was elected independent Chairman of the Board of Directors. Mr. Fell is a member of the Audit Committee, the Compensation Committee, and the Corporate Governance/Nominating Committee. Mr. Fell also serves as a member of various ad hoc committees of the Board, which are formed to address specific issues. Since 1983, Mr. Fell has been an independent floor trader and member of various divisions of the Chicago Mercantile Exchange. These include the Index and Options Market (1983-present), the International Monetary Market (1984-present), and the Growth and Emerging Market (1995-present). Since 1986, Mr. Fell has been the President and sole owner of K.F., Inc., a financial derivatives trading corporation. Andrew E. Shapiro has been a member of the Board of Directors since September 2002, and was elected independent Vice Chairman of the Board of Directors in February 2003. Mr. Shapiro is Chairman of the Company's Corporate Governance/Nominating Committee, and also serves as a member of the Compensation Committee. Mr. Shapiro also serves as a member of various ad hoc committees of the Board, which are formed to address specific issues. Mr. Shapiro is Managing Member and President of Lawndale Capital Management, LLC, a San Francisco Bay area investment advisory firm, and Chairman and President of a predecessor investment advisor, and now holding company, Lawndale Capital Management, Inc., since 1992. Prior to forming the Lawndale Capital entities, Mr. Shapiro obtained numerous years of experience in highly leveraged investments and lending. He has been a Board Observer of Earl Scheib, Inc. (AMEX-ESH), pursuant to an agreement with that company's Board, and he is a member of the National Association of Corporate Directors (NACD). Jerry H. Herman is President and Chief Executive Officer, and a member of the Board of Directors, since January 2003. Mr. Herman is responsible for the development and implementation of the Company's strategic objectives, business plan, core businesses, and asset decisions. Mr. Herman also serves as a member of various ad hoc committees of the Board, which are formed to address specific issues. From 1992 to 2002, Mr. Herman was Chief Executive Officer and a member of the Board of Directors of City Hotels USA, the U.S. holding company of a publicly traded ownership, development, management and hospitality company headquartered in Belgium with assets in Europe and the United States. Prior to that, from 1984 to 1991, he was General Counsel and then Senior Vice President of Hotel Acquisitions for C.R.I., Inc., a national real estate investment and management firm with multi-family, hotel, and commercial ownership and mortgage 66 portfolios. Mr. Herman is a member of the District of Columbia Bar and the American Bar Association, and he recently served as a founding member of the National Franchise Advisory Boards of the Doubletree and Homewood Suites brands. James B. Dale was promoted to Chief Financial Officer in 1998, in addition to his responsibilities as Senior Vice President of Finance. Mr. Dale began his employment with the Company in May 1994 as the Company's first Corporate Controller. He has been responsible for overseeing all aspects of the Company's property and corporate accounting departments, including preparation of all SEC filings. In 1999, Mr. Dale was elected Corporate Secretary by the Board of Directors. Prior to joining the Company, Mr. Dale was an Audit Manager with an international public accounting firm, with nearly nine years of experience in auditing, financial reporting and taxation. Mr. Dale is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. Steven J. Belmonte, CHA, has been a member of the Board of Directors since August, 2002. Mr. Belmonte is Chairman of the Company's Compensation Committee, and also serves as a member of various ad hoc committees of the Board, which are formed to address specific issues. In 2002, Mr. Belmonte launched Hospitality Solutions, LLC, a full-service, nationwide consultation firm specializing in lodging industry issues at the hotel and corporate level. Hospitality Solutions offers expert witness and mediation services, litigation support, license agreement formulation or termination negotiation assistance, asset management, special projects, targeted training programs, and motivational speaking. From 1991 to 2002, Mr. Belmonte oversaw the Ramada hotel chain, which had over 1,000 hotels and nearly 135,000 hotel rooms throughout the United States, becoming the longest standing president of a national franchised hotel chain. Mr. Belmonte has assumed leadership roles in charities related to the hotel industry as follows: Chairman of the American Hotel Foundation (AHF) and Vice Chairman of the American Hotel & Lodging Educational Foundation (AH&LEF). Furthermore, Mr. Belmonte's charitable leadership has also extended to Childreach, whose activities have included constructing two medical facilities, a Food and Science Laboratory and a library in Africa, and schools in the Dominican Republic and Honduras. Salomon J. Dayan, M.D., has been a member of the Board since August, 1996. Dr. Dayan also serves as a member of various ad hoc committees of the Board, which are formed to address specific issues. In 1980, Dr. Dayan, a physician certified in internal and geriatric medicine, founded the Salomon J. Dayan Ltd., a multi-specialty medical group, which is dedicated to the care of the elderly in hospital and nursing home settings. He was Chief Executive Officer from 1980 until the medical group was sold in 1998. Dr. Dayan was the Medical Director and Executive Director of Healthfirst, a corporation that operates multiple medical ambulatory facilities in the Chicago, Illinois area from 1986 until the corporation was sold in 1996. Since 1994, he has been an assistant professor at Rush Medical Center in Chicago. Dr. Dayan is currently the Chairman of the Board of Directors of J. D. Financial, a bank holding company owning Pan American Bank. Dr. Dayan also has numerous investments in residential and commercial real estate. Gerald T. LaFlamme has been a member of the Board of Directors since August 2002. Mr. LaFlamme is Chairman of the Company's Audit Committee, and also serves as a member of various ad hoc committees of the Board, which are formed to address specific issues. He has been the President and Chief Executive Officer of JL Development Company, Inc. a real estate development and consulting firm, since March 2004. From 2001 through 2003, Mr. LaFlamme was the Senior Vice President and Chief Financial Officer of Davidson Communities, LLC, a real estate development company, where his responsibilities include land acquisitions, joint venture transactions and the financing of real estate projects. From 1997 through 2001, Mr. LaFlamme was retired. From 1978 to 1997, Mr. LaFlamme was a Managing Partner with Ernst & Young LLP, and a predecessor accounting firm, and had responsibility for managing the firm's Real Estate Office in San Diego, California. Mr. LaFlamme has extensive experience in structuring real estate transactions and in developing business strategies for Real Estate Investment Trusts, residential and commercial developers, and hospitality management companies. Mr. LaFlamme is a Certified Public Accountant. Thomas J. Romano has been a member of the Board since November 1999. Mr. Romano is a member of the Audit Committee and Corporate Governance/Nominating Committee. Mr. Romano also serves as a member of various ad hoc committees of the Board, which are formed to address specific issues. Mr. Romano has been an Executive Vice President and a member of executive management for Bridgeview Bank Group since 1997. He served as Chief Credit Officer and President of the Lake County, Illinois region, responsible for a significant loan portfolio from 1997 until June 2002, at which time he became, responsible for leading the community banks' marketing efforts for Bridgeview Bank Group and Bridgeview Capital Solutions. Prior to Bridgeview Bank Group, his experience includes 19 years with First of America Bank where his responsibilities included the management of the commercial lending functions across the Northern Illinois 67 Region. Mr. Romano is currently a member of Robert Morris Associates and serves as a director for Vista National Insurance, Laserage Technology Corporation and the Goldman Philanthropic Partnerships. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based upon a review of Section 16(a) filings furnished to the Company, the Company is not aware of any failure to file reports required by Section 16(a) on a timely basis during 2003. CODE OF BUSINESS CONDUCT AND ETHICS Our Board of Directors adopted a Code of Business Conduct and Ethics, which governs business decisions made and actions taken by our directors, officers, and employees. A copy of this code is available on our website at http://www.arlingtonhospitality.com under the heading of "About Us" and subheading "Corporate Governance" and we intend to disclose on this website any amendment to, or waiver of, any provision of this Code applicable to our directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or NASDAQ. A copy of this code is also available in print to any stockholder upon written request addressed to Investor Relations, Arlington Hospitality, Inc., 2355 S. Arlington Heights Road, Suite 400, Arlington Heights, Illinois 60005. See also Item 1 - Business, under the heading "Corporate Governance." ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the annual and long-term compensation for services as officers to the Company for the fiscal years ended December 31, 2003, 2002 and 2001, of those persons who were, at December 31, 2003: The chief executive officer and the other executive officer of the Company (the "Named Officers"). See "Compensation of Directors" under Item #11. SUMMARY COMPENSATION TABLE
Long-Term Compensation ---------------------------- Annual Compensation Restricted Securities Name and Principal ---------------------------- Stock Underlying All Other Position Year Salary (5) Bonus(1) Awards (6) Options(#)(2) Compensation(3) - ------------------------------------ ---- ----------- -------- ---------- -------------- --------------- Jerry H. Herman 2003 287,308 - - - 2,732 President, Chief Executive Officer, and Director James B. Dale 2003 160,442 7,200 - - 1,871 Senior Vice President Finance, 2002 145,000 17,850 - 21,000 2,036 Secretary, Treasurer, and 2001 132,115 9,000 - 21,000 2,214 Chief Financial Officer Richard A. Gerhart (4) 2003 132,500 9,700 - - 2,329 Senior Vice President Hotel Operations
(1) Mr. Dale and Mr. Gerhart received cash bonuses of $7,200 and &9,700, respectively in 2003. (2) Includes 14,000 and 7,000 options issued in 2002 and 2001, respectively, to Mr. Dale which did not vest and were forfeited. All other options issued to Mr. Dale were fully vested as of December 31, 2003. (3) Includes life insurance premiums paid by the Company on behalf of the Named Officers and the Company's 401(k) matching contributions of $256 for Mr. Gerhart in 2003 and $1,646, $1,586 and $1,764 for Mr. Dale in 2003, 2002 and 2001, respectively. (4) Mr. Gerhart, who has been employed by the Company since 1999, was made an executive officer in August 2003. (5) Mr. Dale received $8,387 in 2003 for his services as our interim chief executive officer from December 12, 2002 to January 6, 2003. (6) Mr. Dale and Mr. Gerhart were awarded 750 and 971 shares of restricted stock, respectively, valued at $2,550 and $3,300, in recognition of their leadership roles in 2002, which restricted stock will be issued in 2004. 68 STOCK OPTIONS The following table summarizes the number and terms of stock options granted to each of the Named Officers during the year ended December 31, 2003. OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term --------------------------------------------------------- ----------------------------- % of Total Options Granted to Exercise or Options Employees in Base Price Expiration Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($) - --------------- --------- ------------------ ----------- ---------- ----- ------ Jerry H. Herman 75,000 46.9% $3.16 Feb. 2003 - - Jerry H. Herman 35,000 21.9% $3.33 Mar. 2003 - -
As part of his initial employment with us on January 7, 2003, Mr. Herman was granted a 60 day option to purchase 75,000 shares of restricted stock using an upward exercise price reset formula to the greater of a floor price, the price on the date of his start date or, with respect to options not yet exercised on the one month anniversary of his start date, the fair market value of our shares on that date. Prior to his one-month anniversary, Mr. Herman exercised 40,000 of the options that were issued. The exercise price of the remaining 35,000 options was reset upward on his one-month anniversary and expired without exercise. There were no stock options granted to Messrs. Dale and Gerhart during 2003. The following table provides information concerning the exercise of stock options during 2003 and the year-end value of unexercised options for each of the Named Officers of the Company. OPTION EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised Options Held at in-the-Money Options at Shares December 31, 2003 December 31, 2003 (1) Acquired Value -------------------------- -------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------------ ----------- -------- ----------- ------------- ----------- ------------- Jerry H. Herman 40,000 $ 12,400 - - $ - $ - James B. Dale - - 80,500 - 22,277 - Richard A. Gerhart - - 57,000 - 20,754 -
(1) The closing sale price of the Company's Common Stock on such date on the Nasdaq National Market was $3.76. EMPLOYMENT AGREEMENTS On January 7, 2003, Jerry H. Herman became our president and chief executive officer under the terms of an employment agreement dated as of December 19, 2002. The agreement expires on December 31, 2005, unless terminated earlier. Under the agreement, we pay Mr. Herman a base salary of $300,000 per year and Mr. Herman is eligible to earn a bonus consisting of a cash portion and restricted stock portion subject to his and our satisfying certain performance criteria. The budget for the performance criteria is established each year by the board of directors. The criteria consist of a pre-tax income benchmark, an adjusted stockholder equity per share benchmark, and a third benchmark comprised of up to two components relating to development of franchises or joint ventures, growth of the AmeriHost brand or construction and development of hotels. In each case, there are limits on the amount of cash and equity performance bonus that Mr. Herman may earn each year. Mr. Herman has the right under the agreement to sell shares received as part of the stock portion of the bonus, some of which would otherwise had been restricted from transfer, to us in an amount necessary to pay income taxes, with the number of shares allowed to be sold determined according to a formula specified in the agreement but no less than fair market at the time of grant. Mr. Herman is also entitled to bonuses upon the occurrence of specified capital events, such as the assignment, conveyance, sale or termination of our agreements with Cendant, a merger of us into another 69 corporation, a sale of our assets, a sale of all of our stock to a new purchaser or the bulk sale of fifteen or more of our hotels to a new purchaser which result in consideration to us above certain levels. Mr. Herman also participates in our employee benefit plans and is reimbursed for business expenses. The agreement granted Mr. Herman the right to purchase up to 75,000 restricted shares of our common stock for 60 days beginning January 7, 2003, with the exercise price determined according to an upward reset formula specified in the agreement but no less than fair market value of the stock on the date of the grant. On January 17, 2003, Mr. Herman exercised this right with regard to 40,000 restricted shares of our common stock, which he purchased at a price of $3.16 per share. We also agreed to nominate Mr. Herman during the term of his employment for election to our board of directors and to recommend that stockholders vote in favor of his election. Mr. Herman's employment agreement may terminate, at Mr. Herman's option, on a "change in control," which is defined as a sale of all or substantially all of our assets, a merger resulting in the ownership of over 50% of our voting stock by parties unaffiliated with us before the transaction or the sale of over 50% of our shares or other equity interests to parties unaffiliated with us before the transaction. If Mr. Herman is terminated without cause, or resigns as the result of a change in control or for "good reason," as defined in the agreement, he is entitled to severance compensation equal to the base salary for the remaining term of the agreement but no less than twelve months and no greater than twenty-four months. "Good reason" is defined in the agreement to include, among other things, a material reduction in Mr. Herman's responsibilities not consistent with the agreement, a material decrease in Mr. Herman's salary or benefits, our failure to nominate and recommend Mr. Herman for election to the board of directors and any material breach by us of the agreement. Our senior vice president of finance and chief financial officer, James B. Dale, provides services to us under the terms of an employment agreement dated January 12, 2001. The agreement originally expired January 12, 2004, but its term has since been extended to January 12, 2005, as discussed below. Under the agreement, we paid Mr. Dale a base salary equal to $152,000 in 2003, which automatically increased by 5% in 2004, to approximately $160,000 per year. The agreement provided for cash bonuses based on the sale of AmeriHost Inn hotels and the timing of our financial reporting. Mr. Dale received some, but not all of the performance bonuses. Mr. Dale also earned 750 shares of restricted stock in 2003, in recognition of his leadership effort in 2002, which are expected to be issued in 2004. Mr. Dale's employment agreement entitles him to receive severance payments equal to six months salary if his employment is terminated by us "without cause," as defined in the agreement. In addition, if we are sold, Mr. Dale is entitled to receive the sum of six months base salary, at his salary level at the time of sale. Our senior vice president of hotel operations, Richard A. Gerhart, provides services to us under the terms of an employment agreement dated July 1, 2002. The agreement has a three-year term. Under the agreement, we pay Mr. Gerhart a base salary equal to $132,500 for the first year of the agreement, $137,800 for the second year, and $144,000 for the third year. In addition, Mr. Gerhart is entitled to cash bonuses if various company performance criteria are achieved. These criteria relate to increases in revenue for AmeriHost Inns owned by us for at least thirteen months, gross operating profit for AmeriHost Inns as compared with budgeted and prior year amounts, gross operating profit of non-AmeriHost Inn hotels and sales of AmeriHost Inn hotels. The performance criteria also include achieving certain levels of net income, income before taxes, depreciation and amortization or cash flow. Mr. Gerhart also earned 971 shares of restricted stock in 2003, in recognition of his leadership efforts in 2002, which is expected to be issued in 2004. If we terminate Mr. Gerhart "without cause," he is entitled to receive his salary and bonus for six months from the date of termination. We entered into supplemental retention and performance agreements with Mr. Dale and Mr. Gerhart as of December 1, 2002, concurrent with our former Chief Executive Officer's resignation. Under these agreements, Mr. Dale and Mr. Gerhart were entitled to severance payments in addition to the severance payments described above, payable in five monthly installments, had their employment been terminated before December 31, 2003 other than because of death, disability, voluntary termination or "for cause." In addition, under the agreements we agreed to pay each of Mr. Dale and Mr. Gerhart a performance retention bonus in the form of cash and restricted stock if various performance criteria were satisfied, and they remained employed with us through January 1, 2004. The performance criteria in Mr. Dale's agreement relate primarily to the timely preparation of financial statements, periodic reports and meeting minutes, sales of hotels, and assistance in our obtaining financing within certain time periods. The performance criteria in Mr. Gerhart's agreement relate primarily to hotel revenue and profitability results. Mr. Dale's supplemental agreement also extended the term of Mr. Dale's employment agreement with us to January 12, 2005. The amount due under these supplemental agreements has not yet been determined, however is not anticipated to be greater than $20,000 in the aggregate, including both cash and restricted stock. 70 COMPENSATION OF DIRECTORS In February 2003 our Board of Directors approved a compensation plan for non-employee directors that called for each of our non-employee directors to receive the following compensation for serving as a member of our board of directors: (i) an annual cash retainer, (ii) a grant of restricted stock, and (iii) fees for attending board and committee meetings as well as reimbursement for all out-of-pocket expenses relating to attendance at these meetings. Cash Retainer Each non-employee director received an annual cash retainer of $9,000 paid in equal monthly installments, except that as of March 2003, Mr. Fell and Mr. Shapiro received cash retainer payments at an annual rate of $13,500 and $11,250, respectively, for serving as chairman and vice-chairman of the board, respectively. Restricted Stock In November 2003, each non-employee director received 6,000 shares of our common stock, except for Messrs. Fell and Shapiro, who received 9,000 and 7,500 shares of our common stock, respectively, for serving as chairman and vice-chairman of the board, respectively. The restricted stock was issued under our 2003 Non-Employee Director Restricted Stock Plan that was approved at out annual shareholder meeting held on October 29, 2003. These shares may not be transferred for a one-year period, except in the case of a "change of control." After this one-year period, the shares may not be transferred until the earlier of a "change of control," five years from the date of the grant, or the date the director ceases to be a director. "Change of control" is defined in the plan to cover various circumstances in which 50% or more of the beneficial ownership of our issued and outstanding stock, either directly or by merger or other extraordinary transaction is acquired by others. Meeting Fees The meeting fees for non-employee directors are summarized in the following tables: BOARD OF DIRECTOR MEETING FEES
TELEPHONE IN-PERSON --------- --------- Meetings of 1.5 hours or less $250 $1,500 Meetings over 1.5 hours $500 $1,500
The above fees for each meeting of the full board are increased by 50% for the chairman when he presides and 25% for the vice chairman in the event he presides over a board meeting. COMMITTEE MEETING FEES
TELEPHONE IN-PERSON --------- --------- Meetings of 1.5 hours or less $150 $ 500 Meetings over 1.5 hours $300 $1,000
The above fees for each committee meeting are increased by 50% for the chairman of the audit committee and 30% for the individuals who chair other committee meetings. 71 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 29, 2004, by (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's Directors, (iii) each of the Named Officers and (iv) all Directors and executive officers as a group.
Shares Beneficially Owned Name As of March 29, 2004 Percent - --------------------------------- ------------------------- ------- Wellington Management Company LLP 565,000 (1) 11.3% Kenneth M. Fell 507,200 (2) 10.1 Andrew E. Shapiro 496,200 (3) 9.9 Lawndale Capital Management LLC 488,700 (3) 9.9 Michael P. Holtz 470,000 (4) 9.4 H. Andrew Torchia 426,032 (5) 8.5 Richard A. D'Onofrio 338,519 (6) 6.8 Salomon J. Dayan 310,812 (7) 6.1 Dimensional Fund Advisors, Inc. 307,500 (8) 6.1 Raymond and Liliane R. Dayan 269,314 (9) 5.4 James B. Dale 82,525 (10) 1.6 Richard A. Gerhart 60,471 (11) 1.2 Jerry H. Herman 40,000 (12) 0.8 Thomas J. Romano 26,500 (13) 0.5 Steven J. Belmonte 21,968 (14) 0.4 Gerald T. LaFlamme 8,480 (15) 0.2 ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (9 PERSONS) 1,554,156 29.8%
(1) Based upon information provided in its Form 13F dated December 31, 2003. Wellington Management Company LLP, in its capacity as investment advisor, may be deemed the beneficial owner of 565,000 shares of our common stock wich are owned by numerous investment counseling clients. The address of Wellington Management is 75 State Street, Boston, Massachusetts 02109. (2) Based upon information filed on Form 4 dated November 13, 2003. Includes 9,000 restricted shares held directly, 207,170 shares held by KF, Inc. Profit Sharing Plan; 199,430 shares held by Kenneth M. Fell Trust; 88,100 shares held by Mr. Fell's IRA; 2,500 shares held by Mr. Fell's wife, Margaret A. Fell, IRA; and 1,000 shares issuable upon the exercise of options. Mr. Fell's address is One South Wacker Drive, Suite 350, Chicago, Illinois 60606. (3) Based upon information filed on Form 4 dated November 12, 2003. Includes 7,500 restricted shares held directly by Mr. Shapiro; 426,200 shares beneficially held by Diamond A. Partners, L.P. and 62,500 shares held by Diamond A. Investors, L.P. Mr. Shapiro is managing member of Lawndale Capital Management, LLC, the general partner and investing advisor to these partnerships. Lawndale Capital Management has only a pro-rata pecuniary interest in the securities with respect to which indirect beneficial ownership is reported and disclaims beneficial ownership in these securities, except to the extent of its pecuniary interest. Mr. Shapiro disclaims beneficial ownership of these shares. Both Lawndale Capital Management and Mr. Shapiro disclaim membership in any group in connection with the ownership of these securities. The address for each of Mr. Shapiro, Lawndale Capital Management LLC, Diamond A. Partners, L.P. and Diamond A. Investors, L.P. is 591 Redwood Highway, Suite 2345, Mill Valley, California 94941. (4) Based on information filed on Form 4 dated December 11, 2002. Includes 470,000 shares issuable upon the exercise of options. Mr. Holtz's address is 490 East Route 22, North Barrington, Illinois 60010. (5) Based upon information provided in a 13D/A joint filing dated January 13, 2003. Includes 80,443 shares owned directly by Mr. Torchia and 150,000 shares issuable upon the exercise of options held by Mr. Torchia. In addition, includes 195,589 of the 383,508 shares owned by Urban 2000 Corp. Mr. Torchia is the 51% stockholder of Urban 2000 Corp. and disclaims beneficial ownership of all but these 195,589 shares. The address of Urban 2000 Corp. is 10300 West Higgins Road, Suite 105, Rosemont, Illinois 60018. (6) Based upon information provided in a 13D/A joint filing dated January 13, 2003. Consists of 600 shares owned directly by Mr. D'Onofrio and 150,000 options owned by Mr. D'Onofrio, which currently are exercisable. In addition, includes 187,919 of the 383,508 shares owned by Urban 2000 Corp. Mr. D'Onofrio is the 49% stockholder of Urban 2000 Corp. and disclaims beneficial ownership of all but these 187,919 shares. The address of Urban 2000 Corp. is 10300 West Higgins Road, Suite 105, Rosemont, Illinois 60018. (7) Based upon information filed in Form 4 dated November 12, 2003. Includes 6,000 restricted shares held directly; 228,812 shares held by the Salomon J. Dayan UTD 11/08/78; 4,000 shares held by the children of Dr. Dayan and 72 72,000 shares issuable upon the exercise of options. Dr. Dayan's address is 2837 Sheridan Place, Evanston, Illinois 60201. (8) Based upon information provided in its Schedule 13G dated February 6, 2004, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as investment advisor, may be deemed beneficial owner of 307,500 shares of the Company which are owned by numerous investment counseling clients. Of the shares shown above, DFA has sole voting and investment power for 307,500 shares. The address of DFA is 1299 Ocean Avenue, Santa Monica, California 90401. (9) Consists of 206,814 shares owned by trusts for which Liliane Dayan acts as trustee, and 62,500 shares issuable upon the exercise of options held by these trusts. Mrs. Dayan has sole voting and investment power for all 269,314 shares. Mr. Dayan is the brother of Dr. Solomon Dayan, who is one of our directors and whose beneficial ownership of our shares is also reflected in the above table. The address of Mr. and Mrs. Dayan is c/o Michael Best and Friedrich LLP, 401 N. Michigan Ave., Suite 1900, Chicago, Illinois 60611. (10) Includes 1,275 shares held directly, 750 shares of restricted stock to be issued, and 80,500 shares issuable upon the exercise of options. (11) Includes 2,500 shares held directly, 971 shares of restricted stock to be issued, and 57,000 shares issuable upon the exercise of options. (12) Includes 40,000 shares of restricted stock. (13) Based upon information filed on Form 4 dated November 10, 2003. Includes 6,000 restricted shares directly held; 10,000 shares held directly; 5,000 shares held by Ashley E. Romano UGTMA, with Mr. Romano as custodian; and 5,500 shares subject to options presently exercisable. (14) Based upon information filed on Form 4 dated November 10, 2003. Includes 6,000 restricted shares directly held; 14,968 shares held directly and 1,000 shares issuable upon the exercise of options. (15) Based upon information filed on Form 4 dated November 10, 2003. Includes 6,000 restricted shares held directly; 1,480 shares held by the 1988 LaFlamme Family Trust dated January 14, 1988 and 1,000 shares issuable upon the exercise of options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Dr. Dayan, one of our directors, and parties related to him, have invested approximately $3.1 million in seven joint ventures with us since 1988 on the same terms as all other investors in the joint ventures. In three joint ventures, we guaranteed minimum annual distributions to the partners equal to 10% of their original capital contribution. We also granted these partners the right to convert their joint venture interests into shares of our common stock, under certain conditions. We purchased the limited partners' interests in two of these joint ventures at prices previously agreed to in September 2000 in connection with our partners' approval of the sale of the AmeriHost Inn brand and franchising rights to Cendant Corporation. With regard to the third joint venture, we paid the limited partners a total of $25,000 in January 2003 to extend the deadline for acquiring the limited partners' interests. We then acquired the limited partners' interests in this joint venture for $830,000 in September 2003. The underlying hotels for two of these joint ventures have since been sold. Currently, Dr. Dayan and related parties are no longer investors in any joint venture in which we participate. Dr. Dayan is also the owner and chairman of the board of directors of the company that owns Pan American Bank. In 2003, a joint venture in which we were a partner repaid its remaining loan from Pan American Bank, totaling approximately $940,000, with proceeds from the sales of the hotel securing this loan. Subsequent to this loan payoff, we have not entered into any transactions with Pan American Bank, and we do not intend to transact any future business with Pan American Bank so long as Dr. Dayan continues to serve as a director and is affiliated with Pan American Bank. In June 2003, we reimbursed members of the "Committee to Enhance Shareholder Value," for out-of-pocket expenses paid by the committee to third parties in connection with the successful election of Messrs. Fell and Belmonte to our board of directors at our 2002 annual meeting. The total amount reimbursed was approximately $64,000. Messrs. Fell and Belmonte, as members of the committee prior to its dissolution, each received their pro-rata share of this reimbursement. This reimbursement was approved unanimously by all disinterested members of the Company's Board. 73 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table presents fees for professional audit services rendered and fees billed for other services rendered by KPMG LLP for the fiscal years ended December 31, 2003 and 2002, respectively:
2003 2002 ---------- -------- Audit fees $ 219,000 $179,500 Audit-related fees -0- 0 Tax fees 78,000 87,000 All other fees -0- 0 ---------- -------- $ 297,000 $266,500 ========== ========
Audit Fees. This category includes fees paid for the audit of our annual financial statements and review of financial statements included in our quarterly reports on Form 10-Q. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of our annual and interim financial statements, including the application of proposed accounting rules and the preparation of an annual "management letter" containing observations and discussions on internal control matters. Audit-Related Fees. KPMG LLP did not perform any services in this category for us in 2003 or 2002. Tax Fees. This category consists of professional services rendered by KPMG LLP for tax compliance and tax advice. The services for the fees disclosed under this category include tax advisory services associated with our ongoing business and business ventures. All Other Fees. KPMG LLP did not perform any services in this category for us in 2003 or 2002. Our Audit Committee pre-approved all of the services by KPMG LLP. 74 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. Financial Statements: The following consolidated financial statements are filed as part of this Report on Form 10-K for the fiscal year ended December 31, 2003. (a)(1) Financial Statements: Independent Auditors' Report.......................................................................... F-1 Consolidated Balance Sheets at December 31, 2003 and 2002............................................. F-2 Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001............ F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001.. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001............ F-6 Notes to Consolidated Financial Statements............................................................ F-8 (a)(2) Financial Statement Schedules:
No financial statement schedules are submitted as part of this report because they are not applicable or are not required under regulation S-X or because the required information is included in the financial statements or notes thereto. 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)
75 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
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 - ----------- ----------- 3.2 Seventh Certificate of Amendment of Restated Certificate of Incorporation of Arlington Hospitality, Inc., attached as exhibit F 3.3 Eighth Certificate of Amendment of Restated Certificate of Incorporation of Arlington Hospitality, Inc., attached as exhibit G 10.15 2003 Non-Employee Director Restricted Stock Plan, attached as exhibit D 10.16 2003 Long Term Incentive Plan, attached as exhibit E
The following exhibits were included in the Registrant's Report on Form 10-Q filed November 14, 2003:
Exhibit No. Description - ----------- ----------- 3.4 By-laws of Arlington Hospitality, Inc. as revised on September 8, 2003 3.5 Amendment to By-laws of Arlington Hospitality, Inc. dated September 8, 2003
76 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
The following exhibits are included in this Report on Form 10-K filed March 30, 2004:
Exhibit No. Description - ----------- ----------- 10.23 Amended and Restated Master Lease Agreement dated January 24, 2001 between Arlington Hospitality, Inc. and PMC Commercial Trust 10.24 Amended and Restate Loan and Security Agreement dated April 30, 2003 between Arlington Hospitality, Inc. and LaSalle Bank N.A. 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 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 December 31, 2003:
Date Filed Description ---------- ----------- October 30, 2003 Press Release announcing results of the annual shareholder meeting November 17, 2003 Press release announcing operating results for the three and nine months ended September 30, 2003 December 4, 2003 Press release announcing completion of reverse/forward stock split December 19, 2003 Press release announcing November 2003 results and hotel sales and development activity
77 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 By: /s/ Keith P. Morris ------------------------------------ Vice President Finance Chief Accounting Officer March 30, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Jerry H. Herman /s/ Kenneth M. Fell - ------------------------------------- ------------------------------------ Jerry H. Herman, Director Kenneth M. Fell, Chairman March 30, 2004 March 30, 2004 /s/ Andrew E. Shapiro /s/ Gerald T. LaFlamme - ------------------------------------- ------------------------------------ Andrew E. Shapiro, Vice-Chairman Gerald T. LaFlamme, Director March 30, 2004 March 30, 2004 /s/ Steven J. Belmonte /s/ Thomas J. Romano - ------------------------------------- ------------------------------------ Steven J. Belmonte, Director Thomas J. Romano, Director March 30, 2004 March 30, 2004 /s/ Salomon J. Dayan - ------------------------------------- Salomon J. Dayan, Director March 30, 2004 78 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Arlington Hospitality, Inc. We have audited the accompanying consolidated balance sheets of Arlington Hospitality, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arlington Hospitality, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Chicago, Illinois March 26, 2004 See notes to consolidated financial statements F-1 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2003 2002 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,623,550 $ 3,969,515 Accounts receivable, less an allowance of $76,500 and $150,000 at December 31, 2003 and 2002 (including approximately $382,000 and $166,000 from related parties) 1,289,492 2,064,463 Notes receivable, current portion (Note 2) 146,000 100,000 Prepaid expenses and other current assets 1,142,032 975,432 Refundable income taxes 975,316 1,574,776 Costs and estimated earnings in excess of billings on uncompleted contracts (Note 3) 1,232,481 1,479,101 Assets held for sale - other brands 10,603,160 - Assets held for sale - AmeriHost Inn hotels 28,162,442 - ------------ ------------ Total current assets 47,174,473 10,163,287 ------------ ------------ Investments in and advances to unconsolidated hotel joint ventures (Note 4) 3,309,344 4,291,504 ------------ ------------ Property and equipment (Notes 6 and 7): Land 5,735,489 13,418,378 Buildings 31,174,776 76,849,071 Furniture, fixtures and equipment 13,176,842 26,553,701 Construction in progress 312,925 6,447,039 Leasehold improvements 2,396,689 2,760,906 ------------ ------------ 52,796,721 126,029,095 Less accumulated depreciation and amortization 13,242,842 26,417,755 ------------ ------------ 39,553,879 99,611,340 ------------ ------------ Notes receivable, less current portion (Note 2) 867,500 782,083 Deferred income taxes (Note 9) 6,071,000 2,427,000 Other assets, net of accumulated amortization of approximately $1,259,000 and $1,035,000 (Note 5) 2,737,217 2,658,500 ------------ ------------ 9,675,717 5,867,583 ------------ ------------ $ 99,713,413 $119,933,714 ============ ============
See notes to consolidated financial statements F-2 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2003 2002 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,768,402 $ 3,965,028 Bank line-of-credit (Note 6) 3,850,000 6,384,287 Accrued payroll and related expenses 393,815 827,353 Accrued real estate and other taxes 1,980,015 1,969,297 Other accrued expenses and current liabilities 1,407,511 1,974,350 Current portion of long-term debt (Note 7) 1,195,050 4,038,301 Liabilities of assets held for sale - other brands 9,585,492 - Liabilities of assets held for sale - AmeriHost Inns 28,540,561 ------------ ------------ Total current liabilities 49,720,846 19,158,616 ------------ ------------ Long-term debt, net of current portion (Note 7) 26,513,398 72,203,688 ------------ ------------ Deferred income (Note 14) 11,361,927 10,867,418 ------------ ------------ Commitments and contingencies (Notes 4, 6, 7, 8 and 14) Minority interests 329,819 333,888 ------------ ------------ Shareholders' equity (Notes 1 and 8): Preferred stock, no par value; authorized 100,000 shares; none issued - - Common stock, $.005 par value; authorized 25,000,000 shares; issued and outstanding 4,994,956 shares at December 31, 2003, and 4,962,817 shares at December 31, 2002 24,975 24,814 Additional paid-in capital 13,220,302 13,184,564 Retained earnings (deficit) (1,020,979) 4,597,601 ------------ ------------ 12,224,298 17,806,979 Less: Stock subscriptions receivable (Note 8) (436,875) (436,875) ------------ ------------ 11,787,423 17,370,104 ------------ ------------ $ 99,713,413 $ 119,933,71 ============ ============
See notes to consolidated financial statements F-3 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ------------ ------------ ------------ Revenue (Note 10): Hotel operations: AmeriHost Inn hotels $ 39,823,522 $ 43,216,506 $ 45,081,431 Other hotels 1,639,306 2,274,089 2,271,675 Development and construction 4,196,878 7,180,222 1,724,249 Hotel sales and commissions 22,831,102 10,017,080 12,922,459 Management services 445,862 957,801 1,066,645 Employee leasing 1,858,103 3,267,491 4,678,189 Incentive and royalty sharing (Note 16) 972,219 588,938 209,633 Office building rental and other 749,782 669,769 169,612 ------------ ------------ ------------ 72,516,774 68,171,896 68,123,893 ------------ ------------ ------------ Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 30,624,701 31,570,220 32,919,678 Other hotels 1,855,957 2,144,693 1,881,594 Development and construction 4,739,296 7,205,328 1,479,947 Hotel sales and commissions 19,328,404 8,159,459 9,621,536 Management services 280,383 714,648 716,802 Employee leasing 1,798,714 3,208,708 4,564,508 Office building rental and other 214,232 56,757 2,958 ------------ ------------ ------------ 58,841,687 53,059,813 51,187,023 ------------ ------------ ------------ 13,675,087 15,112,083 16,936,870 Depreciation and amortization 3,602,049 4,338,641 3,899,476 Leasehold rents - hotels (Note 14) 5,033,210 5,112,019 5,832,750 Corporate general and administrative 2,419,485 2,198,640 1,907,742 Impairment provision (Note 1) 5,069,781 542,019 - ------------ ------------ ------------ Operating income (loss) (2,449,438) 2,920,764 5,296,902 Other income (expense): Interest expense (4,087,120) (4,762,527) (4,611,926) Interest income 467,538 489,747 821,839 Other income (loss) (62,928) 329,959 126,880 Gain on sale of fixed assets (Notes 16) 400,000 727,076 1,286,338 Equity in net income and (losses) from unconsolidated joint ventures (724,575) (412,094) (925,654) ------------ ------------ ------------ Income (loss) before minority interests and income taxes (6,456,523) (707,074) 1,994,379 Minority interests in operations of consolidated subsidiaries and partnerships (162,304) (121,088) (264,829) ------------ ------------ ------------ Income (loss) before income taxes (6,618,827) (828,162) 1,729,550 Income tax benefit (expense) (Note 9) 2,456,000 172,000 (759,000) ------------ ------------ ------------ Net income (loss) from continuing operations (4,162,827) (656,162) 970,550 Discontinued operations, net of tax (Note 13) (1,455,753) (1,053,770) (215,450) ------------ ------------ ------------ Net income (loss) $ (5,618,580) $ (1,709,932) $ 755,100 ============ ============ ============ Net income (loss) from continuing operations per share: Basic $ (0.83) $ (0.13) $ 0.19 Diluted $ (0.83) $ (0.13) $ 0.17 Net income (loss) per share: Basic $ (1.12) $ (0.34) $ 0.15 Diluted $ (1.12) $ (0.34) $ 0.13
See notes to consolidated financial statements F-4 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Stock subscrip- Common stock Additional Retained tions Total --------------------- paid-in earnings and notes shareholders' Shares Amount capital (deficit) receivable equity ----------- -------- ------------- ------------ ----------- ------------- BALANCE AT JANUARY 1, 2001 4,979,244 $24,896 $ 13,125,324 $ 5,552,433 $ (436,875) $ 18,265,778 Acquisition of common stock (Note 8) (26,100) (131) (84,984) - - (85,115) Shares and options issued for compensation 4,937 25 130,811 - - 130,836 Net income for the year ended December 31, 2001 - - - 755,100 - 755,100 ---------- ------- ------------ ------------ ---------- ------------ BALANCE AT DECEMBER 31, 2001 4,958,081 $24,790 $ 13,171,151 $ 6,307,533 $ (436,875) $ 19,066,599 Acquisition of common stock (Note 8) (100) - (310) - - (310) Shares and options issued for compensation 4,836 24 13,723 - - 13,747 Net loss for the year ended December 31, 2002 (1,709,932) - (1,709,932) ---------- ------- ------------ ------------ ---------- ------------ BALANCE AT DECEMBER 31, 2002 4,962,817 $24,814 $ 13,184,564 $ 4,597,601 $ (436,875) $ 17,370,104 Acquisition of common stock (Note 8) (36,840) (184) (122,254) - - (122,438) Shares and Options issued for compensation 102,311 512 285,487 - - 285,999 Stock redemption (Note 8) (33,332) (167) (127,495) - - (127,662) Net loss for the year ended December 31, 2003 - - - (5,618,580) - (5,618,580) ---------- ------- ------------ ------------ ---------- ------------ BALANCE AT DECEMBER 31, 2003 4,994,956 $24,975 $ 13,220,302 $ (1,020,979) $ (436,875) $ 11,787,423 ========== ======= ============ ============ ========== ============
See notes to consolidated financial statements. F-5 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ------------- ------------- ------------- Cash flows from operating activities: Cash received from customers $ 75,726,970 77,501,677 78,329,783 Cash paid to suppliers and employees (51,339,097) (57,969,651) (58,192,786) Interest received 425,241 551,838 870,945 Interest paid (4,830,621) (5,516,449) (5,194,741) Income taxes paid 383,460 (236,446) (305,750) ------------ ------------ ------------ Net cash provided by operating activities 20,365,953 14,330,969 15,507,451 ------------ ------------ ------------ Cash flows from investing activities: Distributions, and collections on advances, from affiliates 570,219 3,020,396 1,183,012 Purchase of property and equipment (7,087,994) (18,582,826) (25,399,733) Purchase of investments in, and advances to, minority-owned affiliates (1,391,407) (2,142,492) (2,687,328) Acquisitions of partnership interests, net of cash acquired (777,237) (796,786) (804,613) Collection on notes receivable (131,417) (15,362) 201,332 Proceeds from sale of assets and franchising rights 2,804,497 1,443,701 402,500 ------------ ------------ ------------ Net cash used in investing activities (6,013,339) (17,073,369) (27,104,830) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt 6,888,098 13,016,749 20,612,595 Principal payments on long-term debt (19,095,114) (10,440,190) (9,206,128) Net (repayments) borrowings of line of credit (2,534,287) (409,415) 3,385,569 Distributions to minority interests (90,255) (203,075) (90,255) Common stock repurchases (144,346) (310) (85,115) Issuance of Common Stock 277,325 - - ------------ ------------ ------------ Net cash provided by (used in) financing activities (14,698,579) 1,963,759 14,616,666 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (345,965) (778,641) 3,019,287 Cash and cash equivalents, beginning of year 3,969,515 4,748,156 1,728,869 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 3,623,550 $ 3,969,515 $ 4,748,156 ============ ============ ============
F-6 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ------------ ------------ ------------ Reconciliation of net income (loss) to net cash provided by operating activities: Net income (loss) $ (5,618,580) $ (1,709,932) $ 755,100 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,412,112 5,516,302 4,676,069 Equity in net (income) loss and interest income from unconsolidated joint ventures and amortization of deferred income 553,602 230,402 1,174,630 Minority interests in operations of consolidated subsidiaries and partnerships 86,186 80,331 343,437 Bad debt expense (73,500) 15,000 50,000 Issuance of common stock and common stock options 8,675 13,747 130,836 Gain on sale of assets and franchising rights (337,856) (727,076) (1,286,338) Deferred income taxes (3,644,000) 235,000 740,000 Amortization of deferred gain (1,358,105) (1,079,047) (966,232) Proceeds from sale of hotels 22,831,102 9,865,111 11,511,336 Income from sale of hotels (3,479,500) (1,705,651) (2,189,256) Provision for impairment 5,963,218 642,019 - Other - (298,022) - Changes in assets and liabilities, net of effects of acquisitions: Decrease in accounts receivable 819,033 68,101 255,675 (Increase) decrease in prepaid expenses and other current assets (242,985) 88,369 99,344 Decrease (increase) in refundable income taxes 599,460 (1,276,446) (430,750) Decrease (increase) in costs and estimated earnings in excess of billings 246,620 (399,964) (703,357) Increase in other assets (807,854) (331,689) (413,336) (Decrease) increase in accounts payable (982,699) 1,473,684 23,530 (Decrease) increase in accrued payroll and other accrued expenses and current liabilities (732,493) 1,552,416 165,246 Decrease in accrued interest (21,026) (1,684) (41,151) Increase in deferred income 2,144,543 2,079,998 1,612,668 ------------ ------------ ------------ Net cash provided by operating activities $ 20,365,953 $ 14,330,969 $ 15,507,451 ============ ============ ============
F-7 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and business: Arlington Hospitality, Inc. was incorporated under the laws of Delaware on September 19, 1984. Arlington Hospitality, Inc. also acts through its wholly-owned subsidiaries which have been formed since 1984 under the laws of several states (Arlington Hospitality, Inc. and its subsidiaries, collectively, where appropriate, the "Company"). The Company is engaged in the development and construction of limited service hotels, without food and beverage facilities, as well as the ownership, operation, management and sale of these hotels. During the past several years, the Company has focused almost exclusively on AmeriHost Inn hotels, with limited ownership and operation of other branded hotels. The AmeriHost Inn brand is used by the Company to provide for the consistent, cost-effective development and operation of mid-price hotels in various markets. To date, all of the Company's AmeriHost Inn hotels have been developed and constructed using a two- or three-story prototype, featuring 60 to 120 rooms, interior corridors and an indoor pool area and generally have been located in smaller town markets, and to a lesser extent, secondary markets. The Company intends to focus its new AmeriHost Inn development on larger, secondary markets, and has designed a larger, three-story AmeriHost Inn & Suites prototype with more public space and certain other enhancements for this purpose. The Company's operations are seasonal by nature. The Company's hotel operations and sales revenues are generally greater in the second and third calendar quarters than in the first and fourth calendar quarters, due to weather conditions in the markets in which the Company's hotels are located, as well as general business and leisure travel trends. Principles of consolidation: The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and entities in which the Company has a majority or controlling ownership interest. All significant intercompany accounts and transactions have been eliminated. Revenue recognition: The revenue from the operation of a consolidated hotel is recognized as part of the hotel operations segment when earned. Development fee revenue from construction/renovation projects with unaffiliated third parties or entities in which the Company has a minority ownership interest is recognized using the percentage-of-completion method. Construction fee revenue from construction/renovation projects with unaffiliated third parties or entities in which the Company has a minority ownership interest is recognized on the percentage-of-completion method, generally based on the ratio of costs incurred to estimated total contract costs. Revenue from contract change orders is recognized to the extent costs incurred are recoverable. Profit recognition begins when construction reaches a progress level sufficient to estimate the probable outcome. Provision is made for anticipated future losses in full at the time they are identified. The Company records an AmeriHost Inn hotel sale price as operating revenue and the net cost basis of the AmeriHost Inn hotel asset as operating expense, when the sale is consummated, as part of the ongoing operational activity of the Company. F-8 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 The Company recognizes management fee revenue when it performs hotel management services for unrelated third parties and unconsolidated joint ventures. The management fees are computed based upon a percentage of total hotel revenues, plus incentive fees in certain instances, in accordance with the terms of the individual written management agreements. The Company recognizes the management fee revenue in the hotel management segment as the related hotel revenue is earned. F-9 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The Company recognizes employee-leasing revenue when it staffs hotels and performs related services for unrelated third parties and unconsolidated joint ventures. Employee leasing revenues are generally computed as the actual payroll costs, plus an administrative fee, in accordance with the terms of the individual written staffing agreements. The Company recognizes the employee leasing revenue in the employee leasing segment as the related payroll cost is incurred. The franchisor of the AmeriHost Inn brand, Cendant Corporation ("Cendant"), has agreed to pay the Company a development incentive fee every time the Company sells one of its existing AmeriHost Inn hotels, or one it develops and sells, to a buyer who executes an AmeriHost Inn franchise agreement with the franchisor (see "Deferred income" below). The franchisor of the AmeriHost Inn brand has agreed to pay the Company a portion of all royalty fees received from all of its AmeriHost Inn franchisees through September 2025. Generally, the royalty fees from each franchisee are based upon a percentage of guest room revenue. The Company includes the amortization of the deferred development incentive fees and the royalty sharing fees as incentive and royalty sharing fee revenue in the accompanying consolidated financial statements. The Company owns the building in which its headquarters is located and leases a portion of the office space to third-party tenants under lease terms that expire from 2004 through 2009. Rental revenue is recognized monthly in accordance with the terms of the leases, including charges for common area expenses and real estate taxes. Cash equivalents: The Company considers all investments with an initial maturity of three months or less to be cash equivalents. Concentrations of credit risk: Financial instruments which potentially subject the Company to concentrations of credit risk, consist principally of temporary cash investments, accounts receivable and notes receivable. The Company invests temporary cash balances in financial instruments of highly rated financial institutions generally with maturities of less than three months. Fair values of financial instruments: The carrying values reflected in the consolidated balance sheets at December 31, 2003 and 2002, reasonably approximate the fair values for cash and cash equivalents, accounts and contracts receivable and payable, and variable rate long-term debt. The carrying value of the notes receivable approximate their fair values based upon the estimated fair value of the underlying collateral (Note 2). The Company estimates that the fair value of its long-term debt at December 31, 2003, approximates the carrying value considering the property specific nature of the notes. In making such assessments, the Company considered the current rate at which the Company could borrow funds with similar remaining maturities. Investments: Investments in entities in which the Company has a non-majority, non-controlling ownership interest are accounted for using the equity method, under which method the original investment is increased (decreased) for the Company's share of the joint venture's net income (loss), increased by contributions made and reduced by distributions received. F-10 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Property and equipment: Property and equipment are stated at cost. Repairs and maintenance are charged to expense as incurred, and renewals and betterments are capitalized. Depreciation is being provided for assets placed in service, principally by use of the straight-line method over their estimated useful lives. Leasehold improvements are being amortized by use of the straight-line method over the term of the lease. Construction period interest of approximately $57,000, $287,000 and $337,000 was capitalized in 2003, 2002 and 2001, respectively, and is included in property and equipment. For each classification of property and equipment, depreciable periods are as follows: Building 31.5-39 years Furniture, fixtures and equipment 5-7 years Leasehold improvements 1-15 years
Other assets: Deferred lease costs: Deferred lease costs represent the amounts paid for the acquisition of leasehold interests for certain hotels. These costs are being amortized by use of the straight-line method over the terms of the leases. Deferred loan costs: Deferred loan costs represent the costs incurred in issuing mortgage notes. These costs are being amortized by use of the interest method over the life of the debt. Initial franchise fees: Initial franchise fees paid by the Company to franchisors for certain hotels are capitalized and amortized by use of the straight-line method over the terms of the franchise licenses, ranging from 10 to 20 years. Deferred income: Deferred income includes the gain from the sale of 21 hotels in 1998 and 1999, which were simultaneously leased-back (Note 14). This gain is being recognized on a straight-line basis over the 15-year term of the lease, as amended, as an adjustment to leasehold rent expense. Deferred income also includes incentive fees received in connection with the sale of AmeriHost Inn hotels. These fees are recognized on a straight-line basis over a 76-month period in which the unamortized portion of the fees may be considered refundable under certain conditions. Deferred income also includes that portion of development, construction and renovation fees earned from entities in which the Company holds an ownership interest. The portion of fees deferred is equal to the Company's proportional ownership interest in the entity and is being recognized in income over the life of the operating assets. The balance of the fees is recorded in income as earned. F-11 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Income taxes: Deferred income taxes are provided on the differences in the bases of the Company's assets and liabilities, as determined for tax and financial reporting purposes, and relate principally to hotel impairment charges, depreciation of property and equipment and deferred income. The deferred income tax balance at December 31, 2003 also includes a net operating loss carry forward of approximately $5.2 million expiring in 2024. Earnings per share: Basic earnings per share ("EPS") is calculated by dividing the income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS gives effect to all dilutive common stock equivalents outstanding for the period. The Company excluded stock equivalents which had an anti-dilutive effect on the EPS computations. The calculation of basic and diluted earnings per share for each of the three years ended December 31, is as follows:
2003 2002 2001 ------------- ------------- ------------- Net income (loss) before discontinued operations $ (4,162,827) $ (656,162) $ 970,550 Discontinued operations, net of tax (1,455,753) (1,053,770) (215,450) ------------- ------------- ------------- Net income (loss) (5,618,580) (1,709,932) 755,100 Impact of convertible partnership interests - - (78,178) ------------- ------------- ------------- Net income (loss) available to common shareholders - diluted $ (5,618,580) $ (1,709,932) $ 676,922 Weighted average common shares outstanding 5,011,572 4,958,438 4,974,821 Dilutive effect of: Stock options - - 38,650 Convertible partnership interests - - 168,100 ------------- ------------- ------------- Dilutive common shares outstanding 5,011,572 4,958,438 5,181,571 ============= ============= ============= Net income (loss) per share - Basic: From continuing operations (0.83) (0.13) 0.19 From discontinued operations (0.29) (0.21) (0.04) ------------- ------------- ------------- $ (1.12) $ (0.34) $ 0.15 ============= ============= ============= Net income (loss) per share - Diluted: From continuing operations (0.83) (0.13) 0.17 From discontinued operations (0.29) (0.21) (0.04) ------------- ------------- ------------- $ (1.12) $ (0.34) $ 0.13 ============= ============= =============
F-12 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Advertising: The costs of advertising, promotion and marketing programs are charged to operations in the year incurred. These costs were approximately $1,117,000, $1,411,000 and $1,389,000 for the years ended December 31, 2003, 2002 and 2001. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and reported amounts of revenue and expenses during the reported periods. Actual results may differ from those estimates. Reclassifications Certain prior period amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on previously reported net income or total shareholders' equity. Long-lived assets and impairment: On January 1, 2002, the Company adopted SFAS 144, "Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for Long-Lived assets (SFAS 144)". SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), and related literature and establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. SFAS 144 requires a long-lived asset to be sold to be classified as "held for sale" in the period in which certain criteria are met, including that the sale of the asset within one year is probable. SFAS 144 also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from the Company's ongoing operations. The Company periodically reviews the carrying value of certain of its long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if an impairment exists. If an impairment exists, the Company would determine the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets. In July 2003, the Company implemented a plan to sell approximately 25 to 30 hotels over a period of two years. In connection with the implementation of the plan to sell hotels, the Company has recorded a $6.0 million non-cash impairment charge during 2003, related to 18 of the hotels targeted for sale as a result of current market conditions and the change in holding periods of the properties. Approximately $909,000 of the non-cash impairment charges relates to three consolidated non-AmeriHost Inn hotels anticipated to be sold, and has been included in "discontinued operations" (Note 13). 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. F-13 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 As a result of 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 December 31, 2003. Accordingly, the debt that 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 13). 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. In addition, in accordance with this literature, we have ceased depreciating the hotel assets that have been classified as "held for sale". If the Company determines that a property is no longer held for sale, or if a property does not sell after a certain period of time, under certain conditions, a depreciation expense adjustment may be recorded at that time, up to the amount of depreciation that would have been recorded during the period that the asset was classified as "held for sale." During the fourth quarter of 2003, two AmeriHost Inn hotels previously classified as "held for sale" were reclassified back to operating assets since the Company was no longer actively marketing these properties for sale. In accordance with SFAS 144, depreciation was recorded through December 31, 2003, as if the hotels were never classified as "held for sale". Stock-based compensation Prior to 2003, the Company applied Accounting Principles Bulletin ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations, and the intrinsic method, of 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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" prospectively, with an effective date of January 1, 2003. Under SFAS No. 123, the Company records the fair value of any stock based award as compensation expense as of the date the award is granted. On August 13, 2003, the 1996 Non-Employee Director Stock Option Plan was terminated. At December 31, 2003, options to purchase 27,000 shares of common stock issued under this plan, were outstanding. 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% vested on December 31, 2003. The Company expensed approximately $156,000 in the fourth quarter of 2003 in connection with these restricted stock grants. On October 29, 2003, the Company's 1996 Omnibus Incentive Stock Plan was terminated. At December 31, 2003, options to purchase 300,500 shares of common stock issued under this plan, were outstanding. Also, on October 29, 2003, the shareholders approved the 2003 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. To date, total of 2,718 restricted shares of common stock have been granted pursuant to this plan F-14 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 From 1992 to 2002, the Company granted to various current and former key employees and directors, non-qualified options to purchase shares of common stock with exercise prices ranging from $3.25 to $6.50 per share. The exercise price is the market price on the date of grant. At December 31, 2003, options to purchase 1,041,833 shares of common stock were outstanding. These options are currently exercisable and expire through September 2012. In 1997, the Company granted to two then officers, options to purchase 65,625 shares of common stock with an exercise price of $1.53 per share. These options currently are exercisable and expire in February 2007. As part of his initial employment with the Company on January 7, 2003, the Chief Executive Officer was granted a 60-day option to purchase 75,000 shares of restricted stock using an upward exercise price reset formula to the greater of a floor price, the price on the date of his start date or, with respect to options not yet exercised on the 1 month anniversary of his start date, the fair market value of the Company's shares on that date. These options were considered to be two successively granted 30-day options. Prior to his one-month anniversary in 2003, the Chief Executive Officer exercised 40,000 of the options that were issued at a total price of approximately $126,000. The exercise price of the remaining 35,000 options was reset upward on his one-month anniversary and expired without exercise. The fair value of this right to purchase restricted stock was nominal, and was recorded as compensation expense pursuant to the transition rules of FASB Statement No. 148. As part of his initial employment with the Company on August 18, 2003, an Executive was granted successive 30-day options to purchase 25,000 shares of restricted stock using a price formula that reset to the greater of a floor price, the price on the date of his start date or, with respect to options not yet exercised on the one month anniversary of his start date, the fair market value of our shares on that date. These options went unexercised during both 30-day periods. 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. The following table summarizes the employee stock options granted, exercised and outstanding:
Weighted Average Shares Exercise Price ------ -------------- Options outstanding January 1, 2001 1,764,558 4.39 Forfeitures (16,000) 3.23 Options granted 201,500 3.34 --------- ----- Options outstanding December 31, 2001 1,950,058 4.29 Forfeitures (140,500) 2.84 Exercised (100,000) 2.48 Options granted 213,000 2.85 --------- ----- Options outstanding December 31, 2002 1,922,558 4.33 Forfeitures (527,100) 4.55 Exercised (85,500) 3.24 Options granted 125,000 3.33 --------- ===== Options outstanding and exercisable as of December 31, 2003 1,434,958 $4.23 ========= =====
F-15 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The weighted-average grant-date fair value of stock options granted to employees prior to January 1, 2003, the effective date of the Company's adoption of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model, and the pro forma effect on earnings of the fair value accounting for employee stock options under SFAS No. 123 are as follows:
2003 2002 2001 ------------- ------------- ------------- Grant-date fair value per share: Options issued at market $ - $ 1.16 $ 2.04 Weighted average exercise prices: Options issued at market $ - $ 2.85 $ 3.34 Significant assumptions (weighted-average): Risk-free interest rate at grant date n/a 3.39% 5.19% Expected stock price volatility n/a 0.43 0.53 Expected dividend payout n/a n/a n/a Expected option life (years) (a) n/a 4.62 7.91 Net income (loss): As reported $ (5,618,580) $ (1,709,932) $ 755,100 Stock-based employee compensation, expense, net of tax $ (47,771) $ (126,182) $ (197,032) Pro forma $ (5,666,351) $ (1,836,114) $ 558,068 Net income (loss) per share - Basic: As reported $ (1.12) $ (0.34) $ 0.15 Pro forma $ (1.13) $ (0.37) $ 0.11 Net income (loss) per share - Diluted: As reported $ (1.12) $ (0.34) $ 0.13 Pro forma $ (1.13) $ (0.37) $ 0.09
(a) The expected option life considers historical option exercise patterns and future changes to those exercise patterns anticipated at the date of grant. The following table summarizes information about employee stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable ------------------------------------------------- --------------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------- ----------- ---------------- -------------- ----------- -------------- $1.53 to 3.56 842,625 3.00 Years $3.35 842,625 $3.35 $3.74 to 4.38 229,000 2.99 4.00 229,000 4.00 $6.31 to 7.81 363,333 3.18 6.43 363,333 6.43 - ------------- --------- ---------- ----- --------- ----- $1.53 to 7.81 1,434,958 3.04 $4.23 1,434,958 $4.23 ============= ========= ========== ===== ========= =====
F-16 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 2. NOTES RECEIVABLE:
2003 2002 ---------- ---------- Notes receivable consist of: Hotel sale related notes $ 996,000 $ 850,000 Other notes 17,500 32,083 ---------- ---------- 1,103,500 882,083 Less current portion 146,000 100,000 ---------- ---------- Notes receivable, less current portion $ 867,500 $ 782,083 ========== ==========
Notes receivable at December 31, 2003, consists primarily of notes received in connection with the sale of hotels. The notes provide for the monthly payment of interest only at rates ranging from 7.0% to 9.0% and mature through December 31, 2021. Certain of the notes are collateralized by the related hotel or other tangible assets. 3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS: Information regarding contracts-in-progress is as follows at December 31, 2003 and 2002:
2003 2002 ---------- ---------- Costs incurred on uncompleted contracts $2,159,650 $1,606,580 Estimated earnings 487,808 643,215 ---------- ---------- 2,647,458 2,249,795 Less billings to date 1,414,977 770,694 ---------- ---------- Costs and estimated earnings in excess of billings on uncompleted contracts $1,232,481 $1,479,101 ========== ==========
Costs and estimated earnings in excess of billings on uncompleted contracts includes $1,216,666 and $1,348,565 as of December 31, 2003 and 2002, from joint ventures in which the Company has a minority ownership interest (Note 10). 4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES: The Company has non-controlling ownership interests, ranging from 1.0% to 50.0%, in general partnerships, limited partnerships and limited liability companies formed for the purpose of owning and operating hotels. These investments are accounted for using the equity method. The Company had investments in 14 hotel joint ventures at December 31, 2003, with a total investment balance of $859,000, and 12 hotel joint ventures at December 31, 2002, with a total investment balance of approximately $1,399,000. The Company is secondarily liable for the obligations and liabilities of the limited partnerships in which it holds a general partnership interest. The Company advances funds to hotels in which the Company has a minority ownership interest for working capital and construction purposes. The advances bear interest ranging from the prime rate to 10% per annum and are due on demand. The Company expects the partnerships to repay these advances through the sale of the properties, cash flow generated from hotel operations and mortgage financing. The advances were approximately $2,451,000 and $2,892,000 at December 31, 2003 and 2002, respectively, and are included in investments in and advances to unconsolidated hotel joint ventures in the accompanying consolidated balance sheets. F-17 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES (CONTINUED): On September 18, 2000, in connection with obtaining the approval 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 (Note 8), 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 twelve months ended December 31, 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 =========== ===========
The following represents condensed financial information for all of the Company's investments in affiliated companies accounted for under the equity method at December 31, 2003, 2002 and 2001.
2003 2002 2001 ------------ ------------ ------------ Current assets $ 1,987,939 $ 677,290 $ 581,390 Noncurrent assets 26,502,009 26,732,517 29,215,768 Current liabilities 3,781,468 3,667,191 6,049,363 Long-term debt 23,429,037 23,591,779 26,095,565 Equity (deficit) 1,279,443 150,837 (2,347,770) Gross revenue 8,906,962 9,641,145 12,173,902 Gross operating profit 2,533,023 3,036,726 3,716,282 Depreciation and amortization 1,228,750 1,315,745 1,824,408 Net loss (892,323) (478,350) (1,680,699)
The Company has provided approximately $16.7 million in guarantees as of December 31, 2003, on mortgage loan obligations for nine joint ventures in which the Company holds a minority equity interest, which expire at various F-18 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 dates through March 2024. Other partners also have guaranteed portions of the same obligations. The partners of one of the partnerships have entered into a cross indemnity agreement whereby each partner has agreed to indemnify the others for any payments made by any partner in relation to the guarantee in excess of their ownership interest. The Company 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 $39,000, as of December 31, 2003, its estimated fair value at the time of issuance, less accumulated amortization. 5. OTHER ASSETS: Other assets, net of accumulated amortization, at December 31, 2003 and 2002, are comprised of the following:
2003 2002 ------------- -------------- Deposits, franchise fees and other assets $ 1,149,209 $ 1,404,305 Deferred loan costs 935,366 1,189,163 Deferred lease costs 652,642 65,032 ------------- -------------- Total $ 2,737,217 $ 2,658,500 ============= ==============
6. BANK LINE-OF-CREDIT: The Company had $3,850,000 and $6,384,287 outstanding on its bank operating line-of-credit at December 31, 2003 and 2002, respectively. The operating line-of-credit is collateralized by substantially all the assets of the Company, subject to first mortgages from other lenders on hotel assets, bears interest at the rate of prime plus 2.5% per annum, with a minimum rate of 6.75% per annum, and was scheduled to mature April 30, 2004. The line-of-credit provides for the maintenance of certain financial covenants, including minimum tangible net worth, a maximum leverage ratio, minimum debt service coverage ratio, and minimum net income. The Company was not in compliance with the minimum tangible net worth requirement and the minimum net income requirement as of December 31, 2003. The lender has waived these covenant violations however, in connection with the renewal of the line-of-credit set forth below. On March 23, 2004, the Company accepted a commitment from the aforementioned lender to renew the line-of-credit through April 30, 2005, with a maximum availability of $5.5 million, reducing to $5.0 million on June 30, 2004 reducing further to $4.0 million on August 31, 2004, and to $3.5 million on February 28, 2005. Notwithstanding these dates, the lender has required that the majority of proceeds from the sale of hotel properties must be used to reduce the line-of-credit balance until the balance falls below $4.0 million, at which time the maximum available will be reduced to $4.0 million, even if prior to the August 31, 2004 scheduled reduction date. The commitment is subject to the closing of the renewed loan by April 30, 2004, and certain other conditions. The terms of the agreement were revised to provide for interest at the rate of 10%. The renewed credit line renewal provides for the maintenance of certain financial covenants, similar to, the previous line-of-credit. F-19 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 7. LONG-TERM DEBT: 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 $28.5 million, which has been classified in current liabilities in the accompanying consolidated balance sheet as of December 31, 2003. This amount includes approximately $2.6 million, 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 $8.9 million, which has been classified in current liabilities in the accompanying consolidated balance sheet as of December 31, 2003. This amount includes approximately $400,000, which is contractually due within the next twelve months regardless of the plan for hotel disposition. Approximately $1.2 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. 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 aggregate maturities of long-term debt, excluding long-term debt related to assets held for sale, are approximately as follows:
Year Ending December 31, Amount - ------------------------ ------------ 2004 $ 1,195,000 2005 5,746,000 2006 3,190,000 2007 953,000 2008 1,016,000 Thereafter 15,609,117 ------------ $ 27,709,000 ============
The Company expects to refinance or extend a mortgage loan due in 2004, or sell the related hotel asset and repay the mortgage in its entirety, prior to its maturity. Certain of the hotel mortgage notes, as well as the office building mortgage note, provide for financial covenants, principally minimum net worth requirements, debt to equity ratios and minimum debt service coverage ratios. At December 31, 2003, the Company was not in compliance with the minimum debt service coverage ratio contained in two mortgage loans aggregating approximately $4.6 million. One of these mortgages in the amount of $1.5 million as of December 31, 2003 relates to a hotel classified as "held for sale" since it is part of the hotel disposition plan, and is expected to be sold prior to its maturity in August 2004 with the proceeds used to pay off this mortgage debt. With respect to the other hotel with a covenant violation, the Company has obtained a waiver from the lender. In addition, one joint venture in which the Company has guaranteed the mortgage debt was not in compliance with the minimum debt service coverage ratio covenant contained in the mortgage loan. The joint venture has obtained a waiver from the lender regarding this violation in connection with the one-year extension of the mortgage loan in November 2003. 8. SHAREHOLDERS' EQUITY: Authorized shares: The Company's corporate charter authorizes 25,000,000 shares of Common Stock with a par value of $0.005 per share and 100,000 shares of Preferred Stock with no par value. The Preferred Stock may be issued in series and the F-20 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Board of Directors shall determine the voting powers, designations, preferences and relative participation, optional or other special rights and the qualifications, limitations or restrictions thereof. Non-employee stock options and warrants: The Company has issued options to acquire shares of the Company's common stock to certain of its partners in various hotel joint ventures referred to in Note 4. During 2001, the Company recognized $167,000 of expense related to the issuance of stock options to joint venture partners, including a director of the Company (Note 4). At December 31, 2003, options to purchase 125,000 shares of common stock continued to be outstanding WITH an exercise price of $3.794 per share and exercisable through October 2005. The Company accounted for these options during 2001 at fair value, in accordance with FASB Statement No. 123. Limited partnership conversion rights: The Company was the general partner in a partnership where the limited partners, including a Director of the Company, had the right at certain times and under certain conditions to convert their limited partnership interests into 84,975 shares of the Company's common stock. These conversion rights expired in 2003 when the Company fulfilled its obligation to acquire these limited partner interests (Note 4). Stock subscriptions receivable: In connection with the purchase of certain management contracts from Diversified Innkeepers, Inc. ("Diversified"), the Company secured promissory notes from the principals of Diversified in the total amount of $436,875 with interest at 6.5% per annum. The notes are collateralized by 125,000 shares of common stock of the Company, which were issued upon the exercise of stock options in 1993. The total principal balance is due December 31, 2005. These notes receivable have been classified as a reduction of shareholders' equity on the accompanying consolidated balance sheets. Reverse-Forward stock split: In November 2003 the Company executed a reverse-forward stock split whereby the shares held by shareholders owning less than 100 shares on the effective date were redeemed and converted into the right to receive cash from the Company. Shareholders owning at least 100 shares as of the effective date were not impacted. A total of 33,332 shares were converted on the effective date into the right to receive approximately $127,662 in cash. Through December 31, 2003, the Company has paid $21,908 for the redemption of 5,720 shares in connection with the reverse-forward stock split. All shares that were repurchased or redeemed have been retired. 9. TAXES ON INCOME: The provision for income taxes in the consolidated statements of operations excluding tax benefit of $972,000, $633,000, and $144,000 related to discontinued operations in 2003, 2002, and 2001 respectively, is as follows:
2003 2002 2001 ----------- ----------- ----------- Current $ - $ (407,000) $ 604,000 Deferred (2,456,000) 235,000 155,000 ----------- ----------- ----------- Income tax (benefit) expense $(2,456,000) $ (172,000) $ 759,000 =========== =========== ===========
The following reconciles income tax expense for 2003 at the federal statutory tax rate with the effective rate: F-21 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ------ ------ ------ Income taxes at the federal statutory rate (34.0%) (34.0%) 34.0% State taxes, net of federal tax benefit (3.1%) 2.0% 10.9% ----- ----- ---- Effective tax rate (37.1%) (32.0%) 44.9% ===== ===== ====
9. TAXES ON INCOME (CONTINUED): Temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes that give rise to a net deferred income tax asset relate to the following:
2003 2002 ----------- ----------- Differences in deferred income recognized for tax purposes and financial reporting purposes $ 333,000 $ 270,000 Gain on sale/leaseback transaction recognized for tax purposes and deferred for financial reporting purposes 2,644,000 3,032,000 Start-up costs capitalized for tax purposes and expensed for financial reporting purposes 35,000 62,000 Differences in the basis of investments, property and equipment from partner acquisitions and due to majority-owned partnerships consolidated for financial reporting purposes but not for tax purposes 824,000 1,201,000 Net operating loss carryforward 1,841,000 - Other 154,000 61,000 ----------- ----------- 5,831,000 4,626,000 Impairment provision booked for financial reporting purposes and deferred for tax purposes 2,151,000 - Differences in the basis of property and equipment (349,000) (1,127,000) Cumulative depreciation differences (1,562,000) (1,072,000) ----------- ----------- Net deferred income tax asset $ 6,071,000 $ 2,427,000 =========== ===========
Certain state net operating loss carry forwards are included in the net deferral tax asset and are fully reserved for. 10. RELATED PARTY TRANSACTIONS: The following table summarizes related party revenue recorded in 2003, 2002 and 2001 from various unconsolidated partnerships in which the Company has an ownership interest: F-22 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ----------- ----------- ---------- Development and construction revenue $ 4,175,878 $ 5,253,226 $ 652,815 Hotel management revenue 371,142 808,598 709,631 Employee leasing revenue 2,097,646 2,895,295 2,830,719 Interest income 110,450 212,346 530,035
11. 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, 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, which is the information utilized by the Company's decision makers in managing the business:
2003 2002 2001 ----------- ----------- ----------- Revenues Hotel operations $41,462,828 $45,490,595 $47,353,106 Hotel development and construction 4,196,878 7,180,222 1,724,249 Hotel sales and commissions 22,831,102 10,017,080 12,922,459 Hotel management 445,862 957,801 1,066,645 Employee leasing 1,858,103 3,267,491 4,678,189 Incentive and royalty sharing fees 972,219 588,938 209,633 Office building rental and other 749,782 669,769 169,612 ----------- ----------- ----------- $72,516,774 $68,171,896 $68,123,893 =========== =========== =========== Operating costs and expenses Hotel operations $32,480,658 $33,714,913 $34,801,272 Hotel development and construction 4,739,296 7,205,328 1,479,947 Hotel sales and commissions 19,328,404 8,159,459 9,621,536 Hotel management 280,383 714,648 716,802 Employee leasing 1,798,714 3,208,708 4,564,508 Incentive and royalty sharing fees - - - Office building rental and other 214,232 56,757 2,958 ----------- ----------- ----------- $58,841,687 $53,059,813 $51,187,023 =========== =========== ===========
F-23 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 11. BUSINESS SEGMENTS (CONTINUED)
2003 2002 2001 ------------- ------------- ------------- Operating Income (Loss) Hotel operations AmeriHost Inn hotels $ 1,549,031 $ 3,169,201 $ 3,100,053 Other hotels (927,208) (463,289) (132,413) Impairment provision (5,069,781) (542,019) - Hotel development and construction (545,811) (30,785) 236,319 Hotel sales and commissions 3,502,698 1,857,621 3,300,922 Hotel management 120,559 191,097 295,356 Employee leasing 57,288 56,462 110,642 Incentive and royalty sharing fees 972,219 588,938 209,633 Office building rental and other 373,918 454,397 130,831 Corporate (2,482,351) (2,360,859) (1,954,441) ------------- ------------- ------------- $ (2,449,438) $ 2,920,764 $ 5,296,902 ============= ============= ============= Identifiable assets Hotel operations $ 82,815,916 $ 104,644,225 $ 99,086,728 Hotel development and construction 1,860,323 2,445,882 1,467,116 Hotel sales and commissions - - - Hotel management 1,005,159 1,513,640 119,236 Employee leasing 134,974 256,787 70,584 Incentive and royalty sharing fees - - - Office building rental and other 6,479,267 6,672,294 6,553,474 Corporate 7,417,774 4,400,886 7,877,318 ------------- ------------- ------------- $ 99,713,413 $ 119,933,714 $ 115,174,456 ============= ============= ============= Capital Expenditures Hotel operations $ 6,994,136 $ 18,222,595 $ 18,874,420 Hotel development and construction 503 53,673 5,975 Hotel sales and commissions - - - Hotel management 28,208 16,574 52,173 Employee leasing - - - Incentive and royalty sharing fees - - - Office building rental and other 62,511 273,605 6,411,585 Corporate 2,636 16,378 55,580 ------------- ------------- ------------- $ 7,087,994 $ 18,582,825 $ 25,399,733 ============= ============= =============
F-24 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 11. BUSINESS SEGMENTS (CONTINUED)
2003 2002 2001 ------------- ------------- ------------- Depreciation/Amortization Hotel operations $ 3,327,136 $ 5,135,412 $ 3,751,443 Hotel development and construction 3,393 5,679 7,983 Hotel sales and commissions - - - Hotel management 44,919 52,056 54,487 Employee leasing 2,100 2,321 3,039 Incentive and royalty sharing fees - - - Office building rental and other 161,634 158,615 35,822 Corporate 62,867 162,219 46,702 ------------- ------------- ------------- $ 3,602,049 $ 5,516,302 $ 3,899,476 ============= ============= =============
12. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS: The Company sold eight wholly-owned AmeriHost Inn hotels during the twelve months ended December 31, 2003. Net sale proceeds from these hotels was approximately $22.8 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 $19.2 million, resulting in operating income from the sale of these hotels of approximately $3.5 million. In addition, approximately $14.2 million in mortgage debt was paid off with proceeds from the sale of these hotels. In the third quarter of 2003, a joint venture in which the Company had a controlling interest, and was therefore consolidated in the Company's financial statements, sold its non-AmeriHost Inn hotel. This sale resulted in the pay off of the joint venture's mortgage debt of approximately $1.3 million and a pre-tax gain of approximately $1,000. Also, during the second quarter of 2003, another joint venture in which the Company had a controlling ownership interest, sold its non-AmeriHost Inn hotel. This sale resulted in the reduction of the joint venture's mortgage debt of approximately $945,000, 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 investment in 2002. A director of the Company owns the bank that provided the mortgage debt to this joint venture, which was paid off as a result of this sale. There are no more loans outstanding owed to affiliates of this or any other director. 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. Effective July 10, 2003, the Company implemented a plan to sell approximately 25 - - 30 hotel properties over a period of 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 has hired several regional and national hotel brokerage firms to market most of the properties and manage the sales process. The Company F-25 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 expects this plan to reduce debt (Notes 6 and 7) 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 conjunction with the implementation of the plan for hotel dispositions 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. The Company follows Financial Accounting Standards Board Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") and recognized the costs associated with this activity at fair value when the liability was incurred. 13. DISCONTINUED OPERATIONS: The Company has reclassified its consolidated statements of operations for the twelve months ended December 31, 2003, 2002 and 2001 and its consolidated balance sheet as of December 31, 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 12). 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, 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:
2003 2002 2001 ----------- ----------- ----------- Hotel Operations: Revenue $ 6,205,557 $ 8,358,771 $ 9,029,342 Costs and expenses 6,138,669 7,811,561 7,313,241 ----------- ----------- ----------- 66,888 547,210 1,716,101 Depreciation and amortization 810,062 1,177,662 776,593 Leasehold rents - hotels 172,933 298,777 677,686 Hotel impairment provision 909,523 - - ----------- ----------- ----------- Operating income (loss) (1,825,630) (929,229) 261,822 Other income (expense): Interest expense (722,475) (752,238) (541,664) Other income (expense) (52,026) (46,060) (1,000) Gain on sale of property 96,260 - - ----------- ----------- ----------- Loss from discontinued operations, before minority interests and income taxes (2,503,871) (1,727,527) (280,842)
F-26 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Minority interests in (income) loss of consolidated joint ventures (76,118) (40,757) 78,608 ----------- ----------- ----------- Loss from discontinued operations, before income taxes (2,427,573) (1,686,770) (359,450) Income tax expense (benefit) (972,000) (633,000) (144,000) ----------- ----------- ----------- Net loss from discontinued operations $(1,455,753) $(1,053,770) $ (215,450) =========== =========== ===========
F-27 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 13. DISCONTINUED OPERATIONS (CONTINUED): The assets and liabilities of two non-AmeriHost Inn hotels 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 December 31, 2003. Condensed balance sheet information for these hotels is as follows:
December 31, 2003 ------------ ASSETS Current assets: Cash and cash equivalents $ 283,412 Accounts receivable 82,514 Prepaid expenses and other current assets 36,676 ------------ Total current assets 402,602 ------------ Property and equipment 14,643,713 Less accumulated depreciation and amortization (4,329,857) ------------ 10,313,856 ------------ Other assets, net of accumulated amortization 170,114 ------------ $ 10,886,572 ============ LIABILITIES Current liabilities: Accounts payable $ 264,747 Accrued payroll and other expenses 391,840 Current portion of long-term debt 1,263,095 ------------ Total current liabilities 1,919,682 Long-term debt, net of current portion 7,665,810 Minority interests - Other long term liabilities - Equity 1,301,080 ------------ $ 10,886,572 ============
F-28 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 14. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: Sale/leaseback of hotels: In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn hotels to PMC Commercial Trust ("PMC"), a real estate investment trust ("REIT") for $73.0 million. Upon the respective sales to PMC, a subsidiary of the Company entered into agreements to lease back the hotels for an initial term of 10 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 were subject to a CPI increase with a 2% annual maximum. In January 2001, the subsidiary amended the master lease with PMC to provide for the purchase of eight unidentified hotels from the lessor under specified terms, and to extend the initial lease term by five years. The amendment provides for four increases in rent payments of 0.25% each, if these hotels are not sold to a third party or purchased by the Company by the dates specified. As of December 31, 2003, the first three scheduled rent increases were not effective due to the sale of hotels by PMC to the Company. The third scheduled increase was avoided in September 2003, when the Company purchased a hotel from PMC, using cash of approximately $556,000 and mortgage financing provided by PMC of approximately $1.7 million. The unamortized deferred gain related to the initial sale of this hotel to PMC was recorded as a basis reduction to the hotel asset. Upon its purchase, this hotel was classified as held for sale, 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 PMC leases. If the Company does not either facilitate the sale to a third party, or purchase from PMC, one hotel at a price of approximately $2.6 million by June 5, 2004, the fourth 0.25% rent increase of approximately $127,000 on an annual basis becomes effective. If the Company decides to purchase this hotel by June 5, 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 gains from the sale of the hotels to PMC were deferred for financial statement reporting purposes, due to the continuing involvement with the long-term lease agreement, and are being amortized on a straight-line basis into income as a reduction of leasehold rent expense over the 15-year initial term. At December 31, 2003, the balance of this deferred income was approximately $6.5 million. In 2002, one hotel owned by PMC was sold; in 2001, four hotels owned by PMC were sold. Accordingly, the leases with PMC for these hotels were terminated, and the remaining unamortized gain of approximately $352,000 and $1.0 million was recognized in 2002 and 2001, respectively, as a gain on sale of property in the accompanying consolidated financial statements. In addition, the Company recognized a commission from the sale of these hotels, which is classified as hotel sales and commissions in the accompanying consolidated financial statements. As previously mentioned, the Company acquired one hotel owned by PMC in 2003, one in 2002, and one in 2001, in accordance with the terms of the amendment. In 2004, the Company entered into discussions with PMC, on behalf of its subsidiary, with the objective to restructure these long-term lease agreements. On March 12, 2004, the subsidiary entered into a temporary letter agreement with PMC that expires on April 30, 2004. The temporary letter agreement provides that base rent will continue to accrue at the rate of approximately $445,000 per month, as set forth in the lease agreements; however the base rent payments required to be paid on March 1, 2004 and April 1, 2004 were reduced to approximately $360,000 per month, with the March 1, 2004 payment being due and payable upon the execution of the temporary letter agreement. In addition, the subsidiary was allowed to utilize $200,000 of its security deposit held with PMC to partially fund these payments. Upon the expiration of the temporary letter agreement on April 30, 2004, the deferred F-29 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 portion of the base rent (approximately $170,000) will be payable and the security deposit is to be restored to its March 12, 2004 balance. While the objective is to reach a restructured agreement prior to the expiration of the temporary letter agreement, there can be no assurance that the leases will be restructured on terms and conditions acceptable to the Company, if at all. Hotel leases: Including the hotels leased from the REIT, the Company leases 22 hotels as of December 31, 2003, 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. 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 accrued approximately $107,000 in 2003 in related lease termination fees. Total rent expense for all operating leases was approximately $5,131,000, $5,411,000 and $6,747,000 in 2003, 2002 and 2001, respectively, including approximately $39,000 and $278,000 in 2002 and 2001, respectively, to entities in which the Company has a minority ownership interest. Minimum future rent payments under all operating leases are as follows:
Year Ending December 31, Amount - ------------------------ ---------------- 2004 5,629,000 2005 5,736,000 2006 5,845,000 2007 5,956,000 2008 6,069,000 Thereafter 29,435,000 ------------ $ 58,670,000 ============
F-30 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Construction in progress: As of December 31, 2003, the Company had entered into non-cancelable subcontracts for approximately $857,000 in connection with the construction of a new hotel, representing a portion of the total estimated construction costs for this hotel. These commitments will be funded through construction and long-term mortgage financing currently in place. Employment agreement: The Company has entered into employment agreements with its Chief Executive Officer, its Chief Financial Officer and three other executives. The agreements expire December 31, 2004 through December 31, 2005, and provide for total annual base compensation of $907,000. The agreements also provide for performance bonuses tied to company performance, and are payable in a combination of cash and restricted common stock of the Company, with the restricted stock to be issued pursuant to the 2003 Long Term Incentive Plan adopted by the shareholders in 2003. Legal matters: The Company and certain of its subsidiaries are defendants in various litigation matters arising in the ordinary course of business. In the opinion of management, the ultimate resolution of all such litigation matters is not likely to have a material effect on the Company's financial condition, results of operation or liquidity. F-31 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 15. SUPPLEMENTAL CASH FLOW DATA: The following represents the supplemental schedule of noncash investing and financing activities for the years ended December 31:
2003 2002 2001 ----------- ----------- ----------- Sale of assets and franchising rights: Cost basis of assets sold $ 6,392,462 $ 939,851 $ 192,857 Accumulated depreciation at sale (3,925,821) (168,742) (46,227) Deferred income - (352,507) (1,030,468) Notes received, less $50,000 allowance - - - Gain on sale 337,856 727,076 1,286,338 Income from insurance settlement $ 298,023 ----------- ----------- ----------- Net cash proceeds $ 2,804,497 $ 1,443,701 $ 402,500 =========== =========== =========== Liabilities assumed in connection with acquisition and consolidation of hotel partnership interests $ 1,244,367 $ 1,520,923 $ 2,365,422 =========== =========== =========== Notes received in connection with the sale of hotels $ 250,000 $ 450,000 $ 300,000 =========== =========== =========== Deferred income adjustment to hotels acquired $ 262,513 $ 347,989 $ 511,943 =========== =========== =========== Exchange of note and interest receivable for partnership interest $ - $ 1,256,639 $ - =========== =========== =========== Interest paid, net of interest capitalized $ 4,830,621 $ 5,516,449 $ 5,194,741 =========== =========== ===========
16. SALE OF AMERIHOST INN BRANDS AND FRANCHISING RIGHTS: Effective September 30, 2000, the Company completed the sale of the AmeriHost Inn brands and franchising rights to Cendant. The Company simultaneously entered into franchise agreements with Cendant for its AmeriHost Inn hotels. The Company received an initial payment of approximately $5.5 million upon closing and recorded a gain from this payment, net of closing costs of approximately $5.2 million. In addition, the sale agreement provides for three installment payments to the Company of $400,000 each, payable on September 30, 2001, 2002 and 2003. These payments are included in gain on sale of assets in the accompanying consolidated financial statements when received. The agreement with Cendant also provides for additional incentives to the Company as the AmeriHost Inn hotel franchise system expanded. In conjunction with this transaction, the Company changed its name and began conducting business as Arlington Hospitality, Inc. in May 2001. F-32 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): Selected quarterly financial data (in thousands, except per share amounts) for 2003 and 2002 is summarized below. The sum of the quarterly earnings (loss) per share amounts may not equal the annual earnings per share amounts due primarily to changes in the number of common shares and common share equivalents outstanding from quarter to quarter.
Three Months Ended -------------------------------------------- Year Ended 3/31 6/30 9/30 12/31 12/31 -------- -------- -------- -------- -------- 2003: Total revenue $ 17,794 $ 15,792 $ 23,806 $ 15,125 $ 72,517 Net income (loss) from continuing operations, before impairment (960) 172 1,201 (1,536) (1,123) Impairment provision, net of tax (60) (2,739) (84) (157) (3,040) Net income (loss) from continuing operations (1,020) (2,567) 1,117 (1,693) (4,163) Discontinued operations, net of tax (462) (791) (35) (168) (1,456) Net income (loss) (1,482) (3,358) 1,082 (1,861) (5,619) Net income (loss) per share: Basic $ (0.30) $ (0.67) $ 0.22 $ (0.37) $ (1.12) Diluted $ (0.30) $ (0.67) $ 0.22 $ (0.37) $ (1.12) 2002: Total revenue $ 17,938 $ 20,643 $ 18,390 $ 19,560 $ 76,531 Net income (loss) from continuing operations, before impairment (331) 360 775 (1,140) (336) Impairment provision, net of tax - - - (320) (320) Net income (loss) from continuing operations (331) 360 775 (1,460) (656) Discontinued operations, net of tax (427) (126) (29) (472) (1,054) Net income (loss) (758) 234 746 (1,932) (1,710) Net income (loss) per share: Basic $ (0.15) $ 0.05 $ 0.15 $ (0.39) $ (0.34) Diluted $ (0.15) $ 0.05 $ 0.14 $ (0.39) $ (0.34)
18. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following condensed pro forma financial information is presented as if the acquisitions discussed in Note 4 had been consummated as of the beginning of the period presented but is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated at that time nor does it purport to represent the results of operations for future periods.
For the year ended December 31, 2003 2002 2001 ------------ ------------ ------------ Total Revenue $ 73,089,796 $ 69,896,115 $ 68,911,381 Net income (loss) (5,590,617) (1,667,411) 730,268 Net income (loss) per share: Basic $ (1.12) $ (0.34) $ 0.15
F-33 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Diluted $ (1.12) $ (0.34) $ 0.14 Weighted average number of common shares outstanding: Basic 5,011,572 4,958,438 4,974,821 Diluted 5,011,572 4,958,438 5,181,571
19. NEW ACCOUNTING STANDARDS: In December 2002, the FASB issued 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. In December 2003, the FASB issued Interpretation No. 46R (FIN 46R), "Consolidation of Variable Interest Entities," which addresses how a business enterprise should evaluate whether or not it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of Variable Interest Entities", which was issued in January 2003. The Company is required to adopt the requirements of FIN 46R for interim periods beginning after March 31, 2004. This Interpretation 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 four 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 June 30, 2004. The consolidation of these joint ventures is expected to add approximately $9.7 million in assets and $7.8 million in liabilities to the Company's consolidated balance sheet. As of December 31, 2003, the Company had investments in, and advances to, these joint ventures of approximately $2.0 million, 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. 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. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The effective date of a portion of the statement has been indefinitely postponed by the FASB. The Company does not expect that the implementation of SFAS No. 150 will result in a material financial statement impact. 20. SUBSEQUENT EVENTS: F-34 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 On March 26, 2004, the Company sold one AmeriHost Inn hotel generating gross proceeds of approximately $1.8 million and had simultaneously paid off the related mortgage loan of approximately $748,000. F-35 EX-10.23 3 c84140exv10w23.txt AMENDED AND RESTATED MASTER LEASE AGREEMENT EXHIBIT 10.23 AMENDED AND RESTATED MASTER AGREEMENT THIS AMENDED AND RESTATED MASTER AGREEMENT (this "AGREEMENT") is made and entered into as of this 24th day of January, 2001, by and among PMC COMMERCIAL TRUST and its subsidiaries, PMCT Sycamore, L.P., PMCT Macomb, L.P., PMCT Marysville, L.P., and PMCT Plainfield, L.P. (collectively, the "LESSOR"), AMERIHOST PROPERTIES, INC. doing business as ARLINGTON HOSPITALITY, INC. ("ARLINGTON") and ARLINGTON INNS, INC. formerly AMERIHOST INNS, INC. (the "LESSEE"). This Amended and Restated Master Agreement amends, restates, supercedes and replaces that certain: (i) Master Agreement dated June 30, 1998 by and among PMC Commercial Trust, Amerihost Properties, Inc. and Amerihost Inns, Inc; (ii) Master Agreement dated March 23, 1999 by and among PMCT Sycamore, L.P., Amerihost Properties, Inc. and Amerihost Inns, Inc.; (iii) Master Agreement dated March 23, 1999 by and among PMCT Macomb, L.P., Amerihost Properties, Inc. and Amerihost Inns, Inc.; (iv) Master Agreement dated March 5, 1999 by and among PMCT Marysville, L.P., Amerihost Properties, Inc. and Amerihost Inns, Inc.; and (v) Master Agreement dated March 5, 1999 by and among PMCT Plainfield, L.P., Amerihost Properties, Inc. and Amerihost Inns, Inc. (collectively, the "MASTER AGREEMENTS"). RECITALS WHEREAS, the Lessor owns those certain twenty-nine (29) hotels (the "HOTELS") listed on Exhibit "A" dated January 24, 2001, attached hereto; WHEREAS, Lessor has previously leased the Hotels to Lessee; WHEREAS, Arlington is a guarantor of the Lessee's obligation to pay rent under the Property Leases (as hereinafter defined), on the terms and conditions set forth therein; and 1 WHEREAS, the parties hereto desire to enter into this Amended and Restated Master Agreement to set forth their agreement to amend and restate provisions of the Master Agreements and other matters set forth herein. AGREEMENTS NOW, THEREFORE, in consideration of the foregoing premises, the representations, warranties and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS Unless the context otherwise requires, (a) all capitalized terms not otherwise defined herein shall have the meanings set forth in the Property Leases, (b) references to the singular shall include the plural and vice versa, (c) references to designated "Articles," "Sections" or other subdivisions are references to the designated Articles, Sections or other subdivisions of this Agreement, (d) all accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with GAAP and (e) the words "herein," "hereof," and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. ARTICLE II LEASING OF HOTELS AND RENEWAL OF LEASES 2.1 Hotels. The Lessor and the Lessee have entered into an individual lease in the form attached hereto as Exhibit "B" (the "PROPERTY LEASE") for each of the Hotels at the rents specified 2 on Exhibit "C" dated January 24, 2001 attached hereto, which Exhibit "C" is initialed by Lessor and Lessee. 2.2 Lease Renewal. Lessee and Lessor will each have the unilateral right to extend the Property Leases and, consequently, this Agreement for the first five-year option period as set forth in Section 2.4 of the Property Leases. The first five-year option shall be exercised for all of the Property Leases on the then remaining Hotels as a group and not individually. Thereafter, Lessee only shall have the unilateral right to extend the Property Leases and this Agreement for a second five-year option period, however such option shall be on an "all or none" basis (i.e. the Property Leases on all of the then remaining Hotels shall be extended or none extended). In addition, Lessee is hereby granted a third option to extend the Property Leases and this Agreement for the period from June 30, 2018 to September 30, 2020 for all of the Property Leases on the then existing Hotels and this Agreement on an "all or none" basis. This Section 2.2 supercedes and replaces the existing renewal provisions contained in Section 2.4 of each Property Lease. ARTICLE III RENT So long as this Agreement remains in effect, Lessee promises to pay to Lessor, in lawful money of the United States of America, in immediately available funds, rents in the amount specified below: 3.1 Base Rent. Effective as of the date hereof, Lessee shall pay to Lessor the annual rent (the "Base Rent") in the amount of $7,010,000.00, which shall be payable in equal monthly installments and shall continue until adjusted (i) as provided in the Property Leases; (ii) with the sale 3 of Hotels; or (iii) pursuant to Section 3.2 hereof. The Base Rent shall be paid monthly in advance in the manner set forth in Section 3.1 of the Property Leases. 3.2 Rent Increases. Base Rent for all of the Hotels will be increased by 0.25% multiplied by the sum of the assigned values of all Hotels (the "TOTAL ASSIGNED VALUE") as reflected on Exhibit "E" attached hereto, commencing June 30, 2001 (eg. $70,100,000 X 0.0025 = $175,250, which sum represents the amount of the increase to Base Rent). A second increase of 0.25% multiplied by the Total Assigned Value will be effective commencing June 30, 2002. A third increase of 0.25% multiplied by the Total Assigned Value will be effective June 30, 2003. A fourth increase of 0.25% multiplied by the Total Assigned Value will be effective June 30, 2004. These increases are to be applied prior, and in addition to, the application of any increase resulting from Consumer Price Index adjustments as provided for in Section 3.2 of the Property Leases. ARTICLE IV RESERVES 4.1 Reserves. (a) Lessee shall deposit monthly during the Lease Term, including any extensions thereof, (on or before the 15th day of the subsequent month) into the Capital Expenditure Reserve Account held by Lessor an amount which is equal to two percent (2%) of Room Revenues for all Hotels for the prior month. Commencing January 1, 2001, and each year thereafter, $2,000 per year/per Hotel for parking lot replacement and $1,000 per year/per Hotel for roof replacement will initially be allocated from any balance then held in the Capital Expenditure Reserve Account and thereafter shall be allocated as funds are received. Expenses for parking lot and roof replacement in excess of the funds set aside for those purposes shall be paid from the remaining funds in the Capital Expenditure Reserve Account on a property by property basis. 4 (b) Lessee shall also deposit monthly during the Lease Term (on or before the 15th day of the subsequent month) into the FF&E Reserve Account held by Lessor an amount equal to two percent (2%) of the Room Revenues for all Hotels for the prior month. In addition, any monies held by Lessee in the FF&E Reserve Account as of January 31, 2001 must be paid to Lessor to be held in escrow and disbursed in accordance with Section 4.1(d) herein and the relevant provisions of the Property Leases. (c) For the Hotels in Sycamore, IL; Macomb, IL, Marysville, OH; and Plainfield, IN; the deposits required to be made in 4.1(a) and 4.1(b) shall be reduced by the amount deposited directly by Arlington with the respective lender for these four (4) Hotels. (d) FF&E disbursement requests received by Lessor shall be released within two (2) business days of request by Lessee provided disbursement requests are in accordance with the requirements of the Property Lease and are properly documented. After review, any disputed items will be reimbursed in accordance with the terms of the Property Lease. (e) Lessee is to maintain a minimum aggregate reserve in the Capital Expenditure Reserve Account (including the parking lot and roof allocations) and FF&E Reserve Account combined of no less than $30,000 per Hotel. However, for the Hotels in Sycamore, IL; Macomb, IL; Marysville, OH; and Plainfield, IN; the minimum aggregate reserve in the Capital Expenditure Reserve Account and the FF&E Reserve Account shall be reduced by the balance then on deposit with the respective lender for these four (4) Hotels for the benefit of Arlington. (f) At the end of the Lease Term, including extensions thereof, to the extent the Hotels are not kept in "B+" condition in accordance with Cendant quality assurance standards (or if the Hotels 5 are under another national franchise, then their standards), any funds in the Capital Expenditure Reserve Account (including the parking lot and roof allocations) or FF&E Reserve Account can be used by the Lessor in their sole discretion to cure the issues noted on the respective quality assurance reports. ARTICLE V ESCROW Section 5.1 Escrow. Lessor hereby acknowledges holding in escrow (the "ESCROW") the sum of $1,168,333.33 (the "ESCROW FUNDS"), representing an amount equivalent to two months' Base Rent under all Property Leases. The Escrow Funds shall be invested in "Qualified Investments." The Lessor shall cause earnings thereon to be remitted annually to the Lessee not later than the first day of February of each year in which the Escrow is maintained, provided that an Event of Default has not occurred and is then continuing under any Property Lease. Notwithstanding the foregoing provision, the Lessee shall have the option from time to time, as a substitute for cash, upon reasonable notice to the Lessor, to provide a letter of credit (the "LETTER OF CREDIT") in favor of the Lessor in the amount of the Escrow Funds, in form and substance, and issued by an issuer, reasonably acceptable to the Lessor. Section 5.2 Coverage Ratio. The Escrow hereby created shall continue until such date that the aggregate ratio of Net Operating Income of all Hotels to the aggregate Base Rent of all Hotels (such rent coverage ratio hereinafter called the "RCR"). as of the first day of each quarter during the term of the Escrow, on a trailing 12-month basis commencing on December 31, 1999 shall equal or exceed a ratio of 1.25 to 1.0. Lessor shall have the right to draw on the Escrow Funds 6 upon the occurrence of an Event of Default by the Lessee in the payment of Base Rent to the extent necessary to cure the shortfall in payment of Base Rent and Lessee must replenish the Escrow within two (2) business days after written notice from Lessor. Section 5.3 Financial Reports. During the term of this Agreement, the Lessee shall provide detailed monthly statements to the Lessor within forty-five (45) days of each fiscal period outlining financial results for the Hotels during the accounting period and year-to-date, compared to the previous fiscal year and budget. Annual financial consolidating statements shall be sent to the Lessor not later than one hundred twenty (120) days after the end of the Lessee's fiscal year. The Lessee agrees timely to provide financial data and to cooperate fully with the Lessor in connection with prompt quarterly and annual reconciliations of the monthly payments of Base Rent with the Net Operating Income for equivalent periods. Section 5.4 Termination of Escrow. Within ten (10) days after the submission of evidence reasonably satisfactory to the Lessor that the RCR has been achieved, the Lessor shall remit the Escrow Funds, together with earnings thereon, if any, or return the Letter of Credit, as the case may be, to the Lessee and the appropriate Escrow created hereunder shall be closed and of no further force and effect. ARTICLE VI ARLINGTON GUARANTY Arlington hereby executes this Agreement to acknowledge and reaffirm, among other things, its guaranty to the Lessor of the prompt and complete payment of the Base Rent and Additional Rent under the Property Leases pursuant to those certain Guaranties executed by Arlington dated: (i) June 7 30, 1998 for the benefit of PMC Commercial Trust; (ii) March 23, 1999 for the benefit of PMCT Sycamore, L.P.; (iii) March 23, 1999 for the benefit of PMCT Macomb, L.P.; (iv) March 5,1999 for the benefit of PMCT Plainfield, L.P.; and (v) March 5, 1999 for the benefit of PMCT Marysville, L.P., attached hereto as Exhibit "D" (the "GUARANTIES"); it being expressly understood and agreed that these are continuing Guaranties, and that the obligation of Arlington is and continues to be absolute under any and all circumstances. Arlington hereby consents to the amendment and restatement of the Master Agreements pursuant hereto and agrees that its obligations under the Guaranties continue to be in full force and effect, enforceable against Arlington in accordance with their respective terms. ARTICLE VII NON-COMPETITION If Arlington, or anyone else, commences construction on a new hotel with the AmeriHost brand ("AMERIHOST PROPERTY") within a fifteen (15) mile radius (the "AREA OF NON-COMPETITION") of any Hotel owned by Lessor (the "AFFECTED PROPERTY"), Lessor will agree to waive the Area of Non-Competition for that Affected Property only if Arlington offers in writing to purchase the Affected Property within thirty (30) days of actual knowledge of a violation of the Area of Non-Competition and an additional property of Lessor's choice (the "ADDITIONAL PROPERTY") under the terms and conditions contained herein. Lessor may choose to sell to Arlington only the Affected Property, only the Additional Property, both properties or neither property. If Lessor accepts one or both offers, Lessor's acceptance or rejection of the offers shall be communicated to Arlington in writing within thirty (30) days after receipt of such offers and the sale of the Affected Property and/or the Additional Property must be closed within twelve (12) months after the certificate of 8 occupancy ("C.O.") is issued for that newly constructed AmeriHost Property. Arlington may, but will not be required to purchase the Additional Property if the Affected Property has a twelve (12) month trailing room revenue of less than $10,000 per room. In addition, only if Arlington's net worth is less than $15 million at six months after the C.O. is issued for the newly constructed AmeriHost Property and the sale or sales have not already been consummated, then Arlington shall be required to deposit with Lessor ten percent (10%) of the aggregate purchase price (the "EARNEST MONEY") for the Affected Property and the Additional Property, as the case may be, and shall close the transaction or transactions within twelve (12) months of the C.O. being issued for the newly constructed AmeriHost Property or forfeit the Earnest Money, or the applicable portion thereof, to Lessor. The term "construction" shall include the construction of any new AmeriHost Property or the conversion of an existing property to the AmeriHost brand. In the case of a conversion, the purchase of the Affected Property and/or the Additional Property as requested above shall close within twelve (12) months of completion of the conversion or be deemed an Event of Default pursuant to Article VIII hereof. Notwithstanding any agreements between the parties contained herein, Arlington admits no liability and Lessor waives no rights with respect to the issue of the Area of Non-Competition as set forth in the Master Agreements. This Article VII shall survive and continue beyond the termination of the sale and purchase obligations of the parties contained in Article X. ARTICLE VIII DEFAULT Section 8.1 Event of Default. An Event of Default (herein so called) shall exist under this Agreement if any of the following occur: 9 (a) Base Rent Payment. Lessee breaches any of its obligations to pay Base Rent as provided in Section 3.1 hereof and in Sections 3.1 and 3.2 of any of the Property Leases subject to any notice and cure periods contained in the Property Leases. (b) Capital Expenditure Reserve Account. A breach by Lessee of its obligation to fund and maintain the minimum required aggregate amounts in the Capital Expenditure Reserve Account as provided in Section 4.1(a) hereof and Section 3.7(d) of the Property Leases subject to any notice and cure periods contained in the Property Leases. (c) FF&E Reserve Account. A breach by Lessee of its obligation to create, fund, and maintain the minimum required aggregate amounts in the FF&E Reserve Account as provided in Section 4.1(b) hereof and Section 3.7(f) of the Property Leases subject to any notice and cure periods contained in the Property Leases. (d) Failure of Lessee to replenish the Escrow within two (2) business days after written notice from Lessor. (e) Failure of Arlington to honor the terms of the Guaranties. (f) A default by Arlington under this Agreement (including, but not limited to, a failure to offer to purchase an Affected Property and Additional Property or to consummate the purchases as required pursuant to Article VII herein) or any promissory notes due Lessor will be deemed a "monetary" default under the Property Leases and this Agreement. Arlington shall have fifteen (15) days from notice of default from Lessor to cure such default unless a shorter cure period exists pursuant to this Agreement or the Property Leases. 10 8.2 Remedies. Upon the occurrence of an Event of Default, Lessor shall have the right to terminate this Agreement upon ten (10) days written notice to Lessee (which ten (10) day notice period shall run concurrently with any notice and cure periods contained in the Property Leases); in which event Lessor shall have all the rights and remedies as set forth in Section 12.2 of the Property Leases and this Agreement. ARTICLE IX MISCELLANEOUS Section 9.1 Modification, Amendments and Waivers. No modification, amendment or waiver of any provision of this Agreement shall be effective unless the same is in a writing signed by all parties to this Agreement. Section 9.2 Notices. All notices and other communications pursuant to this Agreement shall be in writing and personally served or mailed as provided in the Property Leases. Section 9.3 Successors and Assigns. The provisions of this Agreement shall be binding upon the parties hereto and all of their successors and assigns and inure to the benefit of the parties hereto and their permitted successors and assigns. Section 9.4 Termination. This Agreement shall terminate at such time as all of the Property Leases have terminated, except that the Escrow created under Article V and the Guaranties referenced in Article VI shall terminate on the terms and conditions therein provided. Section 9.5 Governing Law. This Agreement shall be governed by the laws of the State of Texas, without giving effect to the principles of conflicts of law thereof. 11 Section 9.6 Counterparts. This Agreement may be signed in one or more counterparts, each of which shall be an original, with the same force and effect as if the signatures thereto and hereto were upon the same instrument. Section 9.7 Waiver. Each party waives, to the extent permitted by applicable law, any right to a trial by jury in any proceedings brought by either party to enforce the provisions of this Agreement. Section 9.8 Time of the Essence. Time is of the essence of this Agreement. Section 9.9 Arlington and Lessee will not object to any transfer of assets, merger, consolidation or sale of Hotels among Lessor and its affiliates as long as such transaction does not affect Arlington's or Lessee's rights or obligations under the Property Leases or this Agreement or any amendments or modifications thereto. Section 9.10 To the extent any terms or provisions contained in this Agreement conflict with any terms or provisions contained in the Property Leases, this Agreement shall govern. ARTICLE X PROPERTY PURCHASES 10.1 Initial Property Purchase. Arlington has the option to buy one Hotel of its choice and another Hotel which Lessor chooses, with both purchases (the "INITIAL PURCHASE OPTION") to be closed by June 5, 2001. Lessor has identified the first property it selects to be the AmeriHost Inn, Hudsonville, Michigan (the "FIRST SELECTION"). 12 (a) If Arlington completes the Initial Purchase Option by the deadline described above, the rent increase set forth in Section 3.2 effective June 30, 2001 will not go into effect and be null and void. 10.2 Second Purchase. Arlington has a second option to buy one Hotel of its choice and another Hotel which Lessor chooses, with both purchases (the "SECOND PURCHASE OPTION") to be closed by June 5, 2002. Lessor will identify the second property it selects to be purchased by Arlington (the "SECOND SELECTION") at the closing of the First Selection. (a) If Arlington completes both the Initial Purchase Option and the Second Purchase Option by their respective deadlines described above, the rent increase set forth in Section 3.2 effective June 30, 2002 will not go into effect and be null and void. 10.3 Third Purchase. Arlington has a third option to buy one Hotel of its choice and one Hotel Lessor chooses, with both purchases (the "THIRD PURCHASE OPTION") to be closed by June 5, 2003. Lessor will identify the third property it selects to be purchased by Arlington (the "THIRD SELECTION") at the closing of the Second Selection. In any event, Arlington must have closed its purchase of the First Selection before it may buy a property of its choice under the Third Purchase Option. (a) If Arlington completes the Initial Purchase Option, the Second Purchase Option and the Third Purchase Option by their respective deadlines described above, the rent increase set forth in Section 3.2 effective June 30, 2003 will not go into effect and be null and void. 10.4 Fourth Purchase. Arlington has a fourth option to buy one Hotel of its choice and one Hotel which Lessor chooses, with both purchases (the "FOURTH PURCHASE OPTION") to be closed by June 5, 2004. Lessor will identify the fourth property it selects to be purchased by Arlington at the closing of the Third Selection. In any event, Arlington must have closed on its purchase of the 13 First Selection and Second Selection before it may buy a property of its choice under the Fourth Purchase Option. (a) If Arlington completes the Initial Purchase Option, the Second Purchase Option, the Third Purchase Option and the Fourth Purchase Option by their respective deadlines described above, the rent increase set forth in Section 3.2 effective June 30, 2004 will not go into effect and be null and void. 10.5 In the event that the Second Selection, Third Selection or Fourth Selection is one of the Hotels located at either Sycamore, Illinois; Macomb, Illinois; Marysville, Ohio; or Plainfield, Indiana and such selection or selections do not close by the prescribed deadline, then an automatic six (6) month extension to close the purchase of such property shall be granted. A six (6) month extension of the corresponding dates for rent increases referenced in Section 3.2 shall also be granted provided that: (i) Arlington is proceeding diligently toward closing the purchases as may be independently confirmed and determined by Lessor; and (ii) Arlington has advanced the sum of $200,000.00 to Lessor as a non-refundable deposit on which no interest shall be paid and such deposit shall be forfeited by Arlington if the corresponding purchase is not closed by the appropriate deadline as extended. 10.6 Upon the sale of each Hotel chosen by Arlington including an Affected Hotel described in Article VII, Lessor shall receive the Assigned Value (hereinsocalled) for the Hotel as reflected on Exhibit "E" dated January 24, 2001 attached hereto and initialed by Lessor and Lessee plus $150,000. Upon the sale of each Hotel chosen by Lessor, Lessor shall receive the Assigned Value for the Hotel as reflected on Exhibit "E" attached hereto plus $125,000. All costs from the sale of each Hotel are the sole responsibility of Arlington (i.e., Lessor is not responsible for any selling costs or for any upfront fees including, but not limited to, title premiums, recording fees, 14 prepayment penalties on related debt, assumption fees, or any tax or taxes levied by any local or state taxing authorities). 10.7 Upon request, Lessor shall provide financing to Arlington for up to three of the purchased Hotels, other than properties located in California, upon the following terms: Amount: 75% of sales price Rate: Prime + 1% floating Closing Costs: Arlington Points: 1 1/2% of the loan amount due and payable on the first anniversary of the note Prepayment Penalty: Year 1 - none Year 2 - 5 lockout Year 6 and thereafter 2% Other terms & conditions: Standard Lessor provisions
10.8 Upon the sale of a Hotel, Lessee shall receive a reduction in the amount of Base Rent paid equal to the associated lease payment due for such Hotel as indicated on Exhibit "E" attached hereto. In addition, 100% of the combined Capital Expenditure Reserve Account and the FF&E Reserve Account and the corresponding Base Rent in Escrow as well as any unused prepaid rent for each Hotel sold are to be released to Arlington immediately after the closing of each sale. 10.9 The purchase provisions of this Agreement shall terminate on December 31, 2004 and no further obligation for Lessor to offer any Hotel for sale under the above terms and conditions nor for Arlington to purchase any Hotel under the above terms and conditions shall exist. 10.10 In the event that Arlington is ready and able to close any selection or selections of Hotels by the deadline prescribed in Article X but cannot solely as a result of Lessor's gross negligence or bad faith conduct, then the rent increases set forth in Section 3.2 herein shall be postponed until such time as Lessor allows or facilitates a closing by Arlington. 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. LESSOR PMC COMMERCIAL TRUST By: /s/ LANCE B. ROSEMORE ------------------------------ Name: Lance B. Rosemore Title: President LESSOR PMCT SYCAMORE, L.P., By: PMCT AH-SYCAMORE, INC. its general partner By: /s/ LANCE B. ROSEMORE ------------------------------ Name: Lance B. Rosemore Title: President 16 LESSOR PMCT MACOMB, L.P., By: PMCT AH-MACOMB, INC. its general partner By: /s/ LANCE B. ROSEMORE ------------------------------- Name: Lance B. Rosemore Title: President LESSOR PMCT PLAINFIELD, L.P., By: PMCT AH, INC. its general partner By: /s/ LANCE B. ROSEMORE -------------------------------- Name: Lance B. Rosemore Title: President LESSOR PMCT MARYSVILLE, L.P., By: PMCT AH, INC. its general partner By: /s/ LANCE B. ROSEMORE ------------------------------- Name: Lance B. Rosemore Title: President 17 LESSEE ARLINGTON INNS, INC. formerly AMERIHOST INNS, INC. By: /s/ MICHAEL P. HOLTZ ---------------------------- Name: Michael P. Holtz Title: President AMERIHOST PROPERTIES, INC. doing business as ARLINGTON HOSPITALITY, INC. By: /s/ MICHAEL P. HOLTZ ---------------------------- Name: Michael P. Holtz Title: President 18 EXHIBIT "A" January 24, 2001 AmeriHost Inn - Anderson, California 2040 Deschutes Road Anderson, California 96007 AmeriHost Inn - Ashland, Ohio AmeriHost Inn - Mansfield, Ohio 741 US 250 East 180 East Hanley Road Ashland, Ohio 44805 Mansfield, Ohio 44903 AmeriHost Inn - Coopersville, Michigan 1040 O'Malley Drive Coopersville, Michigan 49404 AmeriHost Inn - Eagles Landing, Georgia AmeriHost Inn - McKinney, Texas 100 North Park Court 951 South Central Expressway Stockbridge, Georgia 30281 McKinney, Texas 75070 AmeriHost Inn - Grand Rapids, Michigan (South) AmeriHost Inn - Monroe, Michigan 7625 Caterpillar Court 14774 Laplaisance Road Grand Rapids, Michigan 49548 Monroe, Michigan 48161 AmeriHost Inn Grand - Rapids, Michigan (North) AmeriHost Inn - Mosinee, Wisconsin 2171 Holton Court 400 Orbiting Drive Walker, Michigan 49544 Mosinee, Wisconsin 54455 AmeriHost Inn - Mount Pleasant, Iowa 1100 North Grand Avenue Mt. Pleasant, Iowa 52641 AmeriHost Inn - Hudsonville, Michigan 3301 Highland Drive Hudsonville, Michigan 49426 AmeriHost Inn - Jackson, Tennessee AmeriHost Inn - Port Huron, Michigan 465 Vann Drive 1611 Range Road Jackson, Tennessee 38305 Port Huron, Michigan 48074 AmeriHost Inn - Kimberly, Wisconsin AmeriHost Inn - Rochelle, Illinois 761 Truman Street 567 East Highway 38 Kimberly, Wisconsin 54136 Rochelle, Illinois 61068 AmeriHost Inn - LaGrange, Georgia AmeriHost Inn - Shippensburg, Pennsylvania 107 Hoffman Drive 125 Walnut Bottom Road LaGrange, Georgia 30240 Shippensburg, Pennsylvania 17257
AmeriHost Inn - Smyrna, Georgia AmeriHost Inn - Sycamore, Illinois 5130 S. Cobb Drive 1475 South Peace Road Smyrna, Georgia 30082 Sycamore, Illinois AmeriHost Inn - Storm Lake, Iowa AmeriHost Inn - Macomb, Illinois 1726 Lake Avenue 1646 N. Lafayette Expressway Storm Lake, Iowa 50588 Macomb, Illinois 61455 AmeriHost Inn - Tupelo, Mississippi AmeriHost Inn - Marysville, Ohio 625 Spicer Drive 16420 Allenby Drive Tupelo, Mississippi 38801 Marysville, Ohio 43040 AmeriHost Inn - Warrenton, Missouri AmeriHost Inn - Plainfield, Indiana 425 West Old Highway 40 6105 Cambridge Way Warrenton, Missouri 63383 Plainfield, Indiana 46168 AmeriHost Inn - Wooster, Ohio (East) 2055 E. Lincolnway Wooster, Ohio 44691 AmeriHost Inn - Wooster, Ohio (North) 789 East Milltown Road Wooster, Ohio 44691 AmeriHost Inn - Yreka, California 148 Moonlit Oaks Ave. Yreka, California 96097
EX-10.24 4 c84140exv10w24.txt AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT EXHIBIT 10.24 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of the 30th day of April, 2003 (the "Agreement"), is executed by and between ARLINGTON HOSPITALITY, INC., a Delaware corporation (the "Borrower"), whose address is 2355 S. Arlington Heights Road, Arlington Heights, Illinois 60005, and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"), whose address is 135 South La Salle Street, Chicago, Illinois 60603. RECITALS WHEREAS, Bank and Borrower are parties to that certain Loan and Security Agreement dated as of February 1, 2002 (the "Original Agreement"), which Original Agreement was amended by that certain First Amendment to Loan and Security Agreement dated as of August 9, 2002 (the "First Amendment") and by that certain Second Amendment to Loan and Security Agreement dated as of December 10, 2002 (the "Second Amendment") (the Original Agreement, as amended by the First Amendment and the Second Amendment, referred to herein as the "Loan Agreement"); WHEREAS, Borrower and Bank do desire to further amend and restate the Loan Agreement for the purposes of extending the maturity of the Revolving Loan and modifying certain other provisions of the Loan Agreement; and WHEREAS, Borrower has requested that Bank waive Borrower's non-compliance with certain covenant requirements more specifically described below; and WHEREAS, Bank is agreeable to such waiver, subject to adoption of the amendments to the Loan Agreement and other terms and conditions set forth herein. NOW, THEREFORE, in consideration of the renewal by the Bank of the line of credit and the mutual covenants and promises contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower and Bank agree as follows: 1. DEFINITIONS. 1.1 Defined Terms. For the purposes of this Agreement, the following capitalized words and phrases shall have the meanings set forth below. "Bankruptcy Code" shall mean the United States Bankruptcy Code, as now existing or hereafter amended. "Business Day" shall mean any day other than a Saturday, Sunday or a legal holiday on which banks are authorized or required to be closed for the conduct of commercial banking business in Chicago, Illinois. "Capital Expenditures" shall mean expenditures (including Capital Lease obligations which should be capitalized under GAAP) for the acquisition of fixed assets which are required to be capitalized under GAAP. "Capital Lease" shall mean, as to any Person, a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such Person as lessee that is, or should be, in accordance with Financial Accounting Standards Board Statement No. 13, as amended from time to time, or, if such Statement is not then in effect, such statement of GAAP as may be applicable, recorded as a "capital lease" on the balance sheet of the Borrower prepared in accordance with GAAP. "Cendant" shall mean Cendant Finance Holding Corporation, a Delaware corporation. "Cendant Agreement" shall mean that certain Royalty Sharing Agreement dated as of September 30, 2000 among Borrower, Cendant and AmeriHost Franchise Systems, Inc. ("Franchisor"). "Closing Date" shall mean April 30, 2003 or such later date which Borrower and the Bank shall agree. "Collateral" shall have the meaning set forth in Section 6.1. "Contingent Liability" and "Contingent Liabilities" shall mean, respectively, each obligation and liability of the Borrower or any of its Subsidiaries and all such obligations and liabilities of the Borrower or any of its Subsidiaries incurred pursuant to any agreement, undertaking or arrangement by which the Borrower or any of its Subsidiaries: (a) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, dividend, obligation or other liability of any other Person in any manner (other than by endorsement of instruments in the course of collection), including without limitation, any indebtedness, dividend or other obligation which may be issued or incurred at some future time; (b) guarantees the payment of dividends or other distributions upon the shares or ownership interest of any other Person; (c) undertakes or agrees (whether contingently or otherwise): (i) to purchase, repurchase, or otherwise acquire any indebtedness, obligation or liability of any other Person or any property or assets constituting security therefor, (ii) to advance or provide funds for the payment or discharge of any indebtedness, obligation or liability of any other Person (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, working capital or other financial condition of any other Person, or (iii) to make payment to any other Person other than for value received; (d) agrees to lease property or to purchase securities, property or services from such other Person with the purpose or intent of assuring the owner of such indebtedness or obligation of the ability of such other Person to make payment of the indebtedness or obligation; (e) to induce the issuance of, or in connection with the issuance of, any letter of credit for the benefit of such other Person; or (f) undertakes or agrees otherwise to assure a creditor against loss. The amount of any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or 2 maximum permitted principal amount, if larger) of the indebtedness, obligation or other liability guaranteed or supported thereby. "Debt Service Charges" shall mean, for any period, the sum of: (a) all interest, charges and related expenses payable with respect to that fiscal period to a lender in connection with borrowed money or the deferred purchase price of assets that are treated as interest in accordance with GAAP, plus (b) the aggregate amount of principal payable on Indebtedness with respect to that fiscal period, plus (c) the portion of rent payable with respect to that fiscal period under Capital Leases that should be treated as interest in accordance with GAAP, plus (d) all charges paid or payable (without duplication) during that period with respect to any Interest Rate Agreements. "Default Rate" shall mean a per annum rate of interest equal to the Prime Rate plus five percent (5%) per annum. "Depreciation" shall mean the total amounts added to depreciation, amortization, obsolescence, valuation and other proper reserves, as reflected on the consolidated financial statement of Borrower and its Subsidiaries and determined in accordance with GAAP. "EBITDA" shall mean, for any period, the sum of the following: (a) Net Income (excluding extraordinary and unusual items and income or loss attributable to equity in any affiliated corporation or Subsidiary but including net deferred incentive fees due from Cendant pursuant to the Cendant Agreement) for such period, plus (b) Interest Charges, plus (c) income taxes payable or accrued, plus (d) Depreciation for such period, plus (e) all other non-cash charges, minus (f) that portion of net income arising out of the sale of assets outside of the ordinary course of business (to the extent not previously excluded under clause (a) of this definition), in each case to the extent included in determining Net Income for such period. "Employee Plan" includes any pension, stock bonus, employee stock ownership plan, retirement, disability, medical, dental or other health plan, life insurance or other death benefit plan, profit sharing, deferred compensation, stock option, bonus or other incentive plan, vacation benefit plan, severance plan or other employee benefit plan or arrangement, including, without limitation, those pension, profit-sharing and retirement plans of the Borrower and/or any of its Subsidiaries described from time to time in the financial statements of the Borrower and any pension plan, welfare plan, defined benefit pension plans (as defined in ERISA) or any multi-employer plan, maintained or administered by the Borrower and/or any of its Subsidiaries or to which the Borrower is a party or may have any liability or by which the Borrower and/or any of its Subsidiaries is bound. "Environmental Laws" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to the business or facilities owned or operated by the Borrower or any of its subsidiaries, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes in the environment (including, without limitation, ambient air, surface water, land surface 3 or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" shall mean any of the events or conditions set forth in Section 11 hereof. "GAAP" shall mean generally accepted accounting principles, using the accrual basis of accounting and consistently applied with prior periods, provided, however, that GAAP with respect to any interim financial statements or reports shall be deemed subject to fiscal yearend adjustments and footnotes made in accordance with GAAP. "Hazardous Materials" shall mean any hazardous, toxic or dangerous substance, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials or wastes that are or become regulated under any Environmental Law (including without limitation, any that are or become classified as hazardous or toxic under any Environmental Law). "Indebtedness" shall mean at any time (a) all Liabilities of the Borrower or any of its Subsidiaries, (b) all Capital Lease obligations of the Borrower or any of its Subsidiaries, (c) all other debt, secured or unsecured, created, issued, incurred or assumed by the Borrower or any of its Subsidiaries for money borrowed or for the deferred purchase price of any fixed or capital asset, (d) indebtedness secured by any Lien existing on property owned by the Borrower or any of its Subsidiaries whether or not the Indebtedness secured thereby has been assumed, and (e) all Contingent Liabilities of the Borrower or any of its Subsidiaries whether or not reflected on its balance sheet. "Indemnified Party" and "Indemnified Parties" shall mean, respectively, each of the Bank and any parent corporations, affiliated corporations or subsidiaries of the Bank, and each of their respective officers, directors, employees, attorneys and agents, and all of such parties and entities. "Letter of Credit" and "Letters of Credit" shall mean, respectively, a letter of credit and all such letters of credit issued by the Bank, in its sole discretion, upon the execution and delivery by the Borrower and the acceptance by the Bank of a Master Letter of Credit Agreement and an application for Letter of Credit, as set forth in SECTION 2.5 of this Agreement. "Letter of Credit Obligations" shall mean, at any time, an amount equal to the aggregate of the original face amounts of all Letters of Credit minus the sum of (i) the amount of any reductions in the original face amount of any Letter of Credit which did not result from a draw thereunder, (ii) the amount of any payments made by the Bank with respect to any draws made under a Letter of Credit for which the Borrower has reimbursed the Bank, (iii) the amount 4 of any payments made by the Bank with respect to any draws made under a Letter of Credit which have been converted to a Revolving Loan as set forth in SECTION 2.5, and (iv) the portion of any issued but expired Letter of Credit which has not been drawn by the beneficiary thereunder. For purposes of determining the outstanding Letter of Credit Obligations at any time, the Bank's acceptance of a draft drawn on the Bank pursuant to a Letter of Credit shall constitute a draw on the applicable Letter of Credit at the time of such acceptance. "Liabilities" shall mean at all times all liabilities of the Borrower or any of its Subsidiaries that would be shown as such on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP. "Lien" shall mean any mortgage, pledge, hypothecation, judgment lien or similar legal process, title retention lien, or other lien or security interest, including, without limitation, the interest of a vendor under any conditional sale or other title retention agreement and the interest of a lessor under a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such Person as lessee that is, or should be, a Capital Lease on the consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP. "Loans" shall mean, collectively, all Revolving Loans made by the Bank to the Borrower and all Letter of Credit Obligations under and pursuant to this Agreement. "Loan Documents" shall mean the agreements and documents delivered to the Bank as set forth in Sections 3.1 and 3.2. "Loan-to-Value Ratio" shall mean (i) in respect of any individual Mortgaged Premises, the ratio of (a) Indebtedness of the Borrower or any Subsidiary secured by Lien on such Mortgaged Premises to (b) the value of the Mortgaged Premises disclosed by the appraisal of such Mortgaged Premises most recently accepted by the Bank, and (ii) in respect of all of the Mortgaged Premises and Other Property of the Borrower and all Wholly-Owned Subsidiaries, the ratio of (a) the aggregate consolidated Indebtedness of the Borrower and all Wholly-Owned Subsidiaries secured by a Lien on any Mortgaged Premises or Other Property to (b) the aggregate value of the Mortgaged Premises and Other Property as determined by the Bank, in its sole discretion. "Maturity Date" shall be April 30, 2004, unless extended by the Bank pursuant to any modification, extension or renewal note executed by the Borrower and accepted by the Bank in its sole and absolute discretion in substitution for the Substitute Revolving Note. "Maximum Letter of Credit Obligation" shall mean the Revolving Loan Commitment less the aggregate amount of all Revolving Loans outstanding at any time. "Mortgage" shall mean those second or junior mortgages or deeds of trust made by Borrower or any of its Subsidiaries in favor of the Bank. "Mortgaged Premises" shall mean the real estate and improvements described in Exhibit B attached hereto and the leasehold interests and improvements owned by the Ohio Partnership. 5 "Net Income" shall mean, with respect to any period, the amount shown opposite the caption "Net Income" or a similar caption on the consolidated financial statements of the Borrower, and its Subsidiaries prepared in accordance with GAAP. "Note" shall mean the Amended and Restated Revolving Note referred to in Section 4.1. "Obligation" shall mean the Loans, as evidenced by the Note, all interest accrued thereon, any fees due the Bank hereunder, any expenses incurred by the Bank hereunder and any and all other liabilities and obligations of the Borrower (and of any partnership in which the Borrower is or may be a partner) to the Bank, howsoever created, arising or evidenced, and howsoever owned, held or acquired, whether now or hereafter existing, whether now due or to become due, direct or indirect, absolute or contingent, and whether several, joint or joint and several, including, but not limited to, any Interest Rate Agreements. "Obligor" shall mean the Borrower, any Subsidiary which makes a Mortgage in favor of the Bank, any guarantor, accommodation endorser, third party pledgor, or any other party liable with respect to the Obligations. "Ohio Partnership" shall mean Athens Motel Associates Limited Partnership II, an Ohio limited partnership. "Other Properties" shall mean any and all real property heretofore presently or hereafter, owned by Borrower or any Subsidiary, excluding the Mortgaged Premises, and any interest of any kind in improvements thereon. "Person" shall mean any individual, partnership, limited liability company, corporation, trust, joint venture, joint stock company, association, unincorporated organization, government or agency or political subdivision thereof, or other entity. "Prime Rate" shall mean the floating per annum rate of interest which at any time, and from time to time, shall be most recently announced by the Bank as its Prime Rate, which is not intended to be the Bank's lowest or most favorable rate of interest at any one time. The effective date of any change in the Prime Rate shall for purposes hereof be the date the Prime Rate is changed by the Bank. The Bank shall not be obligated to give notice of any change in the Prime Rate. "Regulatory Change" shall mean the introduction of, or any change in any applicable law, treaty, rule, regulation or guideline or in the interpretation or administration thereof by any governmental authority or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or its lending office. "Revolving Interest Rate" shall mean the Prime Rate plus two and 50/100ths percent 2.5% per annum; provided, however, that the Revolving Interest Rate shall never be less than six and 75/100ths percent (6.75%) per annum. 6 "Revolving Loan" and "Revolving Loans" shall mean, respectively, each direct advance and the aggregate of all such direct advances, from time to time made by the Bank to the Borrower under and pursuant to this Agreement, as set forth in SECTION 2.1 of this Agreement. "Revolving Loan Availability" shall mean at any time, the Revolving Loan Commitment less the Letter of Credit Obligations. "Revolving Loan Commitment" shall mean (a) Six Million Five Hundred Thousand and 00/100 Dollars ($6,500,000.00) until September 29, 2003, (b) Six Million and 00/100 Dollars ($6,000,000.00) from September 30, 2003 to February 27, 2004 and (c) Five Million Five Hundred Thousand and 00/100 Dollars ($5,500,000.00) from and after February 28, 2004; in each case, as may be further reduced by (i) an amount equal to the net proceeds to Borrower or any Subsidiary from the sale of any Mortgaged Premises, after payment of the Senior Mortgage Indebtedness thereon and costs of sale of such Mortgaged Premises (except to the extent the Bank, in its sole discretion, agrees to accept a Mortgage on a Substitute Mortgaged Premises in lieu of a further reduction of its commitment hereunder) or (ii) such other reserves as the Bank determines in its sole discretion. "Revolving Note" shall have the meanings set forth in Section 4.1 hereof. "Senior Mortgage Indebtedness" shall mean the Indebtedness of Borrower or any Subsidiary existing on the date hereof which is disclosed on the financial statements referred to in Section 7 and secured by one of the Senior Mortgages. "Senior Mortgages" shall mean those (i) first priority mortgages on the Mortgaged Premises listed on Exhibit B attached hereto or (ii) any other Indebtedness of Borrower or any Subsidiary existing on the date hereof which is disclosed on the financial statements referred to in Section 7 and secured by a Lien on any Other Property. "Subordinated Debt" shall mean that portion of the Liabilities of the Borrower or any Subsidiary which is subordinated to the Obligations in a manner satisfactory to the Bank, including, but not limited to, right and time of payment of principal and interest. "Substitute Mortgaged Premises" shall mean such real estate and/or improvements, if any, and Mortgage in favor of the Bank thereon, as may be accepted by the Bank, in its sole discretion, in lieu of a further reduction of the Revolving Loan Commitment. "Subsidiary" and "Subsidiaries" shall mean, respectively, each and all such corporations, partnerships, limited partnerships, limited liability companies, limited liability partnerships or other entities of which or in which the Borrower owns directly or indirectly fifty percent (50.00%) or more of (i) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such entity if a corporation, (ii) the management authority and capital interest or profits interest of such entity, if a partnership, limited partnership, limited liability company, limited liability partnership, joint venture or similar entity, or (iii) the beneficial interest of such entity, if a trust, association or other unincorporated organization. 7 "Tangible Assets" shall mean the total of all assets appearing on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP (with Inventory being valued at the lower of cost or market), after deducting all proper reserves (including reserves for Depreciation, obsolescence and amortization) less the sum of (i) goodwill, patents, trademarks, prepaid expenses, deposits held as security deposits on lease contracts, franchise fees and other similar assets, deferred charges and other personal property which is classified as intangible property in accordance with GAAP, and (ii) any amounts due from shareholders, affiliates, officers or employees of the Borrower or any Subsidiary. "Tangible Net Worth" shall mean at any time the total of Tangible Assets less Liabilities plus Subordinated Debt. "Total Liabilities to Worth Ratio" shall mean a ratio of (a) consolidated Liabilities minus deferred income to (b) consolidated Tangible Net Worth plus the sum of (i) deferred taxes, (ii) deferred income, including deferred loan costs and deferred lease costs, and (iii) deposits held as security deposits on lease contracts, franchise fees and other similar assets, in each case of Borrower and its Subsidiaries. "UCC" shall mean the Uniform Commercial Code in effect in Illinois from time to time. "Wholly-Owned Subsidiary" shall mean any Subsidiary of which or in which the Borrower owns directly or indirectly 100% of (i) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such Person, if it is a corporation, (ii) the capital interest or profits interest of such Persons, if it is a partnership, joint venture or similar entity, or (iii) the beneficial interest of such Persons, if it is a trust, association or other unincorporated organization. 1.2 Accounting Terms. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given them in accordance with GAAP. Calculations and determinations of financial and accounting terms used and not otherwise specifically defined hereunder and the preparation of financial statements to be furnished to the Bank pursuant hereto shall be made and prepared, both as to classification of items and as to amount, in accordance with GAAP as used in the preparation of the financial statements of the Borrower on the date of this Agreement. If any changes in accounting principles or practices from those used in the preparation of the financial statements are hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or any successor thereto or agencies with similar functions), which results in a material change in the method of accounting in the financial statements required to be furnished to the Bank hereunder or in the calculation of financial covenants, standards or terms contained in this Agreement, the parties hereto agree to enter into good faith negotiations to amend such provisions so as equitably to reflect such changes to the end that the criteria for evaluating the financial condition and performance of the Borrower will be the same after such changes as they were before such changes; and if the parties fail to agree on the amendment of such provisions, the Borrower will furnish financial statements in accordance with such changes but shall provide calculations for all financial covenants, perform all financial covenants and 8 otherwise observe all financial standards and terms in accordance with applicable accounting principles and practices in effect immediately prior to such changes. Calculations with respect to financial covenants required to be stated in accordance with applicable accounting principles and practices in effect immediately prior to such changes shall be reviewed and certified by the Borrower's accountants. 1.3 Other Terms Defined in UCC. All other capitalized words and phrases used herein and not otherwise specifically defined shall have the respective meanings assigned to such terms in the UCC, as amended from time to time, to the extent the same are used or defined therein. 1.4 Other Definitional Provisions; Construction. Whenever the context so requires, the neuter gender includes the masculine and feminine, the single number includes the plural, and vice versa, and in particular the word "Borrower" shall be so construed. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and references to Article, Section, Subsection, Annex, Schedule, Exhibit and like references are references to this Agreement unless otherwise specified. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in accordance with SECTION 13.3 hereof. References in this Agreement to any party shall include such party's successors and permitted assigns. References to any "Section" shall be a reference to such Section of this Agreement unless otherwise stated. To the extent any of the provisions of the other Loan Documents are inconsistent with the terms of this Loan Agreement, the provisions of this Loan Agreement shall govern. 2. COMMITMENT OF THE BANK. 2.1 Revolving Loans. (a) Revolving Loan Commitment. Subject to the terms and conditions of this Agreement and the other Loan Documents, and in reliance upon the representations and warranties of the Borrower set forth herein and in the other Loan Documents, the Bank agrees to make such Revolving Loans at such times as the Borrower may from time to time request until, but not including, the Maturity Date, and in such amounts as the Borrower may from time to time request, provided, however, that the aggregate principal balance of all Revolving Loans outstanding at any time shall not exceed the Revolving Loan Availability. Borrower acknowledges that the amount of the Revolving Loan Commitment was determined by the Bank based on the Bank's analysis of the value of the Collateral as of Closing, including the aggregate net equity in respect of the Mortgaged Premises which, due to the nature of such Collateral, may be difficult to establish or highly variable. Accordingly, notwithstanding any other term or provision hereof to the contrary, Bank has the right from time to time to periodically determine and redetermine the value of the Collateral, to establish (based on advance percentages and eligibility criteria established 9 by the Bank and communicated to Borrower from time to time) borrowing base formulas in respect of Accounts and Equipment (as defined in the UCC) and to establish reserves, to require borrowing base certificates and to require such other actions on the part of Borrower as Bank in its discretion may deem necessary or appropriate. Revolving Loans made by the Bank may be repaid and, subject to the terms and conditions hereof, borrowed again up to, but not including the Maturity Date unless the Revolving Loans are otherwise terminated or extended as provided in this Agreement. The Revolving Loans shall be used by the Borrower for the purpose of supporting the working capital and letter of credit needs of the Borrower. (b) Revolving Loan Interest and Payments. Except as otherwise provided in this SECTION 2.1(b), the principal amount of the Revolving Loans outstanding from time to time shall bear interest at the Revolving Interest Rate. Accrued and unpaid interest on the unpaid principal balance of all Revolving Loans outstanding from time to time, shall be due and payable monthly, in arrears, commencing on May 1, 2003 and continuing on the first day of each calendar month thereafter, and on the Maturity Date. Any amount of principal or interest on the Revolving Loans which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest payable on demand at the Default Rate. (c) Revolving Loan Principal Repayments. (i) Mandatory Principal Prepayments. All Revolving Loans hereunder shall be repaid by the Borrower on the Maturity Date, unless payable sooner pursuant to the provisions of this Agreement. In the event the aggregate outstanding principal balance of all Revolving Loans and Letter of Credit Obligations hereunder exceed the Revolving Loan Availability, the Borrower shall, without notice or demand of any kind, immediately make such repayments of the Revolving Loans or take such other actions as shall be necessary to eliminate such excess. In the event the Borrower or any Wholly-Owned Subsidiary shall sell, transfer or otherwise dispose of any of the Mortgaged Premises, the Bank may, in its sole discretion, require that Borrower make a mandatory repayment of the Revolving Loans in an amount equal to the proceeds of the sale of such Mortgaged Premises, after payment of the Senior Mortgage Indebtedness thereon and costs of sale of the Mortgaged Premises. (ii) Optional Prepayments. The Borrower may from time to time prepay the Revolving Loans, in whole or in part, without any prepayment penalty whatsoever, subject to the following conditions: (i) each partial prepayment shall be in an amount equal to $10,000.00 or a higher integral multiple of $5,000; and (ii) any prepayment of the entire principal balance of the 10 Loans shall include accrued interest on such Loans to the date of such prepayment and payment in full of all other Obligations (including payment in full of the fees described in Section 3.6 below) due and payable under this Agreement. 2.2 [INTENTIONALLY OMITTED] 2.3 [INTENTIONALLY OMITTED] 2.4 Interest and Fee Computation; Collection of Funds. Except as otherwise set forth herein, all interest and fees shall be calculated on the basis of a year consisting of 360 days and shall be paid for the actual number of days elapsed. Principal payments submitted in funds not immediately available shall continue to bear interest until collected. If any payment to be made by the Borrower hereunder or under the Note shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing any interest in respect of such payment. 2.5 Letters of Credit. Subject to the terms and conditions of this Agreement and the Master Letter of Credit Agreement dated as of February 1, 2002 between Bank and Borrower ("the Master Letter of Credit Agreement") and, upon the execution and delivery by the Borrower, and the acceptance by the Bank, in its sole and absolute discretion, of an application for letter of credit, the Bank agrees to issue for the account of the Borrower out of the Revolving Loan Availability, such Letters of Credit in the standard form of the Bank and otherwise inform and substance acceptable to the Bank from time to time during the term of this Agreement, provided that the Letter of Credit Obligations may not at any time exceed the Maximum Letter of Credit Obligation and provided, further, that no Letter of Credit shall have an expiration date later than twenty five (25) days prior to the Maturity Date. The amount of any payments made by the Bank with respect to draws made by a beneficiary under a Letter of Credit for which the Borrower has failed to reimburse the Bank upon the earlier of (i) the Bank's demand for repayment, or (ii) five (5) days from the date of such payment to such beneficiary by the Bank, shall be deemed to have been converted to a Revolving Loan as of the date such payment was made by the Bank to such beneficiary. Upon the occurrence of an Event of a Default and at the option of the Bank, all Letter of Credit Obligations shall be converted to Prime Loans, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. 3. CONDITIONS OF BORROWING. Notwithstanding any other provision of this Agreement, the Bank shall not be required to disburse or make all or any portion of the Loans if any of the following conditions shall have occurred. 3.1 Closing Documents. The Borrower shall have failed to execute and deliver to the Bank any of the following Loan Documents at or prior to the Closing Date, all of which must be satisfactory to the Bank and the Bank's counsel in form, substance and execution: (a) Loan Agreement. This Agreement duly executed by the Borrower. 11 (b) Revolving Note. An Amended and Restated Revolving Note duly executed by the Borrower in the form attached hereto as Exhibit "A". (c) Constitutive Documents. Certified copies of Borrower's and each Obligor's articles of incorporation and by-laws, or a certificate of Borrower's and each Obligor's Secretary, confirming that there have been no changes or describing any changes to the articles of organization and by-laws of Borrower or such Obligor since February 1, 2002; (d) Resolutions. Certified resolutions of the board of directors and/or shareholders of the Borrower and each Obligor authorizing the execution, delivery and performance of this Agreement and/or the Loan Documents to which each is a party. (e) Borrower's Attorney's Opinion. An opinion of counsel to the Borrower and each Obligor in form and substance acceptable to the Bank. (f) Amendments to Mortgages. Amendments to the Mortgages to and for the benefit of the Bank on each of the Mortgaged Premises, executed by Borrower or the Subsidiary of Borrower which is the record fee owner of such Mortgaged Premises, in form and substance acceptable to the Bank, conforming each such Mortgage to the terms of this Agreement. (g) Appraisals. If requested by Bank, updated appraisals on any one or more of the Mortgaged Premises prepared by an appraiser acceptable to Bank. (h) Updates to Title Insurance Commitments. Updates to title insurance commitments issued by First American Title Company or other title insurance company acceptable to Bank (collectively, the "Title Insurance Company"), indicating that no judgments, tax or other liens (other than the Liens permitted under Section 8.2 and Liens in favor of the Bank) are of record or on file encumbering any portion of such Mortgaged Premises and that no foreclosure or other adverse proceedings have been commenced in respect of any such Mortgaged Premises. (i) Consent. Consent satisfactory to the Bank from the mortgagee having a Senior Mortgage on the Mortgaged Premises located in Niles, Illinois, consenting to the second mortgage on such Mortgaged Premises in favor of the Bank, in form and substance acceptable to the Bank. (j) UCC Searches. Uniform Commercial Code searches, confirming the Bank's first priority security interests in the Collateral and indicating that no judgments, tax or other liens (other than the Liens permitted under Section 8.2 and Liens in favor of the Bank) are of record or on file encumbering any portion of the Collateral. (k) Insurance. Insurance policies (or binders acceptable to the Bank) with premiums prepaid in companies, forms, amounts and coverage satisfactory to the Bank, identifying the Bank as lender's loss payee or mortgagee's loss payee and as an additional insured and containing waiver of subrogation and mortgage clauses in favor of the Bank. Without limiting the generality of the foregoing, such policies shall include all insurance required to be carried by the Borrower under the Mortgages. The Borrower will also provide casualty insurance against loss and damage by all risks of physical loss or damage, including 12 fire, windstorm, flood, earthquake and other risks covered by the so-called extended coverage endorsement in amounts not less than the full insurable replacement value of all improvements, fixtures and equipment from time to time on the land and bearing a replacement cost agreed amount endorsement. (1) Additional Documents. Such other certificates, financial statements, schedules, resolutions, opinions of counsel, notes and other documents which are provided for hereunder or which the Bank may require, including, but not limited to, evidence acceptable to the Bank that there are no defaults, or events which would be defaults upon the passage of time or the giving of notice, under the Cendant Agreement. 3.2 Event of Default. Any Event of Default, or any event which, with notice or lapse of time or both would constitute an Event of Default, shall have occurred and be continuing. 3.3 Adverse Changes. A material adverse change in the financial condition or affairs of the Borrower, as determined in the Bank's sole and complete discretion, shall have occurred. 3.4 Litigation. Any litigation or governmental proceeding shall have been instituted against the Borrower or any of its officers or shareholders which in the discretion of the Bank, reasonably exercised, materially adversely affects the financial condition or continued operation of the Borrower. 3.5 Representations and Warranties. Any representation or warranty of the Borrower contained herein or in any Loan Document shall be untrue or incorrect in any material way as of the date of any Loan as though made on such date, except to the extent such representation or warranty expressly relates to an earlier date. 3.6 Fees. The Borrower shall have failed to pay to the Bank a renewal fee in the amount of One Hundred Thirty Thousand and 00/100 Dollars ($130,000.00), payable as follows: (a) $30,000 upon execution of this Agreement, (b) $50,000 on August 1, 2003, and (c) $50,000 on December 1, 2003. Bank acknowledges receipt of a waiver fee in the amount of Twenty Thousand Dollars ($20,000) in respect of the waivers described in Section 13.19 below. 4. NOTES EVIDENCING LOANS. 4.1 Revolving Note. The Revolving Loans and the Letter of Credit Obligations shall be evidenced by a single Amended and Restated Revolving Note (together with any and all renewal, extension, modification or replacement notes executed by the Borrower and delivered to the Bank and given in substitution therefor, the "Revolving Note") in the form of Exhibit "A" attached hereto, duly executed by the Borrower and payable to the order of the Bank. At the time of the initial disbursement of a Revolving Loan and at each time an additional Revolving Loan shall be requested hereunder or a repayment made in whole or in part thereon, an appropriate notation thereof shall be made on the books and records of the Bank. All amounts recorded shall be, absent demonstrable error, conclusive and binding evidence of (i) the principal amount of the Revolving Loans advanced hereunder and the amount of all Letter of Credit Obligations, (ii) any unpaid interest owing on the Revolving Loans, and (iii) all amounts repaid on the Revolving Loans or the Letter of Credit Obligations. The failure to record any such amount or any error in 13 recording such amounts shall not, however, limit or otherwise affect the obligations of the Borrower under the Revolving Note to repay the principal amount of the Revolving Loans, together with all interest accruing thereon. 5. MANNER OF BORROWING. Each Loan shall be made available to the Borrower upon its request, from any Person whose authority to so act has not been revoked by the Borrower in writing previously received by the Bank. A request for a Loan must be received by no later than 11:00 a.m. Chicago, Illinois time, on the day it is to be funded. The proceeds of each Loan shall be made available at the office of the Bank by credit to the account of the Borrower or by other means requested by the Borrower and acceptable to the Bank. Each Letter of Credit shall be issued by the Bank pursuant to the Master Letter of Credit Agreement, and the execution and delivery by the Borrower and the acceptance by the Bank, in its sole discretion, of the Bank's standard application for Letter of Credit and the payment by the Borrower of the Bank's fees charged in connection therewith. In addition to all other applicable fees, charges and/or interest payable by the Borrower pursuant to the Master Letter of Credit Agreement or otherwise payable in accordance with the Bank's standard letter of credit fee schedule, all standby Letters of Credit issued under and pursuant to this Agreement shall bear an annual fee equal to one and one-quarter percent (1.25%) of the face amount of such standby Letter of Credit, payable by the Borrower on or before the issuance of such Letter of Credit by the Bank and annually thereafter on the same date unless and until (i) such Letter of Credit has expired or has been returned to the Bank, or (ii) the Bank has paid the beneficiary thereunder the full face amount of such Letter of Credit. All Letters of Credit other than standby Letters of Credit shall bear such fees, costs and interest as charged by the Bank and shall contain such other terms as set forth in the Master Letter of Credit Agreement and the Bank's standard letter of credit fee schedule. The Bank is authorized to rely on any written, verbal, electronic, telephonic or telecopy loan requests which the Bank believes in its good faith judgment to emanate from a properly authorized representative of the Borrower, whether or not that is in fact the case. The Borrower does hereby irrevocably confirm, ratify and approve all such advances by the Bank and does hereby indemnify the Bank against losses and expenses (including court costs, attorneys' and paralegals' fees) and shall hold the Bank harmless with respect thereto. 6. SECURITY FOR THE OBLIGATIONS. 6.1 Security for Obligations. As security for the payment of the Obligations, the Borrower does hereby pledge, assign, transfer and deliver to the Bank and does hereby grant to the Bank a continuing and unconditional security interest in and to any and all property of the Borrower, of any kind or description, tangible or intangible, whether now existing or hereafter arising or acquired, including, but not limited to, the following (all of which property, along with the products and proceeds therefrom, and the additional collateral referred to in Section 6.2 below, are individually and collectively referred to as the "Collateral"): 14 (a) all property of, or for the account of, the Borrower now or hereafter coming into the possession, control or custody of, or in transit to, the Bank or any agent or bailee for the Bank or any parent, affiliate or subsidiary of the Bank or any participant with the Bank in the Loans (whether for safekeeping, deposit, collection, custody, pledge, transmission or otherwise), including all earnings, dividends, interest, or other rights in connection therewith and the products and proceeds therefrom, including the proceeds of insurance thereon; and (b) the additional property of the Borrower, whether now existing or hereafter arising or acquired, and wherever now or hereafter located, together with all additions and accessions thereto, substitutions for, and replacements, products and proceeds therefrom, and all of the Borrower's books and records and recorded data relating thereto (regardless of the medium of recording or storage), together with all of the Borrower's right, title and interest in and to all computer software required to utilize, create, maintain and process any such records or data on electronic media, identified and set forth as follows: (i) All Accounts and all Goods whose sale, lease or other disposition by the Borrower has given rise to Accounts and have been returned to, or repossessed or stopped in transit by, the Borrower, or rejected or refused by an Account Debtor; (ii) All Inventory, including, without limitation, raw materials, work-in-process and finished goods; (iii) All Goods (other than Inventory), including, without limitation, embedded software, Equipment, vehicles, furniture and Fixtures; (iv) All Software and computer programs; (v) All Securities, Investment Property, Financial Assets and Deposit Accounts; (vi) All Chattel Paper, Electronic Chattel Paper, Instruments, Documents, Letter of Credit Rights, all proceeds of letters of credit, Health care insurance Receivables, Supporting Obligations, notes secured by real estate, Commercial Tort Claims and General Intangibles, including Payment Intangibles; and (vii) All insurance policies and proceeds insuring the foregoing property or any part thereof, including unearned premiums. 6.2 Additional Collateral. In addition, the Obligations are also secured by the Mortgages, a Collateral Assignment, Security Agreement and Pledge Agreement made by Arlington Inns of Ohio, Inc. and API/Athens, OH, Inc. dated as of February 1, 2002 pledging certain partnership interests in the Ohio Partnership and a Collateral Assignment and Security Agreement dated as 15 of February 1. 2002 collaterally assigning to Bank Borrower's rights under the Cendant Agreement. 6.3 [INTENTIONALLY OMITTED] 6.4 Possession and Transfer of Collateral. Until an Event of Default has occurred hereunder, the Borrower shall be entitled to possession or use of the Collateral. The cancellation or surrender of the Revolving Note, upon payment or otherwise, shall not affect the right of the Bank to retain the Collateral for any other of the Obligations. The Borrower shall not sell, assign (by operation of law or otherwise), license, lease or otherwise dispose of, or grant any option with respect to any of the Collateral, except that (a) the Borrower may sell Inventory in the ordinary course of business and (b) Borrower or any Subsidiary may sell one or more hotel properties in accordance with the provisions of Section 6.11 hereof. 6.5 Financing Statements. The Borrower shall, at the Bank's request, at any time and from time to time, execute and deliver to the Bank such financing statements, amendments and other documents and do such acts as the Bank deems necessary in order to establish and maintain valid, attached and perfected first security interests in the Collateral in favor of the Bank, free and clear of all Liens and claims and rights of third parties whatsoever (except as otherwise specifically set forth in Section 8 hereof). The Borrower hereby irrevocably authorizes the Bank at any time, and from time to time, to file in any jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of the Borrower or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed, or (ii) as being of an equal or lesser scope or within greater detail, and (b) contain any other information required by Section 5 of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed regarding the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Borrower is an organization, the type of organization and any organization identification number issued to the Borrower, and (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. The Borrower agrees to furnish any such information to the Bank promptly upon request. The Borrower further ratifies and affirms its authorization for any financing statements and/or amendments thereto, executed and filed by the Bank in any jurisdiction prior to the date of this Agreement. 6.6 Additional Collateral. The Borrower shall deliver to the Bank immediately upon its demand, following the occurrence of an Event of Default, such other collateral as the Bank may from time to time request, should the value of the Collateral, in the Bank's sole and absolute discretion, decline, deteriorate, depreciate or become impaired, and does hereby grant to the Bank a continuing security interest in such other collateral, which, when pledged, assigned and transferred to the Bank shall be and become part of the Collateral. The Bank's security interests in each of the foregoing Collateral shall be valid, complete and perfected whether or not covered by a specific assignment. 6.7 Preservation of the Collateral. The Bank may, but is not required to, take such action from time to time as the Bank deems appropriate to maintain or protect the Collateral. The Bank 16 shall have exercised reasonable care in the custody and preservation of the Collateral if it takes such action as the Borrower shall reasonably request in writing; provided, however, that such request shall not be inconsistent with the Bank's status as a secured party, and the failure of the Bank to comply with any such request shall not be deemed a failure to exercise reasonable care. In addition, any failure of the Bank to preserve or protect any rights with respect to the Collateral against prior or third parties, or to do any act with respect to preservation of the Collateral, not so requested by the Borrower, shall not be deemed a failure to exercise reasonable care in the custody or preservation of the Collateral. The Borrower shall have the sole responsibility for taking such action as may be necessary, from time to time, to preserve all rights of the Borrower and the Bank in the Collateral against prior or third parties. Without limiting the generality of the foregoing, where Collateral consists in whole or in part of securities, the Borrower represents to, and covenants with, the Bank that the Borrower has made arrangements for keeping informed of changes or potential changes affecting the securities (including, but not limited to, rights to convert or subscribe, payment of dividends, reorganization or other exchanges, tender offers and voting rights), and the Borrower agrees that the Bank shall have no responsibility or liability for informing the Borrower of any such or other changes or potential changes or for taking any action or omitting to take any action with respect thereto. 6.8 Other Actions as to any and all Collateral. The Borrower further agrees to take any other action reasonably requested by the Bank to insure the attachment, perfection and first priority of, and the ability of the Bank to enforce, the Bank's security interest in any and all of the Collateral including, without limitation, (a) executing, delivering and, where appropriate, filing financing statements and amendments relating thereto under the Uniform Commercial Code, to the extent, if any, that the Borrower's signature thereon is required therefor, (b) causing the Bank's name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of the bank to enforce, the Bank's security interest in such Collateral, (c) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Bank to enforce, the Bank's security interest in such Collateral, (d) obtaining governmental and other third party consents and approvals, including without limitation any consent of any licensor, lessor or other Person obligated on Collateral, (e) obtaining waivers from mortgagees and landlords in form and substance satisfactory to the Bank, and (f) taking all actions required by the UCC in effect from time to time or by other law, as applicable in any relevant UCC jurisdiction, or by other law as applicable in any foreign jurisdiction. 6.9 Collateral in the Possession of a Warehouseman or Bailee. If any of the Collateral at any time is in the possession of a warehouseman or bailee, the Borrower shall promptly notify the Bank thereof, and if requested by the Bank, shall promptly obtain an acknowledgement from the warehouseman or bailee, in form and substance satisfactory to the Bank, that the warehouseman or bailee holds such Collateral for the benefit of the Bank and shall act upon the instructions of the Bank, without the further consent of the Borrower. 6.10 Partial Release of Mortgaged Premises. Upon the written request of the Borrower at any time and from time to time, Borrower or any Subsidiary may sell one or more Mortgaged Premises and the Bank shall execute and deliver to Borrower a release of the Mortgage on any of the Mortgaged Premises so long as no Event of Default shall have occurred and be continuing; 17 provided, however, that the Bank may, in its sole discretion, require that the proceeds of the sale of such Mortgaged Premises, after repayment of the Senior Mortgage Indebtedness and costs of sale, be applied to repayment of the Revolving Loans. 6.11 Sale of Hotel Properties. Without limiting the provisions of Section 6.10 above, and so long as no Event of Default shall have occurred and be continuing or, after giving effect to the proposed sale, would occur, with the giving of notice or lapse of time or both, Borrower or any Subsidiary may sell one or more hotel properties in the ordinary course of business subject to satisfaction of the following conditions: (a) Borrower shall give the Bank no less than thirty (30) days' prior written notice of each such sale; (b) Each notice of proposed sale of a hotel property shall include (i) the location and a description of the property being sold, (ii) the sales price for the property in question, and (iii) the identity of the buyer; and (c) Upon the written request of the Bank, Borrower shall provide such additional information concerning the transaction as the Bank may thereafter request. 7. REPRESENTATIONS AND WARRANTIES. To induce the Bank to make the Revolving Loans, the Borrower makes the following representations and warranties to the Bank, each of which shall be true and correct as of the date of the execution and delivery of this Agreement, and which shall survive the execution and delivery of this Agreement: 7.1 Borrower Organization and Name. The Borrower and each Subsidiary is a corporation duly organized, existing and in good standing under the laws of its state of incorporation, with full and adequate corporate power to carry on and conduct its business as presently conducted. The Borrower and each Subsidiary is duly licensed or qualified in all foreign jurisdictions wherein the nature of its activities require such qualification or licensing. The exact legal name of the Borrower is as set forth in the first paragraph of this Agreement, and the Borrower currently does not conduct, nor has it during the last five (5) years conducted, business under any other name or trade name, except for the names "AmeriHost Properties, Inc.," "AmeriHost Inn," "AmeriHost Inn and Suites," "AmeriHost Hotel" and "AmeriHost Suites." The Borrower's state issued organizational identification number is 204441. 7.2 Authorization; Validity. The Borrower and each Subsidiary which is a party to any of the Loan Documents has full right, power and authority to enter into this Agreement and/or each Loan Document to which it is a party, to make the borrowings and execute and deliver the Loan Documents as provided herein and to perform all of its duties and obligations under this Agreement and each Loan Document to which it is a party. The execution and delivery of this Agreement and/or the Loan Documents will not, nor will the observance or performance of any of the matters and things herein or therein set forth, violate or contravene any provision of law or of the articles of incorporation or bylaws of the Borrower or any Subsidiary which is a party to 18 any Loan Document. All necessary and appropriate corporate action has been taken on the part of the Borrower and each Subsidiary which is a party to any Loan Document to authorize the execution and delivery of this Agreement and/or the Loan Documents to which it is a party. This Agreement and the Loan Documents to which it is a party are valid and binding agreements and contracts of the Borrower and each Subsidiary which is a party to any Loan Document in accordance with their respective terms. 7.3 Compliance With Laws. To the best knowledge of Borrower, the nature and transaction of the business and operations of Borrower and each Subsidiary and the use of their respective properties and assets, including, but not limited to, the Collateral or any real estate owned or occupied by any of them, do not and during the term of the Loans shall not, violate or conflict with any applicable law, statute, ordinance, rule, regulation or order of any kind or nature, including, without limitation, the provisions of the Fair Labor Standards Act or any zoning, land use, building, noise abatement, occupational health and safety or other laws, any building permit or any condition, grant, easement, covenant, condition or restriction, whether recorded or not. 7.4 Environmental Laws and Hazardous Substances. The Borrower represents, warrants and agrees with the Bank that (i) to the best knowledge of Borrower, neither the Borrower nor any Subsidiary has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off any of the premises of the Borrower (whether or not owned by it) or Subsidiary in any manner which at any time violates any Environmental Law or any license, permit, certificate, approval or similar authorization thereunder, (ii) to the best knowledge of Borrower, the operations of the Borrower and each Subsidiary comply in all material respects with all Environmental Laws and all licenses, permits certificates, approvals and similar authorizations thereunder, (iii) to the best knowledge of Borrowers, there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other Person, nor is any pending or, to the best of the Borrower's knowledge, threatened, and the Borrower shall immediately notify the Bank upon becoming aware of any such investigation, proceeding, complaint, order, directive, claim, citation or notice, and shall take prompt and appropriate actions to respond thereto, with respect to any non-compliance with, or violation of, the requirements of any Environmental Law by the Borrower or any Subsidiary or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Material or any other environmental, health or safety matter, which affects the Borrower or its business, operations or assets or any properties at which the Borrower or any Subsidiary has transported, stored or disposed of any Hazardous Materials, (iv) to the best knowledge of Borrower, neither the Borrower nor any Subsidiary has any material liability, contingent or otherwise, in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Material; and (v) without limiting the generality of the foregoing, the Borrower shall, following determination by the Bank that there is non-compliance, or any condition which requires any action by or on behalf of the Borrower or any Subsidiary in order to avoid any non-compliance, with any Environmental Law, at the Borrower's sole expense, cause an independent environmental engineer acceptable to the Bank to conduct such tests of the relevant site as are appropriate, and 19 prepare and deliver a report setting forth the result of such tests, a proposed plan for remediation and an estimate of the costs thereof. 7.5 Absence of Breach. The execution, delivery and performance of this Agreement, the Loan Documents and any other documents or instruments to be executed and delivered by the Borrower or any Subsidiary in connection with the Loans shall not: (i) violate any provisions of law or any applicable regulation, order, writ, injunction or decree of any court or governmental authority, or (ii) conflict with, be inconsistent with, or result in any breach or default of any of the terms, covenants, conditions, or provisions of any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which the Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary or any of their respective property or assets may be bound. 7.6 Collateral Representations. The Borrower or, in the case of the Mortgaged Premises, a Subsidiary, is the sole owner of the Collateral, free from any Lien of any kind, other than the Lien of the Bank and the Liens permitted by Section 8.2 of this Agreement. 7.7 Financial Statements. All financial statements submitted to the Bank have been prepared in accordance with GAAP on a basis, except as otherwise noted therein, consistent with the previous fiscal year and truly and accurately reflect the consolidated financial condition of the Borrower and its Subsidiaries and the consolidated results of the operations for the Borrower and its Subsidiaries as of such date and for the periods indicated. Since the date of the most recent financial statement submitted by the Borrower to the Bank, there has been no material adverse change in the financial condition or in the consolidated assets or liabilities of the Borrower and its Subsidiaries, or any changes except those occurring in the ordinary course of business. 7.8 Litigation and Taxes. There is no litigation, demand, charge, claim, petition or governmental investigation or proceeding pending, or to the best knowledge of the Borrower, threatened, against the Borrower and/or any Subsidiary, which, if adversely determined, would result in any material adverse change in the financial condition or properties, business or operations of the Borrower or Subsidiary. The Borrower and each Subsidiary have duly filed all applicable income or other tax returns and to the best knowledge of Borrower, have paid all income or other taxes when due. There is no controversy or objection pending, or to the best knowledge of the Borrower, threatened in respect of any tax returns of the Borrower or any Subsidiary, except for extensions of time and pending audits being conducted by certain state revenue departments in the ordinary course of business, none of which is (are) expected to result in any material liability, either singly or in the aggregate. 7.9 Event of Default. No Event of Default has occurred and is continuing, and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute such an Event of Default under this Agreement or any of the Loan Documents and neither the Borrower nor any Subsidiary is in default (without regard to grace or cure periods) under any contract or agreement to which it is a party. 7.10 ERISA Obligations. All Employee Plans of the Borrower and its Subsidiaries meet the minimum funding standards of Section 302 of ERISA where applicable and each such 20 Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 is qualified. No withdrawal liability has been incurred under any such Employee Plans and no "Reportable Event" or "Prohibited Transaction" (as such terms are defined in ERISA), has occurred with respect to any such Employee Plans, unless approved by the appropriate governmental agencies. The Borrower and each Subsidiary have promptly paid and discharged all obligations and liabilities arising under the Employee Retirement Income Security Act of 1974 ("ERISA") of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its properties or assets. 7.11 Adverse Circumstances. To the best knowledge of Borrower, no condition, circumstance, event, agreement, document, instrument, restriction, litigation or proceeding (or threatened litigation or proceeding or basis therefor) exists which (a) could adversely affect the validity or priority of the Liens granted to the Bank under the Loan Documents, (b) could materially adversely affect the ability of the Borrower to perform its obligations under the Loan Documents, (c) would constitute a default under any of the Loan Documents, or (d) would constitute such a default with the giving of notice or lapse of time or both. 7.12 Lending Relationship. The Borrower acknowledges and agrees that the relationship hereby created with the Bank is and has been conducted on an open and arm's length basis in which no fiduciary relationship exists and that the Borrower has not relied and is not relying on any such fiduciary relationship in executing this Agreement and in consummating the Loans. The Bank represents that it will receive the Note payable to its order as evidence of a bank loan. 7.13 Business Loan. The Loans, including interest rate, fees and charges as contemplated hereby, (i) are business loans within the purview of 815 ILCS 205/4(l)(c), as amended from time to time, (ii) are an exempted transaction under the Truth In Lending Act, 12 v.S.C. 1601 et seq., as amended from time to time, and (iii) do not, and when disbursed shall not, violate the provisions of the Illinois usury laws, any consumer credit laws or the usury laws of any state which may have jurisdiction over this transaction, the Borrower or any property securing the Loans. 7.14 Compliance with Regulation U. No portion of the proceeds of the Loans shall be used by the Borrower, or any affiliates of the Borrower, either directly or indirectly, for the purpose of purchasing or carrying any margin stock, within the meaning of Regulation U as adopted by the Board of Governors of the Federal Reserve System. 7.15 Governmental Regulation. The Borrower and its Subsidiaries are not, or after giving effect to any loan, will not be, subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940 or to any federal or state statute or regulation limiting its ability to incur indebtedness for borrowed money. 7.16 Bank Accounts. All Deposit accounts and other bank accounts of the Borrower (but not the Subsidiaries) are maintained by Borrower at the Bank. 21 7.17 Place of Business. The principal place of business of the Borrower is 2355 S. Arlington Heights Road, Arlington Heights, Illinois 60005 and the Borrower shall promptly notify the Bank of any change in such location. The Borrower will not remove or permit the Collateral to be removed from such location without the prior written consent of the Bank, except for Inventory sold in the usual and ordinary course of the Borrower's business. 7.18 Complete Information. This Agreement and all financial statements, schedules, certificates, confirmations, agreements, contracts, and other materials submitted to the Bank in connection with or in furtherance of this Agreement by or on behalf of the Borrower fully and fairly state the matters with which they purport to deal, and neither misstate any material fact nor, separately or in the aggregate, fail to state any material fact necessary to make the statements made not misleading. 8. NEGATIVE COVENANTS. 8.1 Indebtedness. The Borrower shall not, and shall cause each of its Subsidiaries to not, either directly or indirectly, create, assume, incur or have outstanding any Indebtedness (including purchase money indebtedness), or become liable, whether as endorser, guarantor, surety or otherwise, for any debt or obligation of any other Person, except: (a) the Obligations; (b) endorsement for collection or deposit of any commercial paper secured in the ordinary course of business; (c) obligations of the Borrower or any of its Subsidiaries for taxes, assessments, municipal or other governmental charges; (d) obligations of the Borrower or any of its Subsidiaries for accounts payable, other than for money borrowed, incurred in the ordinary course of business; and (e) obligations, including the Senior Mortgage Indebtedness, existing on the date hereof which are disclosed on the financial statements referred to in Section 7; (f) obligations in respect of Indebtedness issued to refinance the Senior Mortgage Indebtedness (the "Senior Refinancing Indebtedness"); provided, however, that the issuance of such Senior Refinancing Indebtedness shall not cause or result in a violation of any covenant set forth in Section 10; (g) obligations in respect of Indebtedness secured by a Lien on any Other Property developed by Borrower or any Subsidiary (i) after the sales by Borrower or its Subsidiary of the Kenton, Ohio and Fontana, California hotel properties (or the sale of other hotel properties generating substantially equivalent net proceeds of sale, after repayment of Senior Mortgage Indebtedness thereon and 22 costs of sale of such properties) or (ii) in connection with a joint venture project in which Borrower and/or any Subsidiary own less than fifty percent (50%) of the equity interests and Borrower is the project developer; provided that the issuance of such Indebtedness shall not cause or result in a violation of any covenant set forth in Section 10; (h) obligations arising under Capital Leases for property acquired (or deemed to be acquired) by the Borrower or any of its Subsidiaries or claims arising from the use or loss of, or damage to, such property; and (i) Indebtedness for Capital Expenditures (exclusive of Indebtedness as incurred by a Lien on any Other Property permitted under Section 8.1(g) above) incurred after the date of this Agreement not to exceed One Million and 00/100 Dollars ($1,000,000.00) in the aggregate in any one calendar year. 8.2 Encumbrances. The Borrower shall not, and shall cause each of its Subsidiaries to not, either directly or indirectly, create, assume, incur or suffer or permit to exist any Lien or charge of any kind or character upon any asset of the Borrower or any Subsidiary, whether owned at the date hereof or hereafter acquired except: (a) Liens for taxes, assessments or other governmental charges not yet due or which are being contested in good faith by appropriate proceedings in such a manner as not to make the property forfeitable; (b) Liens or charges incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of an advance or credit, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (c) Liens arising out of judgments or awards against the Borrower with respect to which it shall concurrently therewith be prosecuting a timely appeal or proceeding for review and with respect to which it shall have secured a stay of execution pending such appeal or proceedings for review; (d) pledges or deposits to secure obligations under worker's compensation laws or similar legislation; (e) good faith deposits in connection with lending contracts or leases to which the Borrower is a party; (f) deposits to secure public or statutory obligations of the Borrower; 23 (g) Liens, including the Senior Mortgages, existing on the date hereof and disclosed on the financial statements referred to in Section 7; (h) Liens securing obligations permitted under Section 8.1(f), Section 8.1(g) and/or Section 8.1(h); and (i) Liens granted to the Bank. Without limiting the generality of the foregoing, Borrower shall not, and shall cause each Subsidiary not to, mortgage or otherwise encumber Borrower's or such Subsidiary's fee or leasehold interest in any Mortgaged Premises or Other Property, except as expressly permitted pursuant to (g) or (h) above or as consented to by the Bank in writing. 8.3 Investments. The Borrower shall not, and shall cause each Subsidiary to not, either directly or indirectly, make or have outstanding any new investments (whether through purchase of stocks, obligations or otherwise) in, or loans or advances to, any other Person, or acquire all or any substantial part of the assets, business, stock or other evidence of beneficial ownership of any other Person except: (a) investments in direct obligations of the United States; (b) investments in certificates of deposit issued by the Bank or any bank with assets greater than One Hundred Million Dollars ($100,000,000.00); or (c) investments in Prime Commercial Paper (for purposes hereof, Prime Commercial Paper shall mean short-term unsecured promissory notes sold by large corporations and rated A-I/P-1 by Standard & Poor's Ratings Group, a division of McGraw Hill, Inc., and Moody's Investment Service, Inc.); or (d) deposits held by the Bank or by any affiliate of ABN AMRO Incorporated. Without limiting the generality of the foregoing, except in connection with a joint venture project in which Borrower and/or any Subsidiary owns less than fifty percent (50%) of the equity interests and Borrower is the developer, Borrower shall not, and shall cause each Subsidiary not to invest in or commence development of any new hotel property(ies) until the sale by Borrower and/or a Subsidiary of the Kenton, Ohio and Fontana, California hotel properties (or the sale of other hotel properties generating substantially equivalent net proceeds of sale, after repayment of Senior Mortgage Indebtedness thereon and costs of sale of such properties). 8.4 Transfer; Merger. The Borrower shall not, and shall cause each Subsidiary to not, either directly or indirectly, merge, consolidate, sell, transfer, license, lease, encumber or otherwise dispose of all or any part of its property or business or all or any substantial part of its assets, or sell or discount (with or without recourse) any of its Promissory Notes, Chattel Paper, Payment Intangibles or Accounts, except that Borrower or any Subsidiary may sell one or more hotel properties in accordance with the provisions of Sections 6.10 and 6.11. 24 8.5 Distributions. Except for purchases of Borrower's stock in an amount not to exceed One Million Dollars ($1,000,000.00) in any fiscal year of Borrower, none of which, individually or in the aggregate would cause or result in the occurrence of an Event of Default, the Borrower shall not, either directly or indirectly, purchase or redeem any shares of its stock or, except with the prior written consent of the Bank, declare or pay any dividends, whether in cash or otherwise, or set aside any funds for any such purpose or make any distribution to its shareholders. 8.6 Use of Proceeds. Neither the Borrower nor any of its Subsidiaries or affiliates shall use any portion of the proceeds of the Loans, either directly or indirectly, for the purpose of purchasing any securities underwritten by ABN AMRO Incorporated, an affiliate of the Bank. 8.7 Bank Accounts. The Borrower shall not, and shall cause each Subsidiary to not, establish any new Deposit accounts or other bank accounts, other than local bank accounts maintained by the Subsidiaries or bank accounts established at or with the Bank, without the prior written consent of the Bank. 8.8 Change of Legal Status. Neither the Borrower nor any Subsidiary which is a party to any of the Loan Documents shall change its name, its organizational identification number, if it has one, its type of organization, its jurisdiction of organization or other legal structure without the prior written consent of the Bank. 9. AFFIRMATIVE COVENANTS. 9.1 Compliance with Bank Regulatory Requirements. Upon demand by the Bank, the Borrower shall reimburse the Bank for the Bank's additional costs and/or reductions in the amount of principal or interest received or receivable by the Bank if at any time after the date of this Agreement any law, treaty or regulation or any change in any law, treaty or regulation or the interpretation thereof by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or the Loans, whether or not having the force of law, shall impose, modify or deem applicable any reserve (except reserve requirements taken into account in calculating the Revolving Interest Rate) and/or special deposit requirement against or in respect of assets held by or deposits in or for the account of the Loans by the Bank or impose on the Bank any other condition with respect to this Agreement or the Loans, the result of which is to either increase the cost to the Bank of making or maintaining the Loans or to reduce the amount of principal or interest received or receivable by the Bank with respect to such Loans. Said additional costs and/or reductions will be those which directly result from the imposition of such requirement or condition on the making or maintaining of such Loans. All Loans shall be deemed to be match funded for the purposes of the Bank's determination in the previous sentence. Notwithstanding the foregoing, the Borrower shall not be required to pay any such additional costs which could be avoided by the Bank with the exercise of reasonable conduct and diligence. 9.2 Corporate Existence. The Borrower shall, and shall cause each Subsidiary to, at all times preserve and maintain its corporate existence, rights, franchises and privileges, and shall at all times continue as a going concern in the business which the Borrower or such Subsidiary is presently conducting. If the Borrower does not have a state issued identification number and later 25 obtains one, the Borrower shall promptly notify the Bank of such organizational identification number. 9.3 Maintain Property. The Borrower shall, and shall cause each Subsidiary to, at all times maintain, preserve and keep its plant, properties and Equipment, including, but not limited to, any Collateral, in good repair, working order and condition, and shall from time to time make all needful and proper repairs, renewals, replacements, and additions thereto so that at all times the efficiency thereof shall be fully preserved and maintained. The Borrower shall, and shall cause each Subsidiary to, permit the Bank to examine and inspect such plant, properties and Equipment, including, but not limited to, any Collateral, at all reasonable times. 9.4 Maintain Insurance. The Borrower shall, and shall cause each Subsidiary to, at all times insure and keep insured in insurance companies acceptable to the Bank, all insurable property owned by it which is of a character usually insured by companies similarly situated and operating like properties, against loss or damage from fire and such other hazards or risks as are customarily insured against by companies similarly situated and operating like properties; and shall similarly insure employers', public and professional liability risks. Prior to the date of the funding of the Note the Borrower shall deliver to the Bank a certificate selling forth in summary form the nature and extent of the insurance maintained by the Borrower and its Subsidiaries pursuant to this SECTION 9. All such policies of insurance must be satisfactory to the Bank in relation to the amount and term of the Obligations and type and value of the Collateral and assets of the Borrower and each Subsidiary, shall identify the Bank as lender's loss payee or mortgagee and as an additional insured. In the event the Borrower either fails to provide the Bank with evidence of the insurance coverage required by this Section or at any time hereafter shall fail to obtain or maintain any of the policies of insurance required above, or to pay any premium in whole or in part relating thereto, then the Bank, without waiving or releasing any obligation or default by the Borrower hereunder, may at any time (but shall be under no obligation to so act), obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto, which the Bank deems advisable. This insurance coverage (i) may, but need not, protect the Borrower's and each Subsidiary's interest in the such property, including, but not limited to the Collateral, and (ii) may not pay any claim made by, or against, the Borrower or any Subsidiary in connection with such property, including, but not limited to the Collateral. The Borrower may later cancel any such insurance purchased by the Bank, but only after providing the Bank with evidence that the Borrower has obtained the insurance coverage required by this Section. The costs of such insurance obtained by the Bank, through and including the effective date such insurance coverage is canceled or expires, shall be payable on demand by the Borrower to the Bank, together with interest at the Default Rate on such amounts until repaid and any other charges by the Bank in connection with the placement of such insurance. The costs of such insurance, which may be greater than the cost of insurance which the Borrower may be able to obtain on its own, together with interest thereon at the Default Rate and any other charges by the Bank in connection with the placement of such insurance may be added to the total Obligations due and owing. 9.5 Tax Liabilities. The Borrower shall, and shall cause each Subsidiary to, at all times pay and discharge all property and other taxes, assessments and governmental charges upon, and all claims (including claims for labor, materials and supplies) against the Borrower and each Subsidiary or any of its properties, Equipment or Inventory, before the same shall become 26 delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings and are insured against or bonded over to the satisfaction of the Bank. 9.6 ERISA Liabilities; Employee Plans. The Borrower shall, and shall cause each Subsidiary to, (i) keep in full force and effect any and all Employee Plans which are presently in existence or may, from time to time, come into existence under ERISA, and not withdraw from any such Employee Plans, unless such withdrawal can be effected or such Employee Plans can be terminated without liability to the Borrower or any Subsidiary; (ii) make contributions to all of such Employee Plans in a timely manner and in a sufficient amount to comply with the standards of ERISA; including the minimum funding standards of ERISA; (iii) comply with all material requirements of ERISA which relate to such Employee Plans; (iv) notify the Bank immediately upon receipt by the Borrower or any Subsidiary of any notice concerning the imposition of any withdrawal liability or of the institution of any proceeding or other action which may result in the termination of any such Employee Plans or the appointment of a trustee to administer such Employee Plans; (v) promptly advise the Bank of the occurrence of any "Reportable Event" or "Prohibited Transaction" (as such terms are defined in ERISA), with respect to any such Employee Plans; and (vi) amend any Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 to the extent necessary to keep the Employee Plan qualified, and to cause the Employee Plan to be administered and operated in a manner that does not cause the Employee Plan to lose its qualified status. 9.7 Financial Statements. The Borrower shall, and shall cause each Subsidiary to, at all times maintain a standard and modem system of accounting, on the accrual basis of accounting and in all respects in accordance with GAAP, and shall furnish to the Bank or its authorized representatives such information regarding the business affairs, operations and financial condition of the Borrower and its Subsidiaries, including, but not limited to: (a) as soon as available, and in any event, within ninety (90) days after the close of each of its fiscal years, a copy of the annual audited consolidated financial statements of the Borrower and its Subsidiaries, including balance sheet, statement of income and retained earnings, statement of cash flows for the fiscal year then ended and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified by an independent certified public accountant acceptable to the Bank, containing an unqualified opinion; and (b) as soon as available, and in any event, within forty five (45) days following the end of each fiscal quarter, a copy of the consolidated financial statements of the Borrower and its Subsidiaries regarding such fiscal quarter, including balance sheet, statement of income and retained earnings, statement of cash flows for the fiscal quarter then ended and such other information (including nonfinancial 27 information) as the Bank may request, in reasonable detail, prepared and certified as accurate by the Borrower. No change with respect to such accounting principles shall be made by the Borrower without giving prior notification to the Bank. The Borrower represents and warrants to the Bank that the financial statements delivered to the Bank at or prior to the execution and delivery of this Agreement and to be delivered at all times thereafter accurately reflect and will accurately reflect the consolidated financial condition of the Borrower and its Subsidiaries. The Bank shall have the right at all times during business hours to inspect the books and records of the Borrower and make extracts therefrom. The Borrower agrees to advise the Bank immediately of any adverse change in the financial condition, the operations or any other status of the Borrower. 9.8 Supplemental Financial Statements. The Borrower shall immediately upon receipt thereof, provide to the Bank copies of interim and supplemental reports if any, submitted to the Borrower by independent accountants in connection with any interim audit or review of the books of the Borrower or any Subsidiary. 9.9 Covenant Compliance Report. The Borrower shall, within thirty (30) days after the end of each fiscal quarter, deliver to the Bank (a) a computation in such detail as the Bank shall specify, showing compliance by the Borrower with the covenants set forth in SECTION 10, and (b) a certificate that neither the Borrower nor any Subsidiary is in default under the terms of or has otherwise breached the terms of any of the Senior Mortgages or received any notice(s) with respect to a default or breach of any of the foregoing, in each case certified as accurate by the Borrower. 9.10 Field Audits. The Borrower shall allow the Bank, at the Borrower's sole expense, to conduct an annual field examination of the Accounts of the Borrower and its Subsidiaries, the results of which must be satisfactory to the Bank in the Bank's sole and absolute discretion. 9.11 Other Reports. The Borrower shall, within such period of time as the Bank may specify deliver to the Bank such other schedules and reports as the Bank may require. 9.12 Collateral Records. Borrower shall keep full and accurate books and records relating to the Collateral and shall mark such books and records to indicate the Bank's Lien in the Collateral. 9.13 Notice of Proceedings. The Borrower shall, immediately after knowledge thereof shall have come to the attention of any officer of the Borrower, give written notice to the Bank of all threatened or pending actions, suits, and proceedings before any court or governmental department, commission, board or other administrative agency which may have a material effect on the business, property or operations of the Borrower or any Subsidiary. 9.14 Notice of Default. The Borrower shall, immediately after the commencement thereof, give notice to the Bank in writing of the occurrence of an Event of Default or of any event which, with the lapse of time, the giving of notice or both, would constitute an Event of Default hereunder. 28 9.15 Banking Relationship. The Borrower covenants and agrees, at all times during the term of this Agreement, to utilize the Bank as its primary bank of account and depository for all financial services, including all receipts, disbursements, cash management and related service, of Borrower and its Subsidiaries. 10. FINANCIAL COVENANTS. 10.1 Tangible Net Worth. As of the end of each of its fiscal quarters, the Borrower and its Subsidiaries shall maintain consolidated Tangible Net Worth in an amount not less than Nine Million Five Hundred Thousand and 00/100 Dollars ($9,500,000.00). 10.2 Total Liabilities to Worth. As of the end of each of its fiscal quarters, the Borrower and its Subsidiaries shall maintain a Total Liabilities to Worth Ratio of not greater than the following:
Fiscal Quarter Ended Total Liabilities to Worth -------------------- -------------------------- March 31, 2003 3.75 to 1.0 June 30, 2003 3.75 to 1.0 September 30, 2003 3.75 to 1.0 December 31, 2003 3.50 to 1.0 March 3l, 2004 3.50 to l.0
10.3 Debt Service Coverage Ratio. As of the end of each of its fiscal quarters, the Borrower and its Subsidiaries shall maintain a ratio of (a) consolidated EBITDA to (b) consolidated Debt Service Charges of not less than 1.20 to 1.0, measured on a trailing twelve (12) month basis for the twelve (12) fiscal month period immediately preceding the end of such fiscal quarter. 10.4 Aggregate Loan-to-Value Ratio. The Bank may from time to time order reappraisals on any of the Mortgaged Premises and/or appraisals, in form and substance acceptable to the Bank, on any one or more of the Other Properties. At all times, the Borrower and its Subsidiaries shall maintain an aggregate Loan-to-Value Ratio for the Mortgaged Properties, as determined by the Bank, not exceeding sixty-five percent (65%). 10.5 Aggregate Revenue Per Room. As of the end of each month, aggregate gross room receipts for all hotel properties owned solely by any Wholly Owned Subsidiary shall not have declined as of two consecutive months' end by more than five percent (5%) from the aggregate gross room receipts attributable to the same hotel rooms as of the end of the two (2) immediately preceding fiscal months' end. 29 10.6 Annual Net Income. Borrower's Net Income for the fiscal year ending December 31, 2003 shall be no less than Two Hundred and 00/100 Thousand Dollars ($200,000.00). 11. EVENTS OF DEFAULT. The Borrower, without notice or demand of any kind, shall be in default under this Agreement upon the occurrence of any of the following events (each an "Event of Default"). 11.1 Nonpayment of Obligations. Any amount due and owing on the Note or any of the Obligations, whether by its terms or as otherwise provided herein, is not paid within ten (10) days after notice from the Bank that such amount was not paid when due. 11.2 Misrepresentation. Any oral or written warranty, representation, certificate or statement in this Agreement, the Loan Documents or any other agreement with the Bank shall be false when made or at any time. 11.3 Nonperformance. Any failure to perform or default in the performance of any covenant, condition or agreement contained in this Agreement and, if capable of being cured, such failure to perform or default in performance continues for a period of thirty (30) days after the Borrower receives notice or knowledge from any source of such failure to perform or default in performance. 11.4 Default under Loan Documents. A default by Borrower or any Obligor under any of the other Loan Documents, which continues beyond any applicable grace or cure period, all of which covenants, conditions and agreements contained therein are hereby incorporated in this Agreement by express reference, shall be and constitute an Event of Default under this Agreement and any other of the Obligations. 11.5 Default under Other Agreements. Any default in the payment of principal, interest or any other sum for any other obligation beyond any period of grace provided with respect thereto or in the performance of any other term, condition or covenant contained in any agreement (including, but not limited to any capital or operating lease or any agreement in connection with the deferred purchase price of property) under which any such obligation is created, the effect of which default is to cause or permit the holder of such obligation (or the other party to such other agreement) to cause such obligation to become due prior to its stated maturity or terminate such other agreement. 11.6 Assignment for Creditors. Any Obligor makes an assignment for the benefit of creditors, fails to pay, or admits in writing its inability to pay its debts as they mature; or if a trustee of any substantial part of the assets of any Obligor is applied for or appointed, and in the case of such trustee being appointed in a proceeding brought against such Obligor, the Obligor, by any action or failure to act indicates its approval of, consent to, or acquiescence in such appointment and such appointment is not vacated, stayed on appeal or otherwise shall not have ceased to continue in effect within thirty (30) days after the date of such appointment. 11.7 Bankruptcy. Any proceeding involving any Obligor, is commenced by or against such Obligor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of 30 debt, dissolution or liquidation law or statute of the federal government or any state government, and in the case of any such proceeding being instituted against such Obligor, (i) such Obligor, by any action or failure to act indicates its approval of, consent to or acquiescence therein, or (ii) an order shall be entered approving the petition in such proceedings and such order is not vacated, stayed on appeal or otherwise shall not have ceased to continue in effect within thirty (30) days after the entry thereof. 11.8 Judgments. The entry of any judgment, decree, levy, attachment, garnishment or other process, or the filing of any Lien against any Obligor which is not fully covered by insurance, and such judgment or other process shall not have been, within thirty (30) days from the entry thereof, (i) bonded over to the satisfaction of the Bank and appealed, (ii) vacated, or (iii) discharged. 11.9 Change in Control. Subject to Section 6.11 hereof, any sale, conveyance, assignment or other transfer, directly or indirectly, of any ownership interest of the Borrower in any Subsidiary which owns any of the Mortgaged Premises. 11.10 Collateral Impairment. (a) The entry of any judgment, decree, levy, attachment, garnishment or other process, or the filing of any Lien against, any of the Collateral or any collateral under a separate security agreement securing any of the Obligations and such judgment or other process shall not have been, within thirty (30) days from the entry thereof, (i) bonded over to the satisfaction of the Bank and appealed, (ii) vacated, or (iii) discharged, or (b) the loss, theft, destruction, seizure or forfeiture, or the occurrence of any deterioration or impairment of any of the Collateral or any of the collateral under any security agreement securing any of the Obligations, or any decline or depreciation in the value or market price thereof (whether actual or reasonably anticipated), which causes the Collateral, in the sole opinion of the Bank acting in good faith, to become unsatisfactory as to value or character, or which causes the Bank to reasonably believe that it is insecure and that the likelihood for repayment of the Obligations is or will soon be impaired, time being of the essence, which loss, deterioration, decline, depreciation, or other source of insecurity or impairment continues for a period of thirty (30) days after the Borrower receives written notice from the Bank. The cause of such deterioration, impairment, decline or depreciation shall include, but is not limited to, the failure by the Borrower to do any act deemed necessary by the Bank to preserve and maintain the value and collectability of the Collateral. 12. REMEDIES. Upon the occurrence of an Event of Default, the Bank shall have all rights, powers and remedies set forth in the Loan Documents, in any written agreement or instrument (other than this Agreement or the Loan Documents) relating to any of the Obligations or any security therefor, or as otherwise provided at law or in equity. Without limiting the generality of the foregoing, the Bank may, at its option upon the occurrence of an Event of Default, declare its commitments to the Borrower to be terminated and all Obligations to be immediately due and payable, provided, however, that upon the occurrence of an Event of Default under either Section 11.6, "Assignment for Creditors", or Section 11.7, "Bankruptcy", all commitments of the Bank to the Borrower shall immediately terminate and all Obligations shall be automatically due and payable, all without demand, notice or further action of any kind required on the part of the 31 Bank. The Borrower hereby waives any and all presentment, demand, notice of dishonor, protest, and all other notices and demands in connection with the enforcement of Bank's rights under the Loan Documents, and hereby consents to, and waives notice of release, with or without consideration, of any Collateral, notwithstanding anything contained herein or in the Loan Documents to the contrary. In addition to the foregoing: 12.1 Possession and Assembly of Collateral. The Bank may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which the Bank already has possession), wherever it may be found, and for that purpose may pursue the same wherever it may be found, and may enter into any of the Borrower's premises where any of the Collateral may be or is supposed to be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of and the Bank shall have the right to store the same in any of the Borrower's premises without cost to the Bank. At the Bank's request, the Borrower will, at the Borrower's sole expense, assemble the Collateral and make it available to the Bank at a place or places to be designated by the Bank which is reasonably convenient to the Bank and the Borrower. 12.2 Sale of Collateral. The Bank may sell any or all of the Collateral at public or private sale, upon such terms and conditions as the Bank may deem proper, and the Bank may purchase any or all of the Collateral at any such sale. The Bank may apply the net proceeds, after deducting all costs, expenses, attorneys' and paralegals' fees incurred or paid at any time in the collection, protection and sale of the Collateral and the Obligations, to the payment of the Note and/or any of the other Obligations, returning the excess proceeds, if any, to the Borrower. The Borrower shall remain liable for any amount remaining unpaid after such application, with interest. Any notification of intended disposition of the Collateral required by law shall be conclusively deemed reasonably and properly given if given by the Bank at least five (5) calendar days before the date of such disposition. The Borrower hereby confirms, approves and ratifies all acts and deeds of the Bank relating to the foregoing, and each part thereof. 12.3 Standards for Exercising Remedies. To the extent that applicable law imposes duties on the Bank to exercise remedies in a commercially reasonable manner, the Borrower acknowledges and agrees that it is not commercially unreasonable for the Bank (a) to fail to incur expenses reasonably deemed significant by the Bank to prepare Collateral for disposition or otherwise to complete raw material or work-in-process into finished goods or other finished products for disposition. (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against Account Debtors or other Persons obligated on Collateral or to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against Account Debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other Persons, whether or not in the same business as the Borrower, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral 32 or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, including, without limitation, any warranties of title, (k) to purchase insurance or credit enhancements to insure the Bank against risks of loss, collection or disposition of Collateral or to provide to the Bank a guaranteed return from the collection or disposition of Collateral, or (1) to the extent deemed appropriate by the Bank, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Bank in the collection or disposition of any of the Collateral. The Borrower acknowledges that the purpose of this Section is to provide non-exhaustive indications of what actions or omissions by the Bank would not be commercially unreasonable in the Bank's exercise of remedies against the Collateral and that other actions or omissions by the Bank shall not be deemed commercially unreasonable solely on account of not being indicated in this Section. Without limitation upon the foregoing, nothing contained in this Section shall be construed to grant any rights to the Borrower or to impose any duties on the Bank that would not have been granted or imposed by this Agreement or by applicable law in the absence of this Section. 12.4 UCC and Offset Rights. The Bank may exercise, from time to time, any and all rights and remedies available to it under the UCC or under any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any other agreements between any Obligor and the Bank, and may, without demand or notice of any kind, appropriate and apply toward the payment of such of the Obligations, whether matured or unmatured, including costs of collection and attorneys' and paralegals' fees, and in such order of application as the Bank may, from time to time, elect, any indebtedness of the Bank to any Obligor, however created or arising, including, but not limited to, balances, credits, deposits, accounts or moneys of such Obligor in the possession, control or custody of, or in transit to the Bank. The Borrower, on behalf of itself and each Obligor, hereby waives the benefit of any law that would otherwise restrict or limit the Bank in the exercise of its right, which is hereby acknowledged, to appropriate at any time hereafter any such indebtedness owing from the Bank to any Obligor. 12.5 Additional Remedies. The Bank shall have the right and power to: (a) instruct the Borrower, at its own expense, to notify any parties obligated on any of the Collateral, including, but not limited to, any Account Debtors, to make payment directly to the Bank of any amounts due or to become due thereunder, or the Bank may directly notify such obligors of the security interest of the Bank, and/or of the assignment to the Bank of the Collateral and direct such obligors to make payment to the Bank of any amounts due or to become due with respect thereto, and thereafter, collect any such amounts due on the Collateral directly from such Persons obligated thereon; (b) enforce collection of any of the Collateral, including, but not limited to, any Accounts, by suit or otherwise, or make any compromise or settlement with respect to any of the Collateral, or surrender, release or exchange all or any part thereof, or 33 compromise, extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (c) take possession or control of any proceeds and products of any of the Collateral, including the proceeds of insurance thereon; (d) extend, renew or modify for one or more periods (whether or not longer than the original period) the Note, any other of the Obligations, any obligation of any nature of any other obligor with respect to the Note or any of the Obligations; (e) grant releases, compromises or indulgences with respect to the Note, any of the Obligations, any extension or renewal of any of the Obligations, any security therefor, or to any other obligor with respect to the Note or any of the Obligations; (f) transfer the whole or any part of securities which may constitute Collateral into the name of the Bank or the Bank's nominee without disclosing, if the Bank so desires, that such securities so transferred are subject to the security interest of the Bank, and any corporation, association, or any of the managers or trustees of any trust issuing any of said securities, or any transfer agent, shall not be bound to inquire, in the event that the Bank or said nominee makes any further transfer of said securities, or any portion thereof, as to whether the Bank or such nominee has the right to make such further transfer, and shall not be liable for transferring the same; (g) vote the Collateral; (h) make an election with respect to the Collateral under Section 1111 of the Bankruptcy Code or take action under Section 364 or any other section of the Bankruptcy Code; provided, however, that any such action of the Bank as set forth herein shall not, in any manner whatsoever, impair or affect the liability of the Borrower hereunder, nor prejudice, waive, nor be construed to impair, affect, prejudice or waive the Bank's rights and remedies at law, in equity or by statute, nor release, discharge, nor be construed to release or discharge, the Borrower, any guarantor or other Person liable to the Bank for the Obligations; and (i) at any time, and from time to time, accept additions to, releases, reductions, exchanges or substitution of the Collateral, without in any way altering, impairing, diminishing or affecting the provisions of this Agreement, the Loan Documents, or any of the other Obligations, or the Bank's rights hereunder, under the Note or under any of the other Obligations. 34 The Borrower hereby ratifies and confirms whatever the Bank may do with respect to the Collateral and agrees that the Bank shall not be liable for any error of judgment or mistakes of fact or law with respect to actions taken in connection with the Collateral. 12.6 Attorney-in-Fact. The Borrower hereby irrevocably makes, constitutes and appoints the Bank (and any officer of the Bank or any Person designated by the Bank for that purpose) as the Borrower's true and lawful proxy and attorney-in-fact (and agent-in-fact) in the Borrower's name, place and stead, with full power of substitution, to (i) take such actions as are permitted in this Agreement, (ii) execute such financing statements and other documents and to do such other acts as the Bank may require to perfect and preserve the Bank's security interest in, and to enforce such interests in the Collateral, and (iii) carry out any remedy provided for in this Agreement, including, without limitation, endorsing the Borrower's name to checks, drafts, instruments and other items of payment, and proceeds of the Collateral, executing change of address forms with the postmaster of the United States Post Office serving the address of the Borrower, changing the address of the Borrower to that of the Bank, opening all envelopes addressed to the Borrower and applying any payments contained therein to the Obligations. The Borrower hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable. The Borrower hereby ratifies and confirms all that said attorney-in-fact may do or cause to be done by virtue of any provision of this Agreement. 12.7 No Marshaling. The Bank shall not be required to marshal any present or future collateral security (including but not limited to this Agreement and the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order. To the extent that it lawfully may, the Borrower hereby agrees that it will not invoke any law relating to the marshaling of collateral which might cause delay in or impede the enforcement of the Bank's rights under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Borrower hereby irrevocably waives the benefits of all such laws. 12.8 Application of Proceeds. The Bank will within three (3) business days after receipt of cash or solvent credits from collection of items of payment, proceeds of Collateral or any other source, apply the whole or any part thereof against the Obligations secured hereby. The Bank shall further have the exclusive right to determine how, when and what application of such payments and such credits shall be made on the Obligations, and such determination shall be conclusive upon the Borrower. Any proceeds of any disposition by the Bank of all or any part of the Collateral may be first applied by the Bank to the payment of expenses incurred by the Bank in connection with the Collateral, including attorneys' fees and legal expenses as provided for in SECTION 13 hereof 12.9 No Waiver. No Event of Default shall be waived by the Bank except in writing. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder shall operate as a waiver of the exercise of the same or any other right at any other time; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. There shall be no 35 obligation on the part of the Bank to exercise any remedy available to the Bank in any order. The remedies provided for herein are cumulative and not exclusive of any remedies provided at law or in equity. The Borrower agrees that in the event that the Borrower fails to perform, observe or discharge any of its Obligations or liabilities under this Agreement or any other agreements with the Bank, no remedy of law will provide adequate relief to the Bank, and further agrees that the Bank shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 13. MISCELLANEOUS. 13.1 Obligations Absolute. None of the following shall affect the Obligations of the Borrower to the Bank under this Agreement or the Bank's rights with respect to the Collateral: (a) acceptance or retention by the Bank of other property or any interest in property as security for the Obligations; (b) release by the Bank of all or any part of the Collateral or of any party liable with respect to the Obligations; (c) release, extension, renewal, modification or substitution by the Bank of the Note, or any note evidencing any of the Obligations, or the compromise of the liability of the Obligations; or (d) failure of the Bank to resort to any other security or to pursue the Borrower or any other obligor liable for any of the Obligations before resorting to remedies against the Collateral. 13.2 Entire Agreement. This Agreement (i) is valid, binding and enforceable against the Borrower and the Bank in accordance with its provisions and no conditions exist as to its legal effectiveness; (ii) constitutes the entire agreement between the parties; and (iii) is the final expression of the intentions of the Borrower and the Bank. No promises, either expressed or implied, exist between the Borrower and the Bank, unless contained herein. This Agreement supersedes all negotiations, representations, warranties, commitments, offers, contracts (of any kind or nature, whether oral or written) prior to or contemporaneous with the execution hereof. 13.3 Amendments; Waivers. No amendment, modification, termination, discharge or waiver of any provision of this Agreement or of the Loan Documents, or consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only for the specific purpose for which given. 13.4 WAIVER OF DEFENSES. THE BORROWER, ON BEHALF OF ITSELF AND ANY GUARANTORS OF ANY OF THE OBLIGATIONS, WAIVES EVERY PRESENT AND FUTURE DEFENSE, CAUSE OF ACTION, COUNTERCLAIM OR SETOFF WHICH THE BORROWER MAY NOW HAVE OR HEREAFTER MAY HAVE TO ANY ACTION BY THE BANK IN ENFORCING THIS AGREEMENT. THE BORROWER WAIVES ANY IMPLIED COVENANT OF GOOD FAITH AND RATIFIES AND CONFIRMS WHATEVER THE BANK MAY DO PURSUANT TO THE TERMS OF THIS AGREEMENT. THIS 36 PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER. 13.5 WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR ANY OF THE OTHER OBLIGATIONS, THE COLLATERAL, OR ANY OTHER AGREEMENT EXECUTED OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND THE BORROWER ARE ADVERSE PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER. 13.6 LITIGATION. TO INDUCE THE BANK TO MAKE THE LOANS, THE BORROWER IRREVOCABLY AGREES THAT ALL ACTIONS ARISING, DIRECTLY OR INDIRECTLY, AS A RESULT OR CONSEQUENCE OF THIS AGREEMENT, THE NOTE[S], ANY OTHER AGREEMENT WITH THE BANK OR THE COLLATERAL, SHALL BE INSTITUTED AND LITIGATED ONLY IN COURTS HAVING THEIR SITUS IN THE CITY OF CHICAGO, ILLINOIS. THE BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT HAVING ITS SITUS IN SAID CITY, AND WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS. THE BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWER AS SET FORTH HEREIN IN THE MANNER PROVIDED BY APPLICABLE STATUTE, LAW, RULE OF COURT OR OTHERWISE. 13.7 Assignability. The Bank may at any time assign the Bank's rights in this Agreement, the Note, the Obligations, or any part thereof and transfer the Bank's rights in any or all of the Collateral, and the Bank thereafter shall be relieved from all liability with respect to such Collateral. In addition, the Bank may at any time sell one or more participations in the Loans. The Borrower may not sell or assign this Agreement, or any other agreement with the Bank or any portion thereof, either voluntarily or by operation of law, without the prior written consent of the Bank. This Agreement shall be binding upon the Bank and the Borrower and their respective legal representatives and successors. All references herein to the Borrower shall be deemed to include any successors, whether immediate or remote. In the case of a joint venture or partnership, the term "Borrower" shall be deemed to include all joint venturers or partners thereof, who shall be jointly and severally liable hereunder. 13.8 Confidentiality. The Borrower and the Bank hereby agree and acknowledge that any and all information relating to the Borrower which is (i) furnished by the Borrower to the Bank (or to any affiliate of the Bank), and (ii) non-public, confidential or proprietary in nature, shall be kept confidential by the Bank or such affiliate in accordance with applicable law, provided, however, that such information and other credit information relating to the Borrower may be distributed by the Bank or such affiliate to the Bank's or such affiliate's directors, 37 officers, employees, attorneys, affiliates, auditors and regulators, and upon the order of a court or other governmental agency having jurisdiction over the Bank or such affiliate, to any other party. The Borrower and the Bank further agree that this provision shall survive the termination of this Agreement. 13.9 Binding Effect. This Agreement shall become effective upon execution by the Borrower and the Bank. If this Agreement is not dated or contains any blanks when executed by the Borrower, the Bank is hereby authorized, without notice to the Borrower, to date this Agreement as of the date when it was executed by the Borrower, and to complete any such blanks according to the terms upon which this Agreement is executed. 13.10 Governing Law. This Agreement, the Loan Documents and the Note shall be delivered and accepted in and shall be deemed to be contracts made under and governed by the internal laws of the State of Illinois (but giving effect to federal laws applicable to national banks), and for all purposes shall be construed in accordance with the laws of such State, without giving effect to the choice of law provisions of such State. 13.11 Enforceability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by, unenforceable or invalid under any jurisdiction, such provision shall as to such jurisdiction, be severable and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 13.12 Survival of Borrower Representations. All covenants, agreements, representations and warranties made by the Borrower herein shall, notwithstanding any investigation by the Bank, be deemed material and relied upon by the Bank and shall survive the making and execution of this Agreement and the Loan Documents and the issuance of the Note[S], and shall be deemed to be continuing representations and warranties until such time as the Borrower has fulfilled all of its Obligations to the Bank, and the Bank has been paid in full. The Bank, in extending financial accommodations to the Borrower, is expressly acting and relying on the aforesaid representations and warranties. 13.13 Extensions of Bank's Commitment and Note. This Agreement shall secure and govern the terms of any extensions or renewals of the Bank's commitment hereunder and the Note pursuant to the execution of any modification, extension or renewal note executed by the Borrower and accepted by the Bank in its sole and absolute discretion in substitution for the Note. 13.14 Time of Essence. Time is of the essence in making payments of all amounts due the Bank under this Agreement and in the performance and observance by the Borrower of each covenant, agreement, provision and term of this Agreement. 13.15 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 38 13.16 Facsimile Signatures. The Bank is hereby authorized to rely upon and accept as an original any Loan Documents or other communication which is sent to the Bank by facsimile, telegraphic or other electronic transmission (each, a "Communication") which the Bank in good faith believes has been signed by Borrower and has been delivered to the Bank by a properly authorized representative of the Borrower, whether or not that is in fact the case. Notwithstanding the foregoing, the Bank shall not be obligated to accept any such Communication as an original and may in any instance require that an original document be submitted to the Bank in lieu of, or in addition to, any such Communication. 13.17 Notices. Except as otherwise provided herein, the Borrower waives all notices and demands in connection with the enforcement of the Bank's rights hereunder. All notices, requests, demands and other communications provided for hereunder shall be in writing, sent by certified or registered mail, postage prepaid, by facsimile, telegram or delivered in person, and addressed as follows: If to the Borrower: Arlington Hospitality, Inc. 2355 South Arlington Heights Road Arlington Heights, Illinois 60005 Attention: Legal Department If to the Bank: LaSalle Bank National Association 2355 South Arlington Heights Road Arlington Heights, Illinois 60005 Attention: Alan L. Clark First Vice President or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this subsection. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 13.18 Indemnification. The Borrower agrees to defend (with counsel satisfactory to the Bank), protect, indemnify and hold harmless each Indemnified Party from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and distributions of any kind or nature (including, without limitation, the disbursements and the reasonable fees of counsel for each Indemnified Party thereto, which shall also include, without limitation, attorneys' fees and time charges of attorneys who may be employees of the Bank, any parent corporation or affiliated corporation of the Bank), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations, including, without limitation, securities, Environmental Laws and commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Agreement or any of the Loan Documents, or any act, event or transaction related or attendant thereto, the preparation, execution and delivery of this Agreement and the Loan Documents, including, but not limited to, the making or issuance and management of the Loans, the use or intended use of the proceeds of the Loans, the enforcement of the Bank's rights and remedies under this Agreement, the Loan Documents, the Note[S], any other instruments and 39 documents delivered hereunder, or under any other agreement between the Borrower and the Bank; provided, however, that the Borrower shall not have any obligations hereunder to any Indemnified Party with respect to matters caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it violates any law or public policy, the Borrower shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and, failing prompt payment, shall, together with interest thereon at the Default Rate from the date incurred by each Indemnified Party until paid by the Borrower, be added to the Obligations of the Borrower and be secured by the Collateral. The provisions of this SECTION 13.18 shall survive the satisfaction and payment of the other Obligations and the termination of this Agreement. 13.19 Waiver of Existing Defaults. Bank waives Borrower's failure as of December 31, 2002 to be in compliance with its covenants regarding Total Liabilities to Net Worth and consolidated EBITDA to consolidated Debt Service Charges as set forth in Sections 10.2 and 10.3 of the Loan Agreement and any Event of Default created thereby solely as of such date. This shall be a limited waiver and shall not constitute a waiver of any subsequent covenant violations or any other defaults of Borrower, if any, not expressly described herein, whether of a different or like nature, nor shall it constitute a course of conduct or dealing. 40 IN WITNESS WHEREOF, the Borrower and the Bank have executed this Amended and Restated Loan and Security Agreement as of the date first above written. ARLINGTON HOSPITALITY, INC., a Delaware corporation ATTEST: By: /s/ LEON M. VAINIKOS By: /s/ JERRY H. HERMAN ----------------------- ------------------------------------ Name: LEON M. VAINIKOS Name: Jerry H. Herman ----------------------- ------------------------------------ Title: Assistant Secretary Title: President ----------------------- ------------------------------------ and By: /s/ JAMES B. DALE ------------------------------------ Name: JAMES B. DALE ------------------------------------ Title: Secretary ------------------------------------ Agreed and accepted: LASALLE BANK NATIONAL ASSOCIATION, a national banking association By: /s/ ALAN L. CLARK ------------------------------------ Name: Alan L. Clark ------------------------------------ Title: S.V.P. ------------------------------------ 41 EXHIBIT A AMENDED AND RESTATED REVOLVING NOTE Chicago, Illinois $6,500,000.00 Dated: April 30, 2003 Due: April 30, 2004 FOR VALUE RECEIVED, ARLINGTON HOSPITALITY, INC., a Delaware corporation (together with its respective successors and assigns, individually and collectively, the "Borrower"), promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"), the principal sum of SIX MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($6,500,000.00), or, if less, the aggregate unpaid principal amount of all advances made by the Bank to the Borrower hereunder, on April 30, 2004. This Note constitutes the Amended and Restated Revolving Note issued pursuant to an Amended and Restated Loan and Security Agreement dated as of April 30, 2003, which amended and restated a certain Loan and Security Agreement dated as of February 1, 2002, as amended by a certain First Amendment to Loan and Security Agreement dated as of February 1, 2002, as of August 9, 2002 and a certain Second Amendment to Loan and Security Agreement dated as of December 10, 2002 (collectively, the "Loan Agreement") by and between the Borrower and the Bank, to which Loan Agreement reference is hereby made for a statement of the terms and conditions under which the Revolving Loans evidenced hereby may be made and a description of the terms and conditions upon which this Note may be prepaid in whole or in part, but shall not constitute payment of the Revolving Note dated February 1, 2002, as replaced by a Substitute Revolving Note dated December 10, 2002, or constitute a novation thereof. In case an Event of Default, as defined in the Loan Agreement, shall occur, the entire unpaid principal and accrued interest may be automatically due and payable or may be declared due and payable as provided in the Loan Agreement. The unpaid principal shall bear interest from the date hereof until paid as set forth in the Loan Agreement. Interest shall be payable in accordance with the terms of the Loan Agreement. This Note is subject to optional and mandatory prepayment in certain circumstances, all as set forth in the Loan Agreement. In the event that any installment of the principal of, or interest on, this Note, is not paid when due (whether at stated maturity, by acceleration or otherwise), the entire principal amount outstanding shall bear interest at an annual rate equal to the Prime Rate (as defined in the Loan Agreement) plus five percent (5%) per annum, from the due date until all overdue amounts have been paid in full. Payments of both principal and interest are to be made in lawful money of the United States of America at the offices of the Bank at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the holder shall designate in writing to the maker. This Note is secured by a security interest in Collateral (as defined in the Loan Agreement) and by those certain Mortgages (as defined in the Loan Agreement) dated of even date herewith, each made by a Subsidiary (as defined in the Loan Agreement) for the benefit of the Bank. The maker and all endorsers hereby severally waive presentment for payment, protest and demand, notice of protest, demand and of dishonor and nonpayment of this Note. Borrower hereby agrees to pay all reasonable fees and expenses incurred by the Bank or any subsequent holder, including the reasonable fees of counsel, in connection with protection and enforcement of the rights of the Bank or any subsequent holder under this Note, including without limitation the collection of any amounts due under this Note and the protection and enforcement of such rights in any bankruptcy, reorganization or insolvency proceeding involving the Borrower. This Note is binding upon Borrower and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois, without regard to conflicts of laws principles. IN WITNESS WHEREOF, Borrower has executed this Amended and Restated Revolving Note as of the day and year first above written. ARLINGTON HOSPITALITY, INC. a Delaware corporation By: ________________________________ Its: _______________________________ and By: ________________________________ Its: _______________________________ 2 EXHIBIT B --------- THE LAND THAT PART OF THE EAST FRACTIONAL HALF OF THE SOUTHEAST FRACTIONAL QUARTER OF SECTION 30, TOWNSHIP 41, NORTH, RANGE 13 LYING SOUTH OF GROSS POINT ROAD (HARTS ROAD) (CALEDONIAN ROAD) (EXCEPT THE EAST 150 FEET THEREOF, MEASURED ALONG THE NORTH LINE OF TOUHY AVENUE); AND WHICH LIES NORTHEASTERLY OF A LINE WHICH IS PARALLEL TO THE NORTHEASTERLY LINE OF CALDWELL AVENUE AND 171 FEET (MEASURED AT RIGHT ANGLES TO SAID NORTHERN EASTERLY LINE OF SAID CALDWELL AVENUE), (EXCEPTING FROM SAID TRACT THE FOLLOWING DESCRIBED PROPERTY: COMMENCING AT THE POINT OF INTERSECTION OF THE NORTH LINE OF TOUHY AVENUE WITH A LINE 171 FEET NORTHEASTERLY OF, AND MEASURED AT RIGHT ANGLES TO, THE NORTHEASTERLY LINE OF CALDWELL AVENUE; THENCE NORTHWESTERLY ALONG LINE PARALLEL TO CALDWELL AVENUE, 108 FEET, 1 INCH FOR A PLACE OF BEGINNING; THENCE CONTINUING NORTHWESTERLY ALONG SAID PARALLEL LINE 172 3 1/2 INCHES, MORE OR LESS, TO A POINT WHICH INTERSECTS A LINE DRAWN PERPENDICULAR TO THE NORTHEASTERLY LINE OF CALDWELL AVENUE, SAID LINE BEING 171 FEET NORTHWESTERLY (MEASURED ALONG SAID NORTHEASTERLY LINE OF CALDWELL AVENUE), FROM THE NORTHEASTERLY (MEASURED ALONG SAID NORTHEASTERLY LINE OF CALDWELL AVENUE), FROM THE NORTHEASTERLY CORNER OF TOUHY AND CALDWELL AVENUES; THENCE NORTHEASTERLY ALONG SAID PERPENDICULAR LINE, 113 FEET 8 1/4 INCHES; THENCE SOUTH 206 FEET 8 1/2 INCHES, MORE OR LESS, TO THE PLACE OF BEGINNING, IN COOK COUNTY, ILLINOIS. Property Address: 6450 West Touhy Avenue, Niles, Illinois Permanent Index Number: 10-30-404-008 Legal Description Situate in the City of Wilmington, County of Clinton and State of Ohio, being part of Military Survey No. 2690, and being Lot #1 of the Meadow Park Business Center and being more particularly described as follows: Beginning at the northwesterly corner of Carrie Drive; thence with the west right-of-way line of said Carrie Drive S 24 deg. 56' 23'' E a distance of 59.00 feet to the TRUE POINT OF BEGINNING; thence from said TRUE POINT OF BEGINNING on a curve to the right having a radius of 30 feet, a della of 90 degrees, an arc length of 47.12 feet and a chord length of 42.43 feet, bearing S 20 deg. 03' 37'' W to a point on the north right-of-way of Alex Drive; thence with the north right-of-way of Alex Drive S 65 deg. 03' 37'' W a distance of 130.25 feet to a point; thence on a curve to the right having a radius of 575.00 feet, a della of 03 deg. 45' 50'', an arc length of 37.77 feet and a chord length of 37.77 feet, bearing S 66 deg. 56' 32'' W to a point; thence leaving the north right-of-way of Alex Drive N 24 deg. 56' 23'' W a distance of 391.75 feet to a point on the south right-of-way of the Baltimore and Ohio Railroad, said point being N 74 deg. 21' 48'' E a distance of 655.14 feet from the northwest corner of Robert A. Ralzk property as conveyed by Official Record 92, Page 639, in the Official Records of Clinton County, Ohio said point also being on the City of Wilmington Corporation line as recorded as of this date; thence continuing with the south line of the Baltimore and Ohio Railroad and the City of Wilmington Corporation Line N 74 deg. 21' 48'' E a distance of 200.64 feet to a point; thence leaving the south line of said Balitimore and Ohio Railroad and the City of Wilmington Corporation Line S 24 deg. 56' 23'' E a distance of 330.55 feet to the TRUE POINT OF BEGINNING, containing 1.7078 acres, more or less, subject, however, to all legal highways, easements, restrictions and agreements of record. Property Address: 201 Carrie Drive, Wilmington, Ohio 45177 Tax Numbers: Legal Description ----------------- SITUATED IN THE COUNTY OF WYANDOT IN THE SATE OF OHIO AND IN THE CITY OF UPPER SANDUSKY AND BOUNDED AND DESCRIBED AS FOLLOWS: BEING A PARCEL OF LAND SITUATED IN THE SOUTHWEST QUARTER (1/4) OF SECTION TWENTY-SEVEN (27), TOWN-TWO (92) SOUTH, RANGE FOURTEEN (14) EAST, CITY OF UPPER SANDUSKY, WYANDOT COUNTY, OHIO, DESCRIBED AS FOLLOWS: COMMENCING AT A FOUND RAILROAD SPIKE MARKING THE INTERSECTION OF THE CENTERLINE OF TOWNSHIP HIGHWAY ONE HUNDRED TWENTY-TWO (122) AND THE CENTERLINE OF U.S. ROUTE THIRTY (30); THENCE S 72 DEGREES 00'17" W TWO HUNDRED THIRTY-EIGHT AND FORTY-ONE HUNDREDTHS (238.41) FEET ALONG THE CENTERLINE OF U.S. ROUTE THIRTY (30) TO A FOUND PK NAIL; THENCE N 17 DEGREES 59'43" W FORTY-FIVE (45.00) FEET TO A SET IRON ROD; THENCE S 72 DEGREES 00'17"W FOUR HUNDRED FORTY-FIVE (445.00) FEET ALONG THE NORTHERLY RIGHT-OF-WAY OF U.S. ROUTE THIRTY (30) TO A SET IRON ROD; THENCE N 68 DEGREES 45'21"W SIXTY-SIX AND SIXTY HUNDREDTHS (66.60) FEET ALONG THE NORTHERLY RIGHT-OF-WAY OF U.S. ROUTE THIRTY (30) TO A FOUND IRON ROD; THENCE N 41 DEGREES 58'58"W TWO HUNDRED FOUR AND THIRTY-NINE HUNDREDTHS (204.39) FEET ALONG THE EASTERLY RIGHT-OF-WAY OF STATE ROUTE TWENTY-THREE (23) TO A FOUND IRON ROD MARKING THE POINT OF BEGINNING; THENCE N 82 DEGREES 23'23"W THREE HUNDRED FORTY-EIGHT AND FIFTY-SEVEN HUNDREDTHS (348.57) FEET ALONG THE EASTERLY RIGHT-OF-WAY OF STATE ROUTE TWENTY-THREE (23) TO A FOUND IRON ROD; THENCE N 62 DEGREES 27'53" W ONE HUNDRED THIRTY-THREE AND NINETY-TWO HUNDREDTHS (133.92) FEET ALONG THE EASTERLY RIGHT-OF-WAY OF STATE ROUTE TWENTY-THREE (23) TO A FOUND IRON ROD; THENCE N 00 DEGREES 32'00" WEST ONE HUNDRED SIXTY-FOUR AND TWO HUNDREDTHS (164.02) FEET ALONG THE EASTERLY LINE OF A PARCEL OF LAND OWNED BY RALPH E. SHINDLER (DEED VOLUME 139, PAGE 260) TO A SET IRON ROD; THENCE S 82 DEGREES 23'23" E FIVE HUNDRED TWENTY-EIGHT AND FIFTY-ONE HUNDREDTHS (528.51) FEET TO A SET IRON ROD; THENCE S 07 DEGREES 36'37" W ONE HUNDRED FIFTY-EIGHT AND SEVENTY-ONE HUNDREDTHS (158.71) FEET TO A SET IRON ROD; THENCE S 72 DEGREES 00'17"W SIXTY-TWO AND NINETY-FOUR HUNDREDTHS (62.94) FEET TO A SET IRON ROD; THENCE S 41 DEGREES 58'58"E THIRTY-FOUR AND SEVEN HUNDREDTHS (34.07) FEET TO THE POINT OF BEGINNING. CONTAINING IN ALL 2.3502 ACRES OF LAND MORE OR LESS, SUBJECT TO ALL LEGAL HIGHWAYS AND VOL 56 PAGE 842 VOL 56 PAGE 843 (Continued) EASEMENTS. THE BEARINGS ARE ASSUMED AND FOR ANGULAR MEASUREMENTS ONLY. THIS LEGAL DESCRIPTION IS BASED UPON A SURVEY DONE FOR BOB EVANS FARMS BY KUSMER & ASSOCIATES, INC. IN MARCH, 1994 Property Address: 1726 E. Wyandot Avenue, Upper Sandusky, Ohio 43351 Tax Numbers: Legal Description ----------------- Parcel No. 1 Situated in Cambridge Township, County of Guernsey and State of Ohio and being part of Military Lots 39 and 26, Township 1 North, Range 3 West, of the United States Military Lands Survey, and being more particularly described as follows: Commencing for reference at a 5/8" iron pin in concrete found at the Southeast corner of Military Lot 39; thence with the East line of Military Lot 39 North 2 deg. 21' 30" East a distance of 495.96 feet to a point and being the point of beginning of the tract of land to be described; thence leaving the East line of Military Lot 39 South 65 deg. 01' 24" West a distance of 166.73 feet to a 5/8" iron pin set and passing a 5/8" iron pin set at a distance of 10.34 feet; thence North 24 deg. 58' 36" West a distance of 419.99 feet to a 5/8" iron pin set; thence North 2 deg. 21' 30" East a distance of 178.13 feet to a PK nail set in rock, from which a 5/8" iron pin in concrete with a 1-1/4" plastic ID cap stamped SPILKER LS5862 found bears South 53 deg. 57' 04" West at a distance of 157.73 feet; thence with property belonging to Novelty Company, Inc. by deed reference Volume 357, Page 487, North 53 deg. 57' 04" East a distance of 163.14 feet to a point in State Route 209 and passing a 5/8" iron pin in a concrete with a 1-1/4" plastic ID cap stamped SPILKER LS5862 found at a distance of 80.01 feet; thence with State Route 209 continued Page 1 and with property belonging to Parkway Holding Corporation by deed reference Volume OR 85, Page 904, the following two bearings and distances: 1) with a curve to the left having a radius of 8495.33 feet and a chord bearing South 43 deg. 19' 19" East at a distance of 181.49 feet to a point; 2) South 43 deg. 55' 14" East a distance of 26.53 feet to a point; thence leaving State Route 209 and with property belonging to R.G. Silvestri Enterprises, Inc. by deed reverence Volume 385, Page 456, the following four bearings and distances: 1) South 2 deg. 21' 30" West a distance of 86.09 feet to a 5/8" iron pin set; 2) South 5 deg. 42' 46" East a distance of 165.86 feet to a 5/8" iron pin with 1-1/4" plastic ID cap stamped GARDNER LS6684 found; 3) North 67 deg. 59' 48" East a distance of 44.81 feet to a 5/8" iron pin with 1-1/4" plastic ID cap stamped GARDNER LS6684 found; 4) North 2 deg. 52' 03" East a distance of 167.54 feet to a point in State Route 209 and passing a 5/8" iron pin set at a distance of 50.51 feet; thence with State Route 209 and with property belonging to R.G. Silvestri Enterprises, Inc. by deed reference Volume 385, Page 456, South 43 deg. 42' 36" East a distance of 343.15 feet to a point; thence leaving State Route 209 South 65 deg. 01' 24" West a distance of 279.86 feet to the point of beginning, passing a 5/8" iron pin set at a distance of 89.75 feet, containing 4.271 acres, with 3.224 acres, being in Military Lot 39 and 1.047 acres, being in Military Lot 26, and subject to the public easements of State Route 209 and any other public or private easements of record. The above 4.271 acre survey is intended to described part of the 20.942 acre surveyed tract in Military lot 39 as deeded to William L. and Nancy A. Baker, deed reference Volume OR 16, Page 887, Auditors Parcel #04-00048, and part of the 4.611 acre surveyed tract in Military Lot 26 as deeded to William L. and Nancy A. Baker, deed reference volume OR 27, Page 142, Auditors Parcel #04-00146, both of the Guernsey County Recorder's and Auditor's Offices. This survey was based upon information obtained from tax maps, deed descriptions, previous surveys, existing monumentation, and an existing public road. The reference bearing for this survey is the East line of Military Lot 39 as North 2 deg. 21' 30" East. Bearings are based upon an assumed meridian and are to denote angles only. All iron pins set by this survey are 5/8" by 30" and are capped by a 1-1/4" plastic identification cap stamped LPG-6344. The above described property was surveyed by Larry P. Gernstner, Ohio Registered Surveyor No. 6344, on April 7, 1997. Parcel No. 2 - Easement parcel TOGETHER WITH a ingress and egress easement in the Deed of Easement from William L. Baker and Nancy A. Baker to Cambridge, OH 996 Limited Partnership, dated June 4, 1997, filed for record June 5, 1997 and recorded in Volume 157, Page 40 of Guernsey County Records, and bounded and described as follows: Situated in Cambridge Township, County of Guernsey and State of Ohio, and being part of Military Lot 39, Township 1 North, Range 3 West, of the United States Military Land Survey; being a surveyed easement of ingress and egress; and being more particularly described as follows: Commencing for reference at a 5/8" iron pin in concrete found at the Southeast corner of Military Lot 39; thence with the East line of Military Lot 39 North 2 deg. 21' 30" East a distance of 495.96 feet to a point; thence leaving the East line of Military Lot 39 South 65 deg. 01' 24" West a distance of 166.73 feet to a 5/8" iron pin set and passing a 5/8" iron pin set at a distance of 10.34 feet; thence North 24 deg. 58' 36" West a distance of 419.99 feet to a 5/8" iron pin set; thence North 2 deg. 21' 30" East a distance of 178.13 feet to a PK nail set in rock, from which a 5/8" iron pin in concrete with a 1-1/4" plast ID cap stamped SPILKER LS5862 found bears South 53 deg. 57' 04" West a distance of 157.73 feet and being the point of beginning of the easement of ingress and egress to be described; thence North 12 deg. 28' 30" East a distance of 92.90 feet to a 5/8" iron pin set; thence North 27 deg. 09' 41" East a distance of 40.36 feet to a PK nail set in the pavement of State Route 209; thence with the pavement of State Route 209 South 42 deg. 50' 10" East a distance of 66.76 feet to a point; thence leaving the pavement of State Route 209 and with property belonging to William L. and Nancy A. Baker by deed reference Volume OR 16, Page 887, South 53 deg. 57' 04" West a distance of 117.57 feet to the point of beginning, passing a 5/8" iron pin with 1-1/4" plastic ID cap stamped SPILKER LS5862 found at a distance of 37.56 feet, containing .114 acres, are subject to the public easement of State Route 209 and any other public or private easements of record. The above .114 acre survey easement of ingress and egress is intended to described part of the 1.003 acre surveyed tract in Military Lot 39 as deeded to Novelty Company, Inc., deed reference Volume 357, Page 487, Auditor's Parcel #04-00369, Guernsey County Recorder's and Auditor's Offices. This survey was based upon information obtained from tax maps, deed descriptions, previous surveys, existing monumentation, and an existing public road. The reference bearing for this survey is the East line of Military Lot 39 as North 2 deg. 21' 30" East. Bearings are based upon an assumed meridian and are to denote angles only. All iron pins set by this survey are 5/8" by 30" and are capped by a 1-1/4" plastic identification cap stamped LPG-6344. The above described property was surveyed by Larry P. Gerstner, Ohio Registered Surveyor No. 6344, on April 7, 1997. Property Address: 61595 Southgate Parkway, Cambridge, Ohio 43725 Tax Numbers: All that certain tract or parcel of land situate in the City of New Martinsville, Magnolia District, Wetzel County, West Virginia, being between the B & O Railroad and West Virginia Route No. 2 and on the south side of Williams Run; and being more particularly described as follows: COMMENCING for reference at the Southwest corner of the concrete bridge spanning Williams Run on West Virginia Route No. 2; thence with the West right of way of West Virginia Route No. 2 South 0 degrees 43 minutes 25 seconds East a distance of 185.79 feet to a 5/8" iron pin in concrete found at the Northeast corner of Robinson Enterprises property; thence leaving the west right of way of West Virginia Route No. 2 and with Robinson Enterprises property South 89 degrees 14 minutes 04 seconds West a distance of 250.07 feet to a 5/8" iron pin in concrete found at the Northwest corner of Robinson Enterprises property and being the point of beginning of the tract of land to be described; thence with Robinson Enterprises property South 0 degrees 48 minutes 18 seconds East a distance of 199.94 feet to 5/8" iron pin in concrete found at the Southwest corner of Robinson Enterprises property and the Northwest corner of McDonalds Corporation property; thence with McDonalds Corporation property South 0 degrees 45 minutes 55 seconds East a distance of 170.13 feet to a 5/8" iron pin in concrete found at the southwest corner of McDonalds Corporation property; thence with Robert M. Robinson, Trustee property South 89 degrees 14 minutes 55 seconds West a distance of 296.65 feet to a 1/2" iron pin in concrete found at the Northwest corner of Robert M. Robinson, Trustee property on the East right of way of the B & O Railroad; thence with the East right of way of the B & O Railroad North 8 degrees 16 minutes 00 seconds East a distance of 374.64 feet to a 5/8" iron pin set; thence leaving the East right of way of the B & O Railroad North 89 degrees 14 minutes 04 seconds East a distance of 237.70 feet to the point of beginning, containing 2.270 acres, more or less, subject to any public or private easements of record as surveyed by Larry P. Gerstner, West Virginia, Registered Engineer No. 11142, from field work done on July 19, 1995. TOGETHER WITH a non-exclusive easement for ingress to and egress from said tract or parcel of land which is more particularly described as follows: COMMENCING for reference at the Southwest corner of the concrete bridge spanning Williams Run on West Virginia Route No. 2; thence with the West right of way of West Virginia Route No. 2 South 0 degrees 43 minutes 25 seconds East a distance of 145.79 feet to a point and being the point of beginning of the shared easement of ingress and egress; thence continuing with the West right of way of West Virginia Route 2 South 0 degrees 43 minutes 25 seconds East a distance of 40.00 feet to a 5/8" iron pin in concrete found at the Northeast corner of Robinson Enterprises property; thence leaving the West right of way of West Virginia Route No. 2 and with Robinson Enterprises property South 89 degrees 14 minutes 04 seconds West a distance of 292.07 feet to a point and passing a 5/8" iron pin in concrete found at the Northwest corner of Robinson enterprises property at a distance of 250.07 feet; thence North 0 degrees 43 minutes 25 seconds West a distance of 40.00 feet to a point; thence North 89 degrees 14 minutes 04 seconds East a distance of 292.07 feet to the point of beginning, containing 0.268 acres, more of less, subject to any other public or private easements of record as surveyed by Larry P. Gerstner, West Virginia Registered Engineer No. 11142, from field work done on July 19, 1995. Property Address: 166 N. State Route 2, New Martinsville, West Virginia 26155 52 Legal Description A 2.228 acre tract of land as surveyed by the firm of Trinity Engineering, Inc., of Murray, Kentucky, on July 18, 1995, located at the Southeast corner of the intersection of U.S. Highway 641 and Southwood Drive in the City of Murray, Calloway County, Kentucky, and being known as Tract 1 of the Minor Subdivision Plat of the Thanos Karvounis property as recorded in Plat Book 20, Page 10 and being more particularly described as follows: Beginning at a fence post (found on the south right of way of Southwood Drive (50' right of way), 490 feet East of the centerline of U.S. Highway 641, and being the Northeast corner of the herein described tract of land and the Northwest corner of the John Randolph property; thence South 03 degrees 41'50'' West for a distance of 231.63 feet with the West line of the John Randolph property to an iron pin (found), said pin being a point on the West line of the John Randolph property and a point on the East line of the herein described tract of land; thence 03 degrees 44'32'' West for a distance of 30.00 feet with the West line of the John Randolph property to a #4 rebar (set), said rebar being a point on the West line of the John Randolph property and the Southeast corner of the herein described tract of land; thence North 86 degrees 15'28'' West for a distance of 300.00 feet with the North line of Tract 2 of the remaining portion of the Thanos Karvounis property to a #4 rebar (set), said rebar being the southerly most Southwest corner of the herein described tract of land; thence North 56 degrees 35'37'' West for a distance of 151.55 feet with the North line of Tract 2 of the remaining portion of the Thanos Karvounis property to a #4 rebar (set), said rebar being the Northwest corner of Tract 2 of the Thanos Karvounis property and the Southeast corner of the herein described tract of land; thence North 20 degrees 37'18'' East for a distance of 115.00 feet with the East line of Tract 3, (to be dedicated to the City of Murray), to a #4 rebar (set), said rebar being the Northeast corner of Tract 3 and the Northwest corner of the herein described tract of land; thence North 72 degrees 40'06'' East for a distance of 180.27 feet with the South right of way of Southwood Drive to a concrete right of way monument (found), said monument being a point on the North line of the herein described tract of land; thence North 84 degrees 13'04'' East for a distance of 168.64 feet with the South right of way of Southwood Drive to a concrete right of way monument (found), said monument being a point on the North line of the herein described tract of land; thence South 76 degrees 48'16'' East for a distance of 11.31 feet with the South right of way of Southwood Drive to a fence post (found), said fence post being a point on the North line of the herein described tract of land; thence South 71 degrees 00'32'' East for a distance of 54.35 feet with the South right of way of Southwood Drive to the point of beginning. Together with and subject to convenants, restrictions, and easements of recsord. Being the same lands conveyed by deed from Murray, KY 695 Limited Partnership to AP Properties of Ohio, Inc., dated September 1, 1998 and of record in Book 295, Page 325 in the Calloway County Court Clerk's Office. Property Address: 1210 North 12th Street, Murray Kentucky 42071 Tax Numbers: Legal Description ----------------- BOOK 1010 PAGE 258 All that certain tract or parcel of land situate in the District of Tygart, Wood County, West Virginia, being between the rights of way of West Virginia Route 14 and Nicolette Road, and being more particularly described as follows: COMMENCING for reference a 5/8" iron pin found at the Southeast corner of a 6.804 acre tract surveyed December 4, 1995 by Floyd E. Anderson under the direction of Paul H. Cochran: thence with the East line of said survey and the West right of way of Nicolette Road the following two bearings and distances: 1) North 26 degrees 27' 00" East a distance of 252.74 feet to a 5/8" iron pin set: 2) North 35 degrees 47' 00" East a distance of 54.90 feet to a 5/8" iron pin set and being the point of BEGINNING of the tract of land to be described; thence leaving the East line of said survey and the West right of way of Nicolette road North 54 degrees 13' 00" West a distance of 237.17 feet to a 5/8" iron pin set on the East right of way of West Virginia State Route 14; thence with the East right of way of West Virginia Route 14 North 26 degrees 14' 00" East a distance of 406.15 feet to a 5/8" iron pin set; thence leaving the East right of way West Virginia State Route 14 South 54 degrees 13' 00" East a distance of 304.94 feet to a 5/8" iron pin set on the West right of way of Nicolette Road; thence with the West right of way of Nicolette Road the following two bearings and distances: 1) South 37 degrees 06' 00" West a distance of 16.72 feet to a 5/8" iron pin set; 2) South 35 degrees 47' 00" West a distance of 383.81 feet to the point of beginning. TOGETHER WITH a non-exclusive access easement which is more particularly described as follows: SITUATED in Tygart District 300, Wood County, West Virginia: being a shared easement for ingress and egress and the location of utilities located between the rights of way of West Virginia Route 14 and Nicolette Road: and being more particularly described as follows: COMMENCING for reference at a 5/8" iron pin found at the Southeast corner of a 6.804 acre tract surveyed December 4, 1995 by Floyd E. Anderson under the direction of Paul H. Cochran on the West right of way of Nicolette Road: thence with the West right of way of Nicolette Road North 26 degrees 27' 00" East a distance of 100.00 feet to a 5/8" iron pin set and being the point of beginning of the easement to be described; thence leaving the West right of way of Nicolette Road North 31 degrees 42' 30" West a distance of 45.65 East to a 5/8" iron pin set; thence North 9 degrees 05' 50" East a distance of 37.63 feet to a 5/8" iron pin set; thence North 26 degrees 27' 00" East a distance of 156.60 feet to a 5/8" iron pin set; thence South 54 degrees 13' 00" East a distance of 59.69 feet to a 5/8" iron pin set on the West right of way of Nicolette Road; thence with the West right of way of Nicolette Road the following two bearings and distances: 1) South 35 degrees 47' 00" West a distance of 54.90 feet to a 5/8" iron pin set: 2) South 26 degrees 27' 00" West a distance of 152.74 feet to the point or beginning. Property Address: 201 Hospitality Lane, Mineral Wells, West Virginia 26150 Tax Numbers: LEGAL DESCRIPTION: A PARCEL OF LAND LOCATED IN THE SOUTHEAST QUARTER OF THE SOUTHWEST QUARTER AND OF THE SOUTHWEST QUARTER OF THE SOUTHEAST QUARTER OF SECTION 17, TOWNSHIP 92 NORTH, RANGE 45 WEST OF THE FIFTH PRINCIPAL MERIDIAN, DESCRIBED AS FOLLOWS: COMMENCING AT THE NORTHEAST CORNER OF THE SOUTHEAST QUARTER OF SAID SECTION 17; THENCE NORTH 90 DEGREES 00 MINUTES 00 SECONDS WEST, 103.80 FEET; THENCE SOUTH 00 DEGREES 00 MINUTES 00 SECONDS WEST, 66.00 FEET TO THE ORIGINAL NORTHWESTERLY RIGHT OF WAY LINE OF U.S. HIGHWAY NO. 75; THENCE SOUTH 46 DEGREES 25 MINUTES 00 SECONDS WEST, 3193.22 FEET ALONG SAID NORTHWESTERLY RIGHT OF WAY LINE TO THE POINT OF BEGINNING; THENCE CONTINUING SOUTH 46 DEGREES 25 MINUTES 00 SECONDS WEST, 180.00 FEET; THENCE NORTH 43 DEGREES 12 MINUTES 00 SECONDS WEST, 163.53 FEET; THENCE SOUTH 46 DEGREES 25 MINUTES 00 SECONDS WEST, 120.34 FEET; THENCE NORTH 35 DEGREES 42 MINUTES 05 SECONDS WEST, 179.22 FEET; THENCE NORTH 33 DEGREES 03 MINUTES 20 SECONDS EAST, 282.31 FEET; THENCE SOUTH 43 DEGREES 35 MINUTES 00 SECONDS EAST, 406.29 FEET TO THE POINT OF BEGINNING, IN PLYMOUTH COUNTY, IOWA. NOTE: THE NORTHWESTERLY RIGHT OF WAY LINE OF U.S. HIGHWAY NO. 75 WAS ASSUMED TO BEAR SOUTH 46 DEGREES 25 MINUTES 00 SECONDS WEST. Property Address: 1314 12th Street SW, Le Mars, Iowa 51031 Tax Numbers: Situated in the State of Ohio, in the County of Franklin and in the Village of Canal Winchester, Franklin County, Ohio. Being a tract of land containing 1.791 acres, more or less, Village of Canal Winchester, Franklin County, Ohio. Situated in the State of Ohio, County of Franklin, Village of Canal Winchester in Quarter Section 25, Township 11, Range 21, Congress Lands and being all out of that tract of land as conveyed to Winchester Investment Company of record in Deed Book 3478, Page 335 (all references refer to the records of the Recorder's Office Franklin County, Ohio) and as described as follows: Beginning at an iron pin set in the Westerly right-of-way line of Prentiss School Drive being North 04 deg. 04' 41" East, a distance of 327.43 and North 89 deg. 55' 19" West, a distance of 27.00 feet from the centerline intersection of said Prentiss School Drive with Canal Street as the same is shown on the plat entitled Canal Street Gender Road and Prentiss School Drive dedication and Easements of record in Plat Book 87 Page 40; thence with a new division line across said Winchester Investment Company tract the following courses; South 89 deg. 35' 38" West, a distance of 375.00 feet to an iron pin set; North 00 deg. 04' 41" East, a distance of 208.00 feet to an iron pin set; North 89 deg. 35' 38" East, a distance of 375.00 feet to an iron pin set in said Westerly right-of-way line; thence South 00 deg. 04' 41" West with said Westerly right-of-way line a distance of 208.00 feet to the point of beginning and containing 1.791 acres of land more or less. Subject, however, to all legal rights-of way and/or easements, if any, of previous record. The basis of bearing for the description is North 00 Deg. 04' 41" East for the centerline of Prentiss School Drive Dedication and Easements of record in plat Book 87, Page 40. EX-21.1 5 c84140exv21w1.txt SUBSIDIARIES OF THE REGISTRANT . . . Exhibit 21.1 ARLINGTON HOSPITALITY, INC. LISTING OF SUBSIDIARIES
State of Incorporation Ownership Entity or Organization Percentage - -------------------------------------------- ------------------- ---------- Arlington Hospitality Development, Inc. Illinois 100.00% Arlington Hospitality Management, Inc. Illinois 100.00% Arlington Hospitality Staffing, Inc. Illinois 100.00% Arlington Inns, Inc. Delaware 100.00% Arlington Inns of America, Inc. Delaware 100.00% Arlington Inns of Illinois, Inc. Illinois 100.00% Arlington Inns of Michigan, Inc. Michigan 100.00% Arlington Inns of Ohio, Inc. Ohio 100.00% Arlington Lodging Group, Inc. Delaware 100.00% Arlington Office Group, Inc. Illinois 100.00% AP Equities of Florida, Inc. Florida 100.00% AP Hotels of California, Inc. California 100.00% AP Hotels of Georgia, Inc. Georgia 100.00% AP Hotels of Illinois, Inc. Illinois 100.00% AP Hotels of Iowa, Inc. Iowa 100.00% AP Hotels of Michigan, Inc. Delaware 100.00% AP Hotels of Mississippi, Inc. Mississippi 100.00% AP Hotels of Missouri, Inc. Missouri 100.00% AP Hotels of Ohio, Inc. Delaware 100.00% AP Hotels of Oklahoma, Inc. Oklahoma 100.00% AP Hotels of Pennsylvania, Inc. Pennsylvania 100.00% AP Hotels of Texas, Inc. Delaware 100.00% AP Hotels of Wisconsin, Inc. Wisconsin 100.00% AP Hotels/Parkersburg, WV, Inc. West Virginia 100.00% AP Lodging of Ohio, Inc. Ohio 100.00% AP Properties of Mississippi, Inc. Mississippi 100.00% AP Properties of Ohio, Inc. Ohio 100.00% API of Indiana, Inc. Indiana 100.00% API/Athens, OH, Inc. Ohio 100.00% API/Columbia City, IN, Inc. Indiana 100.00% API/Hammond, IN, Inc. Indiana 100.00% API/Lancaster, OH, Inc. Ohio 100.00% API/Logan, OH, Inc. Ohio 100.00% API/Metropolis, IL, Inc. Illinois 100.00% API/Plainfield, Inc. Indiana 100.00% API/Washington C.H., OH, Inc. Ohio 100.00% Niles, Illinois Hotel Corporation Illinois 100.00% Shorewood Hotel Investments, Inc. Illinois 100.00% Metropolis, IL 1292 Limited Partnership Illinois 54.90% Dayton, Ohio 1291 Limited Partnership Ohio 61.50% Altoona, PA 792 Limited Partnership Pennsylvania 62.78%
EX-23.1 6 c84140exv23w1.txt CONSENT OF KPMG LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT Board of Directors Arlington Hospitality, Inc.: We consent to the incorporation by reference in the registration statements on Form S-3 (no. 33-72742 and 33-32333) and on Form S-8 (no. 33-32331) of Arlington Hospitality, Inc. of our report dated March 26, 2004, relating to the consolidated balance sheets of Arlington Hospitality, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows each of the years in the three-year period ended December 31, 2003, which report appears in the December 31, 2003, Annual Report on Form 10-K of Arlington Hospitality, Inc. KPMG LLP Chicago, Illinois March 30, 2004 EX-31.1 7 c84140exv31w1.txt 302 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 Annual Report on Form 10-K 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 officer 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: March 30, 2004 /s/ Jerry H. Herman --------------------------- Chief Executive Officer EX-31.2 8 c84140exv31w2.txt 302 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 Annual Report on Form 10-k 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 officer 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: March 30, 2004 /s/ James B. Dale ----------------------------- Chief Financial Officer EX-32.1 9 c84140exv32w1.txt 906 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2004, 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 Annual 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 March 30, 2004 EX-32.2 10 c84140exv32w2.txt 906 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2004, 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 Annual 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 March 30, 2004 -----END PRIVACY-ENHANCED MESSAGE-----