-----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, BZ72PM5PBLZ/TQCCvO/8FY/LmaTBjBfwW4U29UBqbnmeMhXOuu4ZBYO/L3p4vO15 eGYi5J7K0Yk52IgyGz4pVQ== 0000914760-00-000068.txt : 20000327 0000914760-00-000068.hdr.sgml : 20000327 ACCESSION NUMBER: 0000914760-00-000068 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERIHOST PROPERTIES INC CENTRAL INDEX KEY: 0000778423 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 363312434 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15291 FILM NUMBER: 577050 BUSINESS ADDRESS: STREET 1: 2400 E DEVON AVE STE 280 CITY: DES PLAINES STATE: IL ZIP: 60018 BUSINESS PHONE: 7082984500 MAIL ADDRESS: STREET 1: 2400 E DEVON AVE STREET 2: SUITE 280 CITY: DES PLAINES STATE: IL ZIP: 60018 FORMER COMPANY: FORMER CONFORMED NAME: AMERICA POP INC DATE OF NAME CHANGE: 19871111 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1999 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-15291 AMERIHOST PROPERTIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3312434 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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. While it is difficult to determine the number of shares owned by non-affiliates (within the meaning of the term under the applicable regulations of the Securities and Exchange Commission), the registrant estimates that the aggregate market value of the registrant's Common Stock held by non-affiliates on March 17, 2000 (based upon an estimate that 89.8% of the shares are so owned by non-affiliates and upon the closing price for the Common Stock of $3.375) was $15,068,746. - -------------------------------------------------------------------------------- As of March 17, 2000, 4,973,498 shares of the Registrant's Common Stock were outstanding. The following documents are incorporated into this Form 10-K by reference: None 1 PART I ITEM 1. BUSINESS. GENERAL Amerihost Properties, Inc. and its subsidiaries (collectively, where appropriate, "Amerihost," or the "Company") is engaged in the development and construction of AmeriHost Inn(R) hotels, its proprietary hotel brand, and the ownership, operation and management of both AmeriHost Inn(R) hotels and other hotels. The Company also began to franchise the AmeriHost Inn(R) brand in 1999. The AmeriHost Inn(R) brand was created by the Company to provide for the consistent, cost-effective development and operation of mid-price hotels in various markets. All AmeriHost Inn(R) hotels have been designed and developed using the Company's 60 to 120 room, interior corridor and indoor pool prototype design and are located in tertiary and secondary markets. In 1999, the Company also developed a 3-story AmeriHost Inn & SuitesSM prototype designed for larger markets. As of December 31, 1999, the Company owned, operated, franchised or managed 90 hotels located in 18 states. Of these hotels, 77 hotels are operated, managed or franchised under the Company's proprietary brand, the AmeriHost Inn(R). Of the 90 hotels, the Company owns a 100% or majority ownership interest in 69 hotels and a minority equity interest, ranging from 1% to 33.6%, in 15 hotels. Of the 84 hotels in which the Company has an ownership interest, 74 are AmeriHost Inn(R) hotels and 10 are other brands, which in most cases were acquired, renovated and repositioned in their respective marketplaces between 1987 and 1993. The Company has three franchised AmeriHost Inn(R) hotels which were owned and operated by unaffiliated third parties at December 31, 1999. The other brand hotels are franchised through Days Inn, Hampton Inn, Holiday Inn and Ramada Inn. The Company also managed three non-AmeriHost Inn(R) hotels at December 31, 1999 for unaffiliated third parties. As of December 31, 1999, an additional four AmeriHost Inn(R) hotels were under construction in all of which the Company has a minority ownership interest. The table below sets forth information regarding the hotels at December 31, 1999. Open Under Hotels Construction Total --------------- ----------------- --------------- Hotels Rooms Hotels Rooms Hotels Rooms 100% or majority owned or leased: AmeriHost Inn(R)hotels 62 3,931 - - 62 3,931 Other brands 7 936 - - 7 936 ------- ------ ------ ------- ------ ------ 69 4,867 - - 69 4,867 ------- ------ ------ ------- ------ ------ Minority ownership interest: AmeriHost Inn(R)hotels 12 774 4 256 16 1,030 Other brands 3 349 - - 3 349 ------- ------ ------ ------- ------ ------ 15 1,123 4 256 19 1,379 ------- ------ ------ ------- ------ ------ Franchised hotels: AmeriHost Inn(R)hotels 3 182 - - 3 182 ------- ------ ------ ------- ------ ------ Managed only hotels: AmeriHost Inn(R)hotels - - - - - - Other brands 3 573 - - 3 573 ------- ------ ------ ------- ------ ------ 3 573 - - 3 573 ------- ------ ------ ------- ------ ------ Totals: AmeriHost Inn(R)hotels 77 4,887 4 256 81 5,143 Other brands 13 1,858 - - 13 1,858 ------- ------ ------ ------- ------ ------ 90 6,745 4 256 94 7,001 ======= ====== ====== ======= ====== ======
2 Since 1993, the Company's growth strategy has focused on the expansion of the AmeriHost Inn(R) hotel brand through new development and construction. Historically, the AmeriHost Inn(R) hotels achieved a revenue per available room ("RevPAR") higher than that realized by the Company's other owned hotels, including those operated under national franchise affiliations. These favorable operating results experienced by the AmeriHost Inn(R) hotels led to the Company's decision to focus on expanding this brand rather than acquiring or developing hotels under other brand affiliations and ultimately to franchise the brand in 1999. The Company intends to continue expanding the development as well as franchising of AmeriHost Inn(R) hotels. The Company entered into a sale/leaseback arrangement for 30 of its hotels in 1998, of which 26 were sold in 1998, and the remaining four were sold in March 1999. This transaction provided funds for additional expansion of the AmeriHost Inn(R) brand and other fee based revenue sources, while allowing the Company to continue realizing the benefits of its hotel operations. A large portion of the proceeds from this transaction were used for the purchase of AmeriHost Inn(R) hotels in 1998 from entities in which the Company had a minority ownership interest. For new construction projects, the Company offers "turn-key" development services, having the in-house expertise to manage a project from inception through completion, including market research, site selection, architectural services, the securing of financing and construction management. The construction contracts entered into between the Company and the entities owning the hotels have generally been one of two types, providing either for the Company to receive costs plus developer's and construction overhead fees or a fixed fee. The Company has used its development and construction expertise for its own account, for joint ventures in which the Company has an ownership interest, and for unaffiliated parties, and intends to use its expertise for franchisees. The Company began franchising the AmeriHost Inn(R) brand in 1999. The Company believes that the AmeriHost Inn(R) franchise agreement is franchisee friendly, providing a strong brand affiliation with an excellent reputation for consistency. The AmeriHost Inn(R) franchise agreement is a long-term agreement and provides for a franchise fee, marketing fee and reservation fees based on the hotel's revenue. In addition, since the Company has extensive experience in all facets of hotel development and operation, it can offer this expertise to franchisees in addition to the franchise services. As a franchisor of hotels, the Company provides a number of services designed to increase occupancy rates, revenue and profitability, including a centralized reservation system and regional and local marketing campaigns. The Company offers complete operational and financial management services, including sales, marketing, quality control, training, purchasing and accounting. This expertise is used for the Company's own account, as well as for joint ventures and unaffiliated entities pursuant to written management contracts. However, under certain management contracts, the Company's joint venture partners or co-managers are responsible for the day-to-day operational management, while the Company provides full financial management and operational consulting and assistance. The Company is currently managing or co-managing all of the hotels in which it has a minority ownership interest, and is also managing three hotels for unaffiliated third parties. These hotels are managed under contracts ranging from 1 to 10 years, with optional renewal periods of equal length, and contain provisions under which the Company is paid fees equal to a percentage of total gross revenues for its services and, in some instances, additional incentive fees based upon hotel performance. The Company has developed centralized systems and procedures which it believes allow it to manage the hotels effectively and efficiently. The Company intends to actively pursue management contracts with additional third parties, while continuing to manage hotels for current as well as future joint ventures. The Company also provides employee leasing services to hotels in which the Company has a minority ownership interest and to hotels owned by unaffiliated third parties which are managed by the Company. Under its employee leasing program, the Company employs all of the personnel working at the participating hotels and leases them to the hotels pursuant to written agreements. Employee leasing affords the Company greater control over payroll costs and allows the participating hotels to benefit from economies of scale on personnel-related costs. The Company's employee leasing agreements typically provide for one year terms, with automatic one year renewals. The Company generally receives fees from each participating hotel in an amount equal to the gross payroll costs for the leased employees, including all related taxes and benefits, plus a percentage of the gross payroll. 3 All revenues attributable to development, construction, management, franchising and employee leasing services with respect to hotels in which the Company has a 100% or majority ownership interest have been eliminated in consolidation. AMERIHOST INN(R) HOTELS AmeriHost Inn(R) hotels, the Company's proprietary brand, are designed and constructed using the Company's two- or three-story prototype, featuring 60 to 120 rooms, interior corridors and an indoor pool area. The AmeriHost Inn(R) hotel's amenities and services include 24-hour front desk and message service, facsimile machines, whirlpool, exercise room, meeting room, a covered entrance and extensive exterior lighting for added security. The standard AmeriHost Inn(R) guest room features an electronic card-key lock, in-room safe, in-room coffee maker, telephone with data port for personal computer, a work area and a 25" color television with premium cable service or movies on demand. In addition, each Amerihost Inn(R) hotel typically includes two to 12 whirlpool suites which, in addition to the standard amenities, include in-room whirlpools, microwave ovens, compact refrigerators and an expanded sitting area. AmeriHost Inn(R) hotels do not contain food and beverage facilities normally associated with full-service hotels. Food service for hotel guests is generally available from adjacent or nearby free-standing restaurants which are independently owned and operated. The AmeriHost Inn(R) hotels are operated, managed or franchised by the Company in accordance with strict guidelines designed to provide guests with a consistent lodging experience. The Company believes the quality and consistency of the amenities and services provided by its AmeriHost Inn(R) hotels increase guest satisfaction and repeat business. The quality of the AmeriHost Inn(R) product and the consistency of the amenities and services have assisted the chain in becoming one of only a few hotel chains in the U.S. to have achieved an American Automobile Association ("AAA") Three Diamond rating at all of its hotels. During 1999, the Company introduced its Commitment PlusSM 100% guest satisfaction guarantee program. This program guarantees that every guest will leave satisfied. All AmeriHost Inn(R) employees have the unconditional authority to correct any oversight to the guest'S satisfaction, or we will refund the guest's money, up to 100%. This 100% satisfaction guarantee will help the brand maintain its quality and consistency. The Company targets smaller communities in tertiary and secondary markets with established demand generators such as major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions, as the principal location for the development and construction of AmeriHost Inn(R) hotels. An AmeriHost Inn(R) hotel is typically positioned to attract both business and leisure travelers seeking consistent amenities and quality rooms at reasonable rates, generally ranging from $45 to $70 per night. The Company's in-house design staff, centralized purchasing program, strict cost controls, and low average land costs all contribute to a favorable cost structure in developing and constructing new AmeriHost Inn(R) hotels. Furthermore, due to the centralization of all accounting, purchasing, payroll and other administrative functions, each hotel is operated efficiently and effectively with a minimal on-site staff. These factors assist the Company in maximizing its return on invested capital, while offering an excellent value to its guests. OTHER OWNED HOTELS The Company's non-AmeriHost Inn(R) hotels were primarily acquired by the Company through joint ventures prior to 1993, in most instances at prices below estimated replacement costs. The other hotels have been owned, operated and managed by the Company independently, or as part of a national franchise system such as Days Inn, Hampton Inn, Holiday Inn, and Ramada Inn. The Company believes that franchises in these locations are important in maintaining occupancy levels, which are supported by the Franchisor's national reservation systems and marketing efforts and brand name recognition. The Company's non-AmeriHost Inn(R) hotels typically are also located in secondary and tertiary markets, with nearby demand generators such as airports, major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions. The non-AmeriHost Inn(R) hotels contain 60 to 215 rooms, generate 4 average daily rates ranging from $35 to $65 per night and offer a variety of amenities and services. Approximately one-third of these hotels contain food and beverage facilities. As part of the Company's strategy to focus its ownership primarily on AmeriHost Inn(R) hotels, the Company intendS to pursue selective sales of certain of these other hotels, if and when attractive terms are available. During 1998, five hotel partnerships in which the Company was a general partner sold their hotels, resulting in proceeds to the Company upon the sale. During 1999, the Company sold four 100% owned hotels, including three to franchisees. In addition, three joint ventures in which the Company was a partner sold their hotels. These proceeds were, and any proceeds from future sales, if and when completed, are expected to be used by the Company to develop additional AmeriHost Inn(R) hotels or pursue other growth objectives of the Company. HOTEL PROPERTIES At December 31, 1999, the Company owned, managed and/or franchised 90 hotels in 18 states, concentrated in the midwestern and southern United States. The Company had an additional four hotels under construction located generally in the same geographical areas. Because the hotel industry is seasonal, the revenues generated by the hotels managed by the Company will increase or decrease depending upon the time of year. Since the Company's management fees are based upon a percentage of the hotels' total gross revenues, the Company is further susceptible to these seasonal variations. Given the location of the properties the Company manages, the revenues are typically lower in the first and fourth quarters of each year. The following is a list of hotel properties under the Company's management or franchised at December 31, 1999 by state: Date State Hotel (1) Rooms Operations Began - ----- --------- ------- ---------------- California AmeriHost Inn(R)Anderson 61 01/20/97 AmeriHost Inn(R)Corning 60 05/29/98 AmeriHost Inn(R)Marysville (3) 62 09/01/99 AmeriHost Inn(R)Yreka 61 08/04/97 ------ 244 Florida Hampton Inn Ft. Myers 123 09/30/92 ------ Georgia AmeriHost Inn(R)Eagles Landing, Stockbridge 60 08/08/95 AmeriHost Inn(R)LaGrange 59 03/01/95 AmeriHost Inn(R)Smyrna 60 12/21/95 Days Inn Northwest, Atlanta (5) 107 11/01/91 Days Inn Peachtree, Atlanta (5) 142 11/01/91 ------ 428 Illinois AmeriHost Inn(R)Harvard 60 07/01/96 AmeriHost Inn(R)Jacksonville (3) 60 06/14/96 AmeriHost Inn(R)Macomb 60 05/19/95 AmeriHost Inn(R)Players Riverboat Hotel, Metropolis (3) 120 02/25/94 AmeriHost Inn(R)Rochelle 61 03/07/97 AmeriHost Inn(R)Sycamore 60 05/31/96 AmeriHost Inn(R)Tuscola 59 08/17/94 Days Inn Niles 149 01/01/90 Days Inn Shorewood 116 10/01/89 ------ 745 ------ 5 Date State Hotel (1) Rooms Operations Began - ----- ----- ------- ---------------- Indiana AmeriHost Inn(R)Columbia City 60 03/05/99 AmeriHost Inn(R)Decatur 60 08/30/98 AmeriHost Inn(R)Hammond 86 03/29/96 AmeriHost Inn(R)Huntington 62 08/21/98 AmeriHost Inn(R)Plainfield 60 09/01/92 Days Inn Plainfield 64 05/01/90 Ramada Inn Lafayette 144 02/02/94 ------ 536 Iowa AmeriHost Inn(R)Boone 60 08/21/98 AmeriHost Inn(R)Le Mars 63 01/07/98 AmeriHost Inn(R)Mt. Pleasant 63 07/02/97 AmeriHost Inn(R)Storm Lake 61 08/13/97 AmeriHost Inn(R)Waverly 60 08/28/96 ------ 307 Kentucky AmeriHost Inn(R)Murray 60 11/01/96 ------ Louisiana Days Inn Kenner, New Orleans (5) 324 11/01/91 ------ Michigan AmeriHost Inn(R)Battle Creek 62 03/19/99 AmeriHost Inn(R)Coopersville 60 12/31/95 AmeriHost Inn(R)Dundee (3) 60 08/14/98 AmeriHost Inn(R)Grand Blanc (3) 60 07/17/96 AmeriHost Inn(R)Grand Rapids North, Walker 60 07/05/95 AmeriHost Inn(R)Grand Rapids South 61 06/11/97 AmeriHost Inn(R)Hudsonville 61 11/24/97 AmeriHost Inn(R)Ionia 60 04/22/98 AmeriHost Inn(R)Marshall (4) 61 04/02/97 AmeriHost Inn(R)Monroe 63 09/19/97 AmeriHost Inn(R)Muskegon, Norton Shores 61 11/04/96 AmeriHost Inn(R)Port Huron 61 07/01/97 ------ 730 Mississippi AmeriHost Inn(R)Batesville (3) 60 04/26/96 AmeriHost Inn(R)Tupelo 61 07/25/97 AmeriHost Inn(R)Vicksburg Landing 89 05/13/95 ------ 210 Missouri AmeriHost Inn(R)Fulton 62 01/21/99 AmeriHost Inn(R)Mexico 61 12/06/97 AmeriHost Inn(R)Warrenton 63 11/07/97 ------ 186 Ohio AmeriHost Inn(R)Ashland 62 08/09/96 AmeriHost Inn(R)Athens (2) 102 11/04/89 AmeriHost Inn(R)Cambridge (2) 72 02/06/98 AmeriHost Inn(R)Columbus Southeast (2) 60 04/17/98 AmeriHost Inn(R)Delaware 73 05/16/97 AmeriHost Inn(R)Jeffersonville North (2) 60 07/20/96 AmeriHost Inn(R)Jeffersonville South (2) 60 10/14/94 AmeriHost Inn(R)Kenton (2) 60 08/02/96 6 Date State Hotel (1) Rooms Operations Began - ----- ----- ------- ---------------- AmeriHost Inn(R)Lancaster (2) 60 09/04/92 AmeriHost Inn(R)Logan (2) 60 04/16/93 AmeriHost Inn(R)Mansfield 60 11/19/94 AmeriHost Inn(R)Marysville 79 06/01/90 AmeriHost Inn(R)Newark (2)(3) 72 01/29/99 AmeriHost Inn(R)St. Mary's (2) 61 11/25/97 AmeriHost Inn(R)Upper Sandusky 60 04/12/95 AmeriHost Inn(R)Wilmington (2) 61 02/21/97 AmeriHost Inn(R)Wooster East 58 01/18/94 AmeriHost Inn(R)Wooster North 60 10/20/95 AmeriHost Inn(R)Zanesville (2) 60 07/30/96 Days Inn New Philadelphia (2) 104 06/04/92 Ramada Inn Dayton Mall 215 01/20/92 Ramada Inn Middletown 120 07/03/92 ------ 1,679 Oklahoma AmeriHost Inn(R)Enid 60 06/11/98 ------ Pennsylvania AmeriHost Inn(R)Grove City 61 04/27/97 AmeriHost Inn(R)Shippensburg 60 08/09/96 Holiday Inn Altoona 144 08/31/92 Holiday Inn Oil City 106 12/02/92 ------ 371 Tennessee AmeriHost Inn(R)Jackson 61 04/01/98 ------ Texas AmeriHost Inn(R)Allen (3) 60 07/25/96 AmeriHost Inn(R)McKinney 61 01/07/97 AmeriHost Inn(R)San Marcos (3) 61 05/23/97 ------ 182 West Virginia AmeriHost Inn(R)New Martinsville (2) 60 05/03/96 AmeriHost Inn(R)Parkersburg North (2) 79 06/26/95 AmeriHost Inn(R)Parkersburg South (2) 61 12/30/96 ------ 200 Wisconsin AmeriHost Inn(R)Green Bay (4) 60 10/12/96 AmeriHost Inn(R)Kimberly 63 06/30/97 AmeriHost Inn(R)Mosinee 53 04/30/93 AmeriHost Inn(R)Sun Prairie 62 03/03/99 AmeriHost Inn(R)Whitewater 61 09/08/97 ------ 299 TOTAL ROOMS 6,745 TOTAL PROPERTIES 90 (1) Unless otherwise noted, the Company owns a direct or indirect equity or leasehold interest in the hotel. (2) Indicates properties which are co-managed with an unaffiliated third party. (3) Indicates properties which are owned and operated by franchisees. (4) Property was sold in 2000 to a franchisee. 7 (5) Indicates properties in which the Company does not have a direct or indirect equity or leasehold interest.
The table below shows the average occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR") experienced by the Company in 1999 in various locations. These statistics include all hotels open as of December 31, 1999. Average Average Revenue Per Occupancy Daily Rate Available Room --------- ---------- -------------- Ohio (22 hotels) 53.2% $57.73 $30.72 Illinois, Iowa and Wisconsin (19 hotels) 54.8% $54.40 $29.82 Michigan and Pennsylvania (16 hotels) 60.2% $57.70 $34.78 Georgia, Mississippi and West Virginia (11 hotels) 60.3% $56.27 $33.95 Indiana and Kentucky (8 hotels) 50.7% $55.35 $28.09 Texas and California (7 hotels) 59.3% $55.51 $32.95 Other hotels (7 hotels located in Tennessee, Florida, Louisiana, Missouri and Oklahoma) 52.7% $47.59 $25.10 All hotels 55.6% $55.45 $30.88
LODGING INDUSTRY The United States lodging industry's performance is strongly correlated to economic activity, with changes in gross national product growth affecting both room supply and demand, resulting in cyclical changes in average occupancy rates, average daily rates, and revenue per available room. The general downturn in the economy and the oversupply of rooms during the late 1980's and early 1990's resulted in decreased economic performance in the lodging industry. Since the early 1990's, the United States lodging industry has shown significant improvement. The primary element contributing to the industry's improved performance has been increased economic activity, which has resulted in growth in the demand for hotel rooms. This growth in hotel room demand has resulted in positive trends industry-wide for room revenues. Although industry analysts expect slight declines in industry-wide occupancy over the next few years, they still expect industry-wide revenues to expand given the anticipated demand growth and strong average daily rate increases. According to Smith Travel Research, the overall United States hotel room occupancy declined 0.8% in 1999, while average daily rates increased 4.0%. GROWTH STRATEGY The Company's growth strategy is to increase revenues, EBITDAR (as defined below) and net income per share by: (i) developing, operating and owning or leasing additional AmeriHost Inn(R) hotels; (ii) franchising the AmeriHost Inn(R) brand, (iii) developing and managing hotels for affiliated and unaffiliated parties and franchisees; (iv) maintaining or enhancing occupancy and average daily rate results at all of its hotels; and (v) controlling operating and corporate overhead expenses. EBITDAR is used by the Company as a supplemental performance measure along with net income to report its operating results. EBITDAR is defined as net income, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit); (v) depreciation and amortization; and (vi) gains or losses from property transactions. The Company's primary growth strategy is to focus on the expansion of its proprietary brand, the AmeriHost Inn(R). During 1999, the Company opened five wholly-owned AmeriHost Inn(R) hotels and one joint venture hotel, and had another four joint venture AmeriHost Inn(R) hotels under construction at December 31, 1999. The Company acquired a 100% ownership interest during 1998 in 26 AmeriHost Inn(R) hotels in which the Company already held a minority ownership interest. The Company may seek to increase its ownership interest in additional existing AmeriHost Inn(R) hotels in which the Company has less than a 100% ownership interest, if available on favorable economic terms. These hotels had been built by the Company using the AmeriHost Inn(R) standard prototype. 8 Due to the expansion of the AmeriHost Inn(R) brand over the past few years, and the recognition the brand has received for the consistency of guest services and amenities, the Company decided to begin selling franchises in 1999. The Company has satisfied all Federal Trade Commission requirements and is currently able to sell franchises in 50 states. The AmeriHost Inn(R) franchise agreement is a long-term agreement, providing for a franchise royalty, marketing and reservation fees based on the hotel's revenue. Due to the Company's expertise in all areas of hotel development and management, the Company anticipates making these services available to the franchisee, including site selection, operational management, and property accounting, in addition to the franchise agreement. Although the Company believes that it can sell a significant number of franchises, it does not expect this segment to contribute to the profitability of the Company during its initial start up period. The Company intends to continue using its hotel development and management expertise to build and operate hotels for itself, as well as for future joint ventures in which the Company holds a minority ownership interest and in some instance, for franchisees. In addition, the Company is also focused on actively pursuing development contracts and management contracts with unaffiliated entities. This may include building and managing non-AmeriHost Inn(R) hotels. During 1999, the Company began construction on four AmeriHost Inn(R) hotels, and completed construction of six hotels, all of which were AmeriHost Inn(R) hotels. The Company intends to continue developing and constructing AmeriHost Inn(R) hotels in communities located in tertiary and secondary markets which already have established demand generators, such as major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions. Typically, the Company seeks communities where an active economic development program is in place, which suggests long-term growth potential for additional lodging demand. In most cases, the local community is interested in a new hotel because existing facilities are dated or inconvenient. The Company provides comfortable, professionally managed accommodations which are typically not available in that community. The Company has an in-house development staff dedicated to identifying and evaluating new development opportunities. Once a market has been identified and a site has been selected, the Company initiates its due diligence process prior to the construction of one of its hotels. Such due diligence typically consists of environmental surveys, feasibility and engineering studies and the securing of zoning and building permits. The Company also maintains an in-house construction and design department, which enables it to manage all phases of construction. The Company's in-house architects and design personnel prepare the blueprints for each AmeriHost Inn(R) hotel through the use of computer assisted drafting equipment, thereby reducing architectural fees. In most cases, the Company hires a general contractor to construct the hotel for a fixed price, eliminating much of the risk typically associated with construction. The Company's project managers oversee the general contractor through each phase of construction in order to assure the quality and timing of the construction. With few exceptions, such as the interior color scheme, each AmeriHost Inn(R) hotel is the same in every detail, including the overall layout, the room sizes and the indoor pool area. The replication of its prototype design allows for accurate budgeting of its construction and overhead costs. Historically, the Company has financed its hotel development and construction through a combination of equity and debt financing, with the equity financing typically provided by the Company and/or its joint venture partners, and the debt financing typically provided by local or regional banks. All of the AmeriHost Inn(R) hotels under construction at December 31, 1999 are being financed in this manner. The Company intends to increase its revenue, EBITDAR and net income per share through the continued development and franchising of its AmeriHost Inn(R) brand hotel and the continued implementation of its operating and marketing strategies. The Company believes that it can develop and operate additional AmeriHost Inn(R) hotels having occupancies and average daily rates similar to those the Company has achieved at its existing AmeriHost Inn(R) hotels. Moreover, the Company believes that the development of additional AmeriHost Inn(R) hotels and expanded geographic diversity will continue to enhance the awareness of the AmeriHost Inn(R) brand and thus improve revenues at existing, as well as future, AmeriHost Inn(R) hotels. The Company believes that leveraging its expertise in hotel development and management by providing these services to unaffiliated parties and franchisees will also assist the Company in reaching its financial objectives. 9 OPERATING STRATEGY The Company's operating strategy is to provide its customers with a consistent lodging experience by offering a package of amenities and services which meet or exceed the customer's expectations during each stay. The Company has developed uniform standards and procedures for each aspect of the development, construction, operation and marketing of its AmeriHost Inn(R) hotels, from site selection to operational management. The Company's operational management activities are overseen by a Senior Vice President of Operations who supervises regional and area managers, who in turn oversee the general managers of the hotels. Each regional manager is responsible for 6 to 10 hotels, depending on each hotel's size and location. In addition to having responsibilities as the general manager of a specific hotel, each area manager is responsible for overseeing the general managers at 1 to 2 additional hotels. In addition to these managers, the Company has centralized sales and marketing personnel who assist and direct the general managers and other on-site personnel in their marketing efforts. The Company also has internal auditors who perform audits of each hotel at least two times each year, including tests of financial items such as cash and receivables, as well as operational, security and ADA (Americans with Disabilities Act) compliance matters, and who are also responsible for developing and conducting a variety of educational and training seminars for general managers and other on-site personnel. The Company has designed a financial management system whereby all accounting and operating information is processed in the Company's centralized accounting office at its headquarters. The system includes cash management, accounts payable and the generation of daily financial and operating information and monthly financial statements which allow senior management and the regional, area and general managers to closely monitor performance and to quickly react to changes in operational conditions. The Company provides each hotel with standardized forms and procedures to ensure uniform and efficient financial reporting. The Company's financial management system relieves certain management and reporting burdens from the individual hotel managers, enabling them to focus on the operation and marketing of the hotel. The centralized financial management system also enhances the quality and timing of internal financial reports. All payroll functions are also centralized at the Company's headquarters through its employee leasing subsidiary, allowing the Company to have greater control over payroll costs. In addition, since all of the approximately 1,700 hotel personnel are employed by the same company, the costs of certain payroll related expenses are lower than if each hotel maintained its own employees, and the Company is able to offer a more attractive health insurance program to its employees. MARKETING STRATEGY The Company believes it has a unique marketing strategy which is to actively seek involvement in and ties to the local communities in which its hotels are located. The local businesses and residential communities are each hotel's best referral source. When staying in smaller communities where the Company's hotels are located, visitors typically seek recommendations from family, friends and business associates. The general managers of the hotels are expected to devote a majority of their time toward marketing activities with local businesses and the community. In an effort to promote community awareness and build strong relationships with business leaders and local residents, general managers are very active in local civic groups and frequently sponsor special events. In addition, the hotels typically sponsor various local social and community events and permit the use of their facilities by local clubs and civic organizations. This community involvement, combined with a professional marketing program, allows the hotel to showcase its facilities for both business and leisure purposes. By focusing on the local community as its primary referral source, the Company believes that each hotel can build a strong sales force of local residents. In order to enhance this local marketing strategy, the Company became part of the Global Distribution System ("GDS") in 1999. The GDS system is the airline reservation system through which most travel agents make hotel bookings. GDS offers tremendous exposure of the AmeriHost Inn(R) brand to travel agents globally. In addition, our guests are now able to book hotel reservations easily through their preferred travel agent. With respect to AmeriHost Inn(R) hotels, the Company's primary marketing strategy is to consistently develop and operate AmeriHost Inn(R) hotels using its prototype design under the trademarked AmeriHost Inn(R) diamond-shaped 10 logo. The Company believes that a consistent product offering, including the same design features, amenities and quality guest services, will promote guest loyalty, referrals and repeat business. The amenities and services featured in the AmeriHost Inn(R) prototype design are not consistently found in the hotels of competitors in the markets which the Company targets. By providing amenities and services on a consistent basis, along with centralized administrative and financial reporting systems, the Company believes it is able to operate profitable hotels while offering an excellent value to its guests. The Company also maintains a toll-free reservation number for the AmeriHost Inn(R) hotels. By dialing 800-434-5800, a guest can make a reservation at any one of the AmeriHost Inn(R) hotels throughout the country. In addition, the Company's internet web site is capable of accepting reservations on-line, further improving our guests' ability to book rooms easily. The Company anticipates that the reservation system will significantly increase the number of reservations as the brand awareness increases. The Company also periodically implements a regional marketing campaign using various media including radio and newspaper. The markets and media selected for the marketing activities are based on extensive research done by the Company and in some cases, an advertising consultant. The Company, its franchisees, and its joint venture partners have committed that 1% of each hotel's room revenues will be used for the regional marketing program. The Company targets independent hotel owners and developers to franchise the AmeriHost Inn(R) brand. The Company has a sales force which covers the majority of the United States. The Company also conducts national and regional advertising campaigns primarily through trade magazines and journals. The Company believes that the consistency maintained by the AmeriHost Inn(R) hotels with regard to amenities and service will attract franchisees, along with the brand's central reservation system and marketing programs. JOINT VENTURES The Company continued to develop new hotels through joint ventures in 1999 whereby the Company and other investors agree to jointly undertake the development, construction, acquisition or renovation of a hotel property. As of December 31, 1999, the Company had 23 projects with joint venture partners, including multiple projects with certain joint venture partners. Four of these joint venture projects were under construction at December 31, 1999. The Company's joint ventures have taken various forms, including general partnerships, limited partnerships, and limited liability companies. Each joint venture has been formed with respect to a particular hotel project and reflects the characteristics of that project, including the relative contributions, in cash, property or services, of its partners. In most instances, the joint venture has taken the form of a limited partnership 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. The Company's subsidiary, as general partner or managing member, has typically received an ownership interest ranging from 1% to 30% for contributing the Company's expertise. In certain cases, the subsidiary has also 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 the Company in proportion to its ownership interest is often subordinate to the prior return of capital and other distributions payable to the other joint venture partners. In addition, in three recent joint venture arrangements, the equity interests held by the joint venture partners are exchangeable into shares of the Company's common stock and the Company has guaranteed minimum annual distributions to the joint venture partners. As the general partner or managing member, the Company's subsidiary generally has the sole or primary management authority with respect to the joint venture. However, in some instances, the joint venture agreement or applicable law may provide to the other joint venture partners the right to amend the joint venture agreement, approve a transfer of the general partner's partnership interest, remove the general partner for cause, or dissolve the joint venture. The joint venture agreements do not typically restrict the right of the Company or its affiliates to engage in related or competitive business activities. 11 COMPETITION There is significant competition in the mid-price lodging industry. There are numerous hotel chains that operate on a national or regional basis, as well as other hotels, motor inns and other independent lodging establishments throughout the United States. Competition is primarily in the areas of price, location, quality, services and amenities. Many of the Company's competitors have recognized trade names, greater resources and longer operating histories than the Company. However, the Company believes that its management is sufficiently experienced, and the markets which the Company targets for development typically offer lesser competition, enabling the Company to compete successfully. There are a number of companies which develop, construct and renovate hotels. Some of these companies perform these services only for their own account, while others actively pursue contracts for these services with third party owners. The Company believes that it can develop, construct and renovate hotels at costs which are competitive. The Company believes that its use of a well-developed prototype, significant experience (the Company has managed the development and construction of approximately 90 hotels) and volume purchasing of furniture and amenities result in development costs which are lower than those experienced by many competitors building comparable hotels. The Company also believes that its ability to offer additional services, such as hotel management, provides some competitive advantages. There are many hotel management companies which provide management services to hotels similar to the services provided by the Company. While the quantity of competition may be high, the Company believes that the quality of its services, including its information and management systems and employee leasing operations, will enable the Company to compete successfully. The Company believes that its focus on tertiary and secondary markets also lessens competition for the types of services provided by the Company. The Company believes that the relationship between the development and construction costs and the average daily rates achieved by the AmeriHost Inn(R) hotels is more favorable than that experienced by many of the Company'S competitors. In addition, a significant portion of the purchasing and accounting functions related to the hotels is handled in the Company's headquarters, thus enabling the local general managers and their staff to focus their efforts on marketing and sales. The centralization of many functions also assists in keeping costs lower due to certain economies of scale. This allows the AmeriHost Inn(R) hotels to operate efficiently and compete effectively. There is significant competition among the national and regional lodging franchisors in the limited service mid-market segment. The Company's competitors include brands such as Holiday Inn Express(R), Hampton Inn(R), And Fairfield Inn(R), among others. The Company believes that potential franchisees select a brand based upon theiR expectation of franchise costs versus the potential for enhanced revenue and profitability, in addition to their perception of a brand's reputation. The Company believes that the high degree of consistency among the AmeriHost Inn(R) hotels with regard to amenities and service, along with its national reservation system and franchise-friendly franchise agreement will enable the Company to compete successfully. FRANCHISE AGREEMENTS At December 31, 1999, the Company had franchise agreements (collectively, the "Franchise Agreements") with Days Inn of America, Inc., Promus Hotels, Inc. (regarding Hampton Inns), Holiday Inns, Inc., Holiday Inns Franchising, Inc. and Ramada Franchise Systems, Inc. Although the terms of the various Franchise Agreements differ, each requires the Company to pay a monthly royalty fee for the right to operate the hotel under the "flag" of that Franchisor and to have access to the other benefits provided by such Franchisor, including access to reservation systems, marketing plans and use of trademarks. The royalty fees are typically based on gross revenues attributable to room rentals, plus marketing and reservation contributions, and typically range between 8% and 10% of gross room revenues. In addition, the Company and/or the joint venture which owns a hotel operated pursuant to a Franchise Agreement will have ongoing obligations to maintain the quality and condition of the hotel to the standards required by the Franchisor. The term of a Franchise Agreement typically is between 10 and 20 years, with a substantial penalty for early termination by the Company with either party typically having the right to terminate after 12 five years. The Company believes that it is generally in compliance with its Franchise Agreements, and the loss of any one of the Franchise Agreements would not have a material impact on the Company. EMPLOYEES As of December 31, 1999, the Company and its subsidiaries had 1,742 full and part-time employees: Hotel Management: Operations 40 Accounting and finance 18 Property general managers 88 Hotel Franchising: 10 Hotel Development: 10 Hotel Operations: 1,168 Corporate: General and administrative 8 Officers 2 Employee Leasing: General and administrative 3 Operations 395 ----- 1,742 ===== To date, the Company has not experienced any work stoppages or significant employee-related problems. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES. The Company's corporate offices and the offices of its wholly-owned subsidiaries are located in approximately 19,000 square feet of space at 2355 South Arlington Heights Road, Suite 400, Arlington Heights, Illinois 60005. These offices are occupied under a lease that expires on December 19, 2011. At December 31, 1999, the Company had a 100% or majority ownership or leasehold interest in 69 operating hotels located in 15 states. The land, building, furniture, fixtures and equipment and construction in progress for these hotels is reflected in the Company's Consolidated Balance Sheet at December 31, 1999. These assets were substantially pledged to secure the related long-term mortgage debt. See Item 1 and Notes 6 and 7 to the Consolidated Financial Statements under Item 14. In addition to the foregoing, the Company has an equity interest in partnerships which own and/or lease property. See Note 4 to Consolidated Financial Statements under Item 14. ITEM 3. LEGAL PROCEEDINGS The Company is subject to claims and suits in the ordinary course of business. In management's opinion, currently pending legal proceedings and claims against the Company will not, individually or in the aggregate, have a material adverse effect on the Company's financial condition, results of operations or liquidity. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended December 31, 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market under the symbol HOST. As of March 17, 2000, there were 1,317 holders of record of the Company's Common Stock. The following table shows the range of reported high and low closing prices per share. High($) Low($) ------- ------ FISCAL 1998 First quarter 5.81 3.94 Second quarter 5.38 4.38 Third quarter 4.63 3.09 Fourth quarter 4.50 2.56 FISCAL 1999 First quarter 3.81 3.00 Second quarter 4.25 3.00 Third quarter 4.13 3.00 Fourth quarter 3.94 2.69 FISCAL 2000 First quarter (through March 17, 2000) 3.75 2.88 The Company has not declared or paid any cash dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be made by the Board of Directors in light of the Company's earnings, financial position, capital requirements and such other factors as the Board of Directors deems relevant. The Board of Directors has the authority to issue up to 100,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of Preferred Stock, including without limitation, dividend rates, conversion rights, voting rights, redemption and sinking fund provisions, and liquidation provisions, and to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the shareholders. The Board of Directors, without shareholder approval, may issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plans to issue any Preferred Stock. 14 ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial data presented below have been derived from the Company's consolidated financial statements. The consolidated financial statements for all years presented have been audited by the Company's independent certified public accountants, whose report on such consolidated financial statements for each of the three years in the period ended December 31, 1999 is included herein under Item 14. The information set forth below should be read in conjunction with the consolidated financial statements and notes thereto under Item 14 and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (in thousands, except per share data) Fiscal Year Ended December 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 -------- ------- -------- -------- --------- STATEMENT OF OPERATIONS DATA: Revenue $ 76,058 $ 68,618 $ 62,666 $ 68,342 $ 51,962 Operating costs and expenses 57,868 54,286 52,285 54,360 41,317 Depreciation and amortization expense 4,567 5,487 4,532 3,479 2,268 Leasehold rents - hotels 7,307 4,192 1,729 2,122 1,976 Corporate general and administrative 1,537 1,569 2,140 1,928 2,111 Operating income 4,780 3,084 1,980 6,453 4,290 Interest expense, net 5,155 5,592 3,299 2,142 1,195 Income (loss), before extraordinary item and cumulative effect of change in accounting principle(1) $ 201 $ (1,167) $ (966) $ 3,395 $ 2,138 ======== ======== ======== ======== ======== Net income (loss) $ 201 $ (2,796) $ (966) $ 3,395 $ 2,138 ======== ======== ======== ======== ======== Earnings (loss) per share, before extraordinary item and cumulative effect of change in accounting principle(1): Basic $ 0.04 $ (0.19) $ (0.15) $ 0.57 $ 0.37 ======== ======= ======= ======== ======== Diluted $ 0.02 $ (0.20) $ (0.19) $ 0.49 $ 0.34 ======== ======= ======= ======== ======== Earnings (loss) per share: Basic $ 0.04 $ (0.45) $ (0.15) $ 0.57 $ 0.37 ======== ======= ======= ======== ======== Diluted $ 0.02 $ (0.45) $ (0.19) $ 0.49 $ 0.34 ======== ======= ======= ======== ======== Weighted average shares outstanding: Basic 5,567 6,180 6,283 6,008 5,839 ======== ======== ======== ======== ======== Diluted 5,857 6,513 6,659 6,839 6,371 ======== ======== ======== ======== ======== BALANCE SHEET DATA: Total assets $103,108 $115,281 $ 92,668 $ 66,901 $ 52,453 Long-term debt, including current portion 60,349 71,841 60,235 34,339 25,014 Working capital (6,817) (6,924) (2,208) 366 1,854 Shareholders' equity 14,181 18,316 21,593 20,912 17,267 OTHER DATA: EBITDAR (2) $ 16,280 $ 12,790 $ 6,023 $ 12,447 $ 8,862 Cash (used in) provided by operating activities (885) 5,408 1,858 7,558 1,918 Cash provided by (used in) investing activities 12,344 15,555 (28,463) (11,347) (13,506) Cash (used in) provided by financing activities (12,187) (18,819) 25,926 5,447 9,933 Capital expenditures 2,103 42,183 29,343 14,049 12,539
15 (1) The Company recorded an extraordinary loss of $333,000 in 1998, net of income taxes, relating to the early extinguishment of mortgage debt on hotels sold in connection with a sale/leaseback transaction. The Company recorded a cumulative effect of a change in accounting principle of $1,296,000 in 1998, net of income taxes, relating to the adoption of Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities." (2) EBITDAR is not defined by generally accepted accounting principles ("GAAP"), however the Company believes it provides relevant information about its operations and is necessary for an understanding of the Company's operations, given its significant investment in real estate. EBITDAR should not be considered as an alternative to operating income (as determined in accordance with GAAP) as an indicator of the Company's operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. EBITDAR is defined as net income, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit); (v) depreciation and amortization; and (vi) gains or losses from property transactions. EBITDAR for 1997, when calculated to exclude non-recurring charges for costs associated with contractual terminations and costs incurred in connection with a potential merger or acquisition which was not consummated, would have been approximately $7.9 million. EBITDAR for 1996, when calculated to exclude a non-recurring charge for costs associated with a public offering of common stock which was not consummated, would have been approximately $12.9 million. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Company is engaged in the development of AmeriHost Inn(R) hotels, its proprietary brand, and the ownership, operation and management of AmeriHost Inn(R) hotels and other mid-price hotels. As of December 31, 1999, there were 77 AmeriHost Inn(R) hotels open, of which 61 were wholly-owned or leased, one was majority-owned, 12 were minority-owned, and three were owned by franchisees. A total of six AmeriHost Inn(R) hotels were opened during the past twelve months. The Company intends to use the AmeriHost Inn(R) brand when expanding its hotel operations segment. Same room revenues for all AmeriHost Inn(R) hotels (including minority-owned, managed-only, and franchised) increased approximately 7.2% during 1999, compared to 1998, primarily attributable to an increase of $2.56 in average daily rate. These results relate to the 74 AmeriHost Inn(R) hotels that were operating for at least thirteen full months during the twelve months ended December 31, 1999. After approximately 10 years of developing and using the AmeriHost Inn(R) name exclusively for the Company's own account and for joint ventures in which the Company maintains an ownership interest, the Company has begun to franchise the AmeriHost Inn(R) brand name. Currently, the Company is qualified to sell AmeriHost Inn(R) hotel franchises in all 50 states and Canada and Mexico. Through December 31, 1999, the Company entered into nine AmeriHost Inn(R) franchise agreements, including six with entities in which the Company has a partial ownershiP interest. However, the Company does not anticipate the franchising activity to have a significant impact on the operations of the Company in 2000, and there can be no assurance that the Company will be successful in selling AmeriHost Inn(R) franchises in the future. Revenues from hotel operations consist of the revenues from all hotels in which the Company has a 100% or majority ownership or leasehold interest ("Consolidated" hotels). Investments in other entities in which the Company has a minority ownership interest are accounted for using the equity method. As a result of the Company's focus on increasing the number of Consolidated hotels, the revenues from the hotel operations segment have increased as a percentage of the Company's overall revenues. The Company has begun to realize revenues in 1999 from its newly formed AmeriHost Inn(R) franchising segment. Franchise fees are recognized pursuant to franchise agreements witH minority-owned entities and unrelated third parties. Development and construction revenues consist of one-time fees for new construction and renovation activities performed by the Company for minority-owned hotels and unrelated third parties, as well as the sale of wholly-owned properties which have been built by the company and held for sale for less than one year. The Company also receives revenue from management and employee leasing services provided to minority-owned hotels and unrelated third parties. The results for 1999 were consistent with the Company's objective of establishing the AmeriHost Inn(R) hoteL franchising department. In addition, due to the Company's focus on developing and constructing a significant number of Consolidated AmeriHost Inn(R) hotels during 1998 and the first part of 1999, as well as acquiring the remaining ownership interests in a significant number of AmeriHost Inn(R) hotels which were previously minority-owned, the Company recognized lower revenues from the development and construction of hotels for minority-owned and unrelated third parties during 1999. In conjunction with the Company's objective of building a franchising segment, the Company decided to develop AmeriHost Inn hotels to be held for sale to potential franchisees. The sale of these hotels held for sale are included in the Company's hotel development segment. During the third quarter of 1999, the Company sold three of its Consolidated AmeriHost Inn(R) hotels to franchisees, two of which were recorded as operational transactions in the hotel development segment. This strategy has a short-term positive impact on revenues and earnings from the sale, while allowing the Company to benefit from a long-term franchise agreement. Revenues from Consolidated AmeriHost Inn(R) hotels increased 49.6% to $49.5 million during 1999, from revenues oF $33.1 million during 1998, due to the net addition of 19 Consolidated AmeriHost Inn(R) hotels during the past eighteen months. Revenues from the hotel management and employee leasing segments decreased by 40.7% in total during 1999, compared to 1998, due primarily to the acquisition of the remaining ownership interest in 17 minority-owned joint venture hotels during the last eighteen months, 16 of which are AmeriHost 17 Inn(R) hotels. Revenues from Consolidated non-AmeriHost Inn(R) hotels decreased 11.6% during 1999, compared to 1998, primarily as a result of the disposition of one Consolidated non-AmeriHost Inn(R) hotel during the second quarter of 1998 and the disposition of two others in 1999. Total revenues increased 10.8% to $76.1 million during 1999, from $68.6 million during 1998. The Company recorded net income of $200,591 for 1999, or $0.02 per diluted share, compared to a net loss of ($2.8) million, or ($0.45) per diluted share in 1998. The results for 1998 include an extraordinary item and the cumulative effect of a change in accounting principle in the total amount of ($1.6) million, after income tax benefit, or ($0.25) per diluted share. The Company uses EBITDAR as a supplemental performance measure, along with net income, to report its operating results. EBITDAR is defined as net income before extraordinary items, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit), (v) depreciation and amortization; and (vi) gains or losses from property transactions. EBITDAR should not be considered as an alternative to operating income (as determined in accordance with Generally Accepted Accounting Principles, "GAAP") as an indicator of the Company's operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. EBITDAR, as defined by the Company, is included herein due to numerous requests by investors and analysts. Management believes that investors and analysts find it to be a useful tool for measuring the Company's ability to service debt. EBITDAR increased 27.3% to $16.3 million during 1999, from $12.8 million during 1998. On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn(R) hotels to PMC Commercial Trust ("PMC") foR $62.2 million. The Company sold an additional four AmeriHost Inn(R) hotels to PMC during March 1999 for $10.8 million. Upon the sale to PMC, the Company entered into agreements to lease back the hotels for an initial term of ten years, with two five year renewal options. The lease payments are fixed at 10% of the sale price for the first three years. Thereafter, the lease payments are subject to a CPI increase with a 2% annual maximum. The Company has deferred the gain on the sale of these hotels pursuant to sale/leaseback accounting. This deferral will be recognized over the initial term of the lease as a reduction of leasehold rent expense. Amerihost had an ownership interest in the operations of 84 hotels, including 34 hotels which are leased, at December 31, 1999 versus 85 hotels at December 31, 1998 (excluding hotels under construction). These figures include 69 Consolidated hotels at December 31, 1998 and December 31, 1999. 18 RESULTS OF OPERATIONS The following table sets forth the percentages of revenues of the Company represented by components of net income for 1999, 1998 and 1997. Percentage of Total Revenue Year Ended December 31, ------------------------------------------- 1999 1998 1997 -------- -------- ------ Revenue 100.0% 100.0% 100.0% Operating costs and expenses 76.1 79.1 83.4 ------ ----- ------- 23.9 20.9 16.6 Depreciation and amortization 6.0 8.0 7.2 Leasehold rents - hotels 9.6 6.1 2.8 Corporate general and administrative 2.0 2.3 3.4 Operating income 6.3 4.5 3.2 Interest expense (7.9) (8.9) ( 6.5) Interest and other income 1.9 1.1 1.4 Equity in income and losses of affiliates (0.2) (0.4) ( 0.8) Gain on sale of assets 0.7 0.5 2.7 Non-recurring expenses 0.0 0.0 (3.0) Income (loss) before minority interests and income taxes 0.8 (3.2) ( 3.0) Minority interests in operations of consolidated subsidiaries and partnerships (0.3) 0.4 0.3 Income (loss) before income taxes 0.5 (2.8) ( 2.7) Income tax (expense) benefit (0.2) 1.1 1.2 Income (loss) before extraordinary item and cumulative effect of change in accounting principle 0.3 % (1.7)% (1.5)% ==== ==== ====
1999 compared to 1998 Revenues increased 10.8% to $76.1 million during 1999, from $68.6 million during 1998. The increase in revenue from the Consolidated AmeriHost Inn(R) hotels was partially offset by the decreases from the hotel management and employee leasing segments, a decrease from the hotel development and construction segment, as well as the decrease from non-AmeriHost Inn(R) hotel operations. Hotel operations revenue increased 31.2% to $62.1 million during 1999, from $47.3 million during 1998. Revenues from Consolidated AmeriHost Inn(R) hotels increased 49.6% to $49.5 million during 1999, from $33.1 million durinG 1998. These increases were attributable primarily to the net addition of 19 Consolidated AmeriHost Inn(R) hotels from July 1, 1998 through December 31, 1999, including the addition of seven newly constructed Consolidated AmeriHost Inn(R) hotels, and the acquisition of additional ownership interest in 16 existing hotels causing them to become Consolidated AmeriHost Inn(R) hotels, as well as an increase in same room revenues, offset by the sale of four Consolidated AmeriHost Inn(R) hotels. The increase in Consolidated AmeriHost Inn(R) hotel revenue was offset by an 11.6% decrease in Consolidated other brand hotel revenue during 1999, compared to 1998. This decrease was primarily the result of the sale of two non-AmeriHost Inn(R) Consolidated hotels, partially offset by thE acquisition of one non-AmeriHost Inn(R) 19 Consolidated hotel. The hotel operations segment included the operations of 69 Consolidated hotels (including 62 AmeriHost Inn(R) hotels) comprising 4,867 rooms at December 31, 1999, compared to 69 Consolidated hotels (including 61 AmeriHost Inn(R) hotels) comprising 4,916 rooms at December 31, 1998. AfteR considering the Company's ownership interest in the majority-owned Consolidated hotels, this translates to 4,624 and 4,647 equivalent owned rooms as of December 31, 1999 and 1998, respectively, or a decrease of 0.5%. Recently, the Company has experienced an increase in competition in certain markets, primarily from newly constructed hotels. As a result, there is increased downward pressure on occupancy levels and average daily rates. The Company believes that as the number of AmeriHost Inn(R) hotels increases, the greater the benefits will be at all locations from marketplace recognition and repeat business. In addition, the Company typically builds new hotels in growing markets where it anticipates a certain level of additional hotel development. Hotel development activity is summarized as follows: 1999 1998 1997 ------------------------------------------------------------------------------------------ Unaffiliated & Unaffiliated & Unaffiliated & Minority- Consolidated Minority- Consolidated Minority- Consolidated Owned (1) Hotels (2) Owned (1) Hotels (2) Owned (1) Hotels (2) --------- ---------- --------- ---------- --------- ---------- Under construction at beginning of year 1 5 4 4 7 12 Starts 4 - 2 7 6 6 Completions 1 5 5 6 9 14 Under construction at end of year 4 - 1 5 4 4 ===== ======= ===== ===== ===== ==== (1) hotels developed/constructed for unaffiliated third parties and entities in which the Company holds a minority ownership interest (2) hotels developed/constructed for the Company's own account and for entities in which the Company holds a majority ownership interest
Hotel development revenue decreased 28.3% to $6.4 million during 1999, from $9.0 million during 1998. The Company was developing and constructing five hotels for minority-owned entities during 1999, compared to six hotels during 1998. In conjunction with the Company's objective of building a franchise segment, the Company decided to develop AmeriHost Inn(R) hotels to be held for sale to potential franchisees. Any sale of these hotels held for sale less than twelve months from the date opened are included in the hotel development segment. The Company sold two AmeriHost Inn(R) hotels for $5.3 million in the third quarter of 1999 to franchisees, which was recognized as development revenue. The Company had several additional projects in various stages of pre-construction development during both years. Hotel management revenue decreased 41.6% to $1.3 million during 1999, from $2.3 million during 1998. The number of hotels managed for third parties and minority-owned entities decreased from 22 hotels, representing 1,930 rooms, at December 31, 1998 to 18 hotels, representing 1,696 rooms, at December 31, 1999. The addition of a management contract for one newly constructed hotel (72 rooms) was more than offset by the termination of one management contract (60 rooms) with a minority-owned entity as a result of the sale of the hotel (non-AmeriHost Inn(R) hotel), the termination of one management contract (64 rooms) with a minority-owned hotel which became a Consolidated hotel due to the Company acquiring additional ownership interest, and the termination of three management contracts with unrelated third parties (182 rooms). Employee leasing revenue decreased 40.5% to $6.0 million during 1999, from $10.1 million during 1998, due primarily to the reduction in hotels managed for minority-owned entities and unrelated third parties as described above, and the associated decrease in payroll costs which is the basis for the employee leasing revenue. 20 Franchising realized revenues of $222,187 during its initial year of operation, consisting primarily of initial franchise fees from newly franchised hotels and the royalty fees from these franchised hotels which are based on the hotel's operational revenue. As of December 31, 1999, the Company has three franchise agreements with independent third parties, and has executed additional franchise agreements with certain existing AmeriHost Inn hotel joint ventures. Total operating costs and expenses increased 6.6% to $57.9 million (76.1% of total revenues) during 1999, from $54.3 million (79.1% of total revenues) during 1998. Operating costs and expenses in the hotel operations segment increased 29.8% to $45.1 million during 1999, from $34.8 million during 1998. These increases resulted primarily from the net addition of 18 Consolidated hotels to this segment during the last eighteen months, and are directly related to the 31.2% increase in Consolidated hotel revenues during 1999. Hotel operations segment operating costs and expenses as a percentage of segment revenue decreased to 72.7% during 1999, from 73.5% during 1998. Operating costs and expenses as a percentage of revenues for the Consolidated hotels decreased slightly during 1999 due to fewer AmeriHost Inn(R) hotels operating during their pre-stabilization period in 1999 compared to 1998. Operating costs and expenses for the hotel development segment decreased 36.2% to $5.4 million during 1999, from $8.5 million during 1998, consistent with the 28.3% decrease in hotel development revenue for 1999. Operating costs and expenses in the hotel development segment as a percentage of segment revenue decreased to 83.9% during 1999, from 94.4% during 1998. In connection with the Company's objective of developing AmeriHost Inn(R) hotels held for sale to potential franchisees, the Company recognized development costs of $4.3 million in 1999, which resulted in a lower percentage of operating costs compared to construction activity. The results for 1998 consisted of a greater amount of construction activity, which resulted in higher operating costs in relation to the revenue recognized. Hotel management segment operating costs and expenses decreased 38.1% to $809,061 during 1999, from $1.3 million during 1998. This decrease was due to the decrease in the number of hotels operated and managed for unrelated third parties and minority-owned entities. Employee leasing operating costs and expenses decreased 41.0% to $5.7 million during 1999, from $9.7 million during 1998, which is consistent with the 40.5% decrease in segment revenue for 1999, compared to 1998. Franchising had operating costs and expenses of $786,658 during 1999, which is its initial year of operations. Depreciation and amortization expense decreased 16.8% to $4.6 million during 1999, from $5.5 million during 1998. The decrease was primarily attributable to the sale and leaseback of 30 hotels, 26 of which closed on June 30, 1998 and four of which closed in March 1999, and the sale of six additional hotels that closed in 1999, partially offset by the addition of 24 Consolidated hotels to the hotel operations segment during the past eighteen months and the resulting depreciation and amortization therefrom. The Company does not recognize any depreciation on the assets sold in the sale/leaseback transaction. Leasehold rents - hotels increased 74.3% to $7.3 million during 1999, compared to $4.2 million during 1998. The increase is attributable to the sale and leaseback transaction with PMC. The Company anticipates leasehold rents - hotels to remain relatively constant after 1999. Corporate general and administrative expense decreased 2.0% to $1.5 million during 1999, from $1.6 million during 1998, and can be attributed primarily to efficiencies gained in the overall administration of the Company. The Company's operating income increased 55.0% to $4.8 million during 1999 from $3.1 million during 1998. The following discussion of operating income by segment is exclusive of any corporate general and administrative expense. Operating income from Consolidated AmeriHost Inn(R) hotels increased 8.6% to $5.2 million during 1999, from $4.8 million during 1998. This increase in operating income was due to the increased number of Consolidated AmeriHost Inn(R) hotels and the increase in same room revenues as a significant number of recently opened Consolidated AmeriHost Inn(R) hotels in 1998 were still operating during their pre-stabilization period when revenues are typically lower. Operating income from the hotel development segment increased 136.8% to $1.0 million during 1999 from $426,427 during 1998. The increase in hotel development operating income was due to 21 the timing of hotels developed and constructed for third parties and minority-owned entities during 1998, compared with 1999, the overall decrease in the number of hotels developed and constructed for third parties and minority-owned entities during 1999, and the sale of two AmeriHost Inn(R) hotels held for sale during the third quarter of 1999 which were included in operating income. The hotel management segment operating income decreased 17.5% to $448,710 during 1999, from $543,747 during 1998. This decrease was due primarily to fewer hotels managed during the past twelve months for unrelated third parties and minority-owned properties, and the expensing of start-up costs as incurred during 1999. Employee leasing operating income decreased 23.7% to $242,309 during 1999, from $317,668 during 1998, due to the decrease in employee leasing agreements with minority-owned entities and unrelated third parties. Interest expense decreased 1.3% to $6.0 million during 1999, from $6.1 million during 1998. This decrease was primarily attributable to the sale and leaseback transaction with PMC, whereby the Company does not incur any interest expense on the sold hotels after the sale dates, offset by the additional mortgage financing of newly constructed and acquired Consolidated hotels. The Company's share of equity in income (loss) of affiliates was ($160,837) during 1999, compared to ($240,868) during 1998. The fluctuation in equity of affiliates was primarily attributable to additional newly opened AmeriHost Inn(R) hotels operating during their initial stabilization period in 1999 when revenues are typically lower, offset by the sale of one minority-owned property in the second quarter of 1999 at a gain. Distributions from affiliates were $278,096 during 1999, compared to $831,113 during 1998. The Company recorded income tax expense of $160,000 in 1999 compared to an income tax benefit, before an extraordinary item and cumulative effect of a change in accounting principal of $780,000 in 1998, which is directly related to the pre-tax income (loss) incurred in 1999 and 1998, respectively. The Company had net income of $200,591 in 1999 compared to a loss before cumulative effect of change in accounting principle of $(1.2) million in 1998, primarily due to the factors discussed above. 1998 Compared to 1997 Revenues increased 9.5% to $68.6 million during 1998, from $62.7 million during 1997. The increase in revenue from the Consolidated AmeriHost Inn(R) hotels was partially offset by the decreases from the hotel management and employee leasing segments, a decrease from the hotel development and construction segment, as well as the decrease from non-AmeriHost Inn(R) hotel operations. Hotel operations revenue increased 48.5% to $47.3 million during 1998, from $31.9 million during 1997. Revenues from Consolidated AmeriHost Inn(R) hotels increased 125.8% to $33.1 million during 1998, from $14.7 million during 1997. This increase was attributable primarily to the addition of 31 Consolidated AmeriHost Inn(R) hotels in 1998, including the addition of six newly constructed Consolidated AmeriHost Inn(R) hotels, and the acquisition of additional ownership interest in 25 existing hotels causing them to become Consolidated AmeriHost Inn(R) hotels, as well as an increase in same room revenues of 9.3%. The increase in Consolidated AmeriHost Inn(R) hotel revenue was offset by a 17.4% decrease in Consolidated other brand hotel revenue during 1998, compared to 1997. This decrease was the result of the sale of one non-AmeriHost Inn(R) Consolidated hotel in 1998, and the sale or lease termination of four non-AmeriHost Inn(R) hotels in 1997. The hotel operations segment included the operations of 69 Consolidated hotels (including 61 AmeriHost Inn(R) hotels) comprising 4,916 rooms at December 31, 1998, compared to 39 Consolidated hotels (including 30 AmeriHost Inn(R) hotels) comprising 3,124 rooms at December 31, 1997. After considering the Company's ownership interest in the majority-owned Consolidated hotels, this translates to 4,647 and 2,804 equivalent owned rooms as of December 31, 1998 and 1997, respectively, or an increase of 65.7%. Hotel development revenue decreased 38.7% to $9.0 million during 1998, from $14.6 million during 1997. Hotel development revenues are directly related to the number of hotels being developed and constructed for minority-owned entities or unrelated third parties. The Company was constructing six hotels for minority-owned entities or 22 unrelated third parties during 1998, compared to 13 hotels during 1997. The Company also had several additional projects in various stages of pre-construction development during both years. Hotel management revenue decreased 25.5% to $2.3 million during 1998, from $3.0 million during 1997. The number of hotels managed for third parties and minority-owned entities decreased from 49 hotels, representing 3,957 rooms, at December 31, 1997 to 22 hotels, representing 1,930 rooms, at December 31, 1998. The addition of management contracts for five newly constructed hotels (312 rooms) was more than offset by the termination of four management contracts (310 rooms) with minority-owned entities as a result of the sale of the hotels (non-AmeriHost Inn(R) hotels), the termination of 25 management contracts (1,629 rooms) with minority-owned hotels which became Consolidated hotels due to the Company acquiring additional ownership interests, and the termination of three management contracts for non-AmeriHost Inn(R) hotels with unrelated third parties (400 rooms). Employee leasing revenue decreased 23.3% to $10.1 million during 1998, from $13.1 million during 1997, due primarily to the reduction in hotels managed for minority-owned entities and unrelated third parties as described above, and the associated decrease in payroll costs which is the basis for the employee leasing revenue. Total operating costs and expenses increased 3.8% to $54.3 million (79.1% of total revenues) during 1998, from $52.3 million (83.4% of total revenues) during 1997. Operating costs and expenses in the hotel operations segment increased 42.8% to $34.8 million during 1998, from $24.3 million during 1997. These increases resulted primarily from the net addition of 30 Consolidated hotels to this segment and are directly related to the 125.8% increase in Consolidated AmeriHost Inn(R) revenues during 1998, offset by the 17.4% decrease in non-AmeriHost Inn(R) hotel revenues during 1998. Hotel operations segment operating costs and expenses as a percentage of segment revenue decreased to 73.5% during 1998, from 76.4% during 1997. Operating costs and expenses as a percentage of revenues for the Consolidated AmeriHost Inn(R) hotels decreased to 70.8% during 1998, from 75.5% during 1997, due primarily to the significant number of stabilized AmeriHost Inn(R) hotels acquired during 1998 which were operating after their pre-stabilization period in 1998. Operating costs and expenses for the hotel development segment decreased 38.3% to $8.5 million during 1998, from $13.7 million during 1997, consistent with the 38.7% decrease in hotel development revenues in 1998. Operating costs and expenses in the hotel development segment as a percentage of segment revenue remained relatively consistent at 94.4% in 1998 compared to 93.7% in 1997, as the level of hotel development and construction activity performed for minority-owned entities and unrelated third parties was consistent between both years. Construction activity has significantly higher operating costs compared to the pre-construction development activity. Hotel management segment operating costs and expenses decreased 8.2% to $1.3 million during 1998, from $1.4 million during 1997. This decrease was due to the decrease in the number of hotels managed for minority-owned and unrelated entities, and the allocation of certain general and administrative expenses. Employee leasing operating costs and expenses decreased 23.8% to $9.7 million during 1998, from $12.8 million during 1997, which is consistent with the 23.3% decrease in segment revenue for 1998. Depreciation and amortization expense increased 21.1% to $5.5 million during 1998, from $4.5 million during 1997. The increase was primarily attributable to the net addition of 30 Consolidated hotels to the hotel operations segment and the resulting depreciation and amortization therefrom, offset by the decrease in depreciation from non-AmeriHost Inn(R) hotels as a result of the sale/dispositions, and the completion of the sale and leaseback of 26 hotels on June 30, 1998. Leasehold rents - hotels increased 142.5% to $4.2 million during 1998, from $1.7 million during 1997. This increase was due primarily to the sale and leaseback transaction with PMC on June 30, 1998, partially offset by the sale of two leased Consolidated non-AmeriHost Inn(R) hotels and the termination of the lease for another Consolidated non-AmeriHost Inn(R) hotel in the first and second quarters of 1997. Corporate general and administrative expense decreased 26.7% to $1.6 million during 1998, from $2.1 million during 1997, and can be attributed primarily to the recognition of compensation expense in 1997 for options issued 23 at an exercise price below the then current market price, operational efficiencies and the allocation of certain expenses. The Company's operating income increased 55.8% to $3.1 million during 1998, from $2.0 million during 1997. The following discussion of operating income by segment is exclusive of any corporate general and administrative expense. Operating income from Consolidated AmeriHost Inn(R) hotels increased 255.0% to $4.8 million during 1998, from $1.3 million during 1997. This increase in operating income was due to the increased number of Consolidated AmeriHost Inn(R) hotels and the increase in same room revenues as a significant number of recently opened Consolidated AmeriHost Inn(R) hotels were still operating in 1997 during their pre-stabilization period when revenues are typically lower. Operating income from the hotel development segment decreased 49.1%, to $426,427 during 1998 from $838,452 during 1997. The fluctuation in hotel development operating income was due to the timing of hotels developed and constructed for third parties and minority-owned entities during 1998, compared with 1997, and the overall decrease in the number of hotels developed and constructed for minority-owned entities and unrelated third parties. Operating income from the hotel management segment decreased 57.1% to $543,748 in 1998 from $1.3 million in 1997. This decrease was due primarily to the decrease in hotel management contracts with minority-owned entities (as a result of the Company acquiring the remaining ownership interest in these hotels) and unaffiliated entities. Employee leasing operating income decreased 1.0% to $317,668 during 1998, from $320,826 during 1997, due to the decrease in employee leasing agreements with minority-owned entities and unrelated third parties. Interest expense increased 50.8% to $6.1 in 1998 from $4.1 million during 1997. The increase attributable to the additional mortgage financing of newly constructed and acquired Consolidated AmeriHost Inn(R) hotels, was partially offset by the sale and leaseback transaction with PMC, whereby the Company did not recognize any interest expense after the hotels were sold on June 30, 1998. The Company's share of equity in income (loss) of affiliates improved to ($240,868) during 1998, from ($516,583) during 1997. The fluctuation in equity of affiliates during 1998, compared to 1997, was primarily due to the sale of four minority owned hotels at a significant gain and the acquisition of a significant number of minority owned hotels by the Company resulting in 100% ownership positions. The Company recorded an income tax benefit, before an extraordinary item and a cumulative effect of a change in accounting principle, of $780,000 in 1998 compared to a benefit of $737,000 in 1997, which is directly attributable to the pre-tax loss incurred in 1998. The Company expensed $332,738 in 1998 as an extraordinary item, net of income tax benefit, in deferred loan costs associated with the early extinguishment of mortgage debt in connection with a sale/leaseback transaction. In addition, the Company expensed $1.3 million in 1998, net of income tax benefit, in previously capitalized start-up and pre-opening costs as a cumulative effect of a change in accounting principle to comply with Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities." The Company expensed $1.7 million during 1997 in costs associated with the termination of a consulting agreement and an employment agreement. The Company considers these costs non-recurring in nature. LIQUIDITY AND CAPITAL RESOURCES The Company has five main sources of cash from operating activities: (i) revenues from hotel operations; (ii) fees from development, construction and renovation projects, including proceeds from the sale of assets held for sale; (iii) fees from management contracts; (iv) fees from employee leasing services; and (v) fees from franchise agreements. Cash from hotel operations is typically received at the time the guest checks out of the hotel. Approximately 10% of the Company's hotel operations revenues is generated through other businesses and contracts and is usually paid within 30 to 45 days from billing. Fees from development, construction and renovation projects are typically received within 15 to 45 days from billing. Due to the procedures in place for processing its construction draws, the Company typically does not pay its contractors until the Company receives its draw from the equity or lending source. Management fee revenues typically are received by the Company within five working days from the end of each month. Cash from the Company's employee leasing segment 24 typically is received 24 to 48 hours prior to the pay date. Franchise fees are typically received within ten days from the end of each month. During 1999, the Company used cash for operations of $885,080, compared to cash provided from operations of $5.4 million during 1998, or an increase in cash used by operations of $6.3 million. The decrease in cash flow from operations during 1999, when compared to 1998, can be attributed to a significant level of hotel development expenditures which were accrued at December 31, 1998, and paid in 1999, the timing of collections from hotel development and construction activity, the start-up of the franchising segment, and a significant number of hotels acquired or opened in 1998 or 1999 which were still operating during their pre-stabilization period. In addition, 1999 had significantly less revenue from the development and construction of hotels for minority-owned entities. The Company invests cash in four principal areas: (i) the purchase of property and equipment through the construction and renovation of Consolidated hotels; (ii) the purchase of equity interests in hotels; (iii) the making of loans to affiliated and non-affiliated hotels for the purpose of construction, renovation and working capital; and (iv) the purchase of property and equipment held for sale. During 1999, the Company received $12.3 million from investing activities compared to receiving $15.6 million during 1998. During 1999, the Company received $16.7 million from the sale of eight hotels, used $2.1 million to purchase property and equipment for Consolidated hotels, and used $2.2 million for investments in and advances to affiliates, net of distributions and collections, and used $260,648 for the acquisition of a hotel partnership interest, net of cash acquired. During 1998, the Company received $64.8 million from the sale of hotels, received $1.5 million in collections on notes receivable, used $42.2 million to purchase property and equipment for Consolidated hotels, and used $8.4 million for the acquisition of hotel partnership interests, net of cash acquired. Cash used in financing activities was $12.2 million during 1999 compared to cash used in financing activities of $18.8 million during 1998. In 1999, the primary factors were principal repayments of $20.3 million on long-term debt, including the repayment of mortgages in connection with the sale of hotels, offset by $7.2 million in proceeds from the mortgage financing of Consolidated hotels, and net proceeds of $5.6 million from the Company's operating line-of-credit. Also, the Company used cash of $4.3 million to repurchase its own common stock. In 1998, the contributing factors were principal payments of $50.0 million on long-term debt, including the repayment of mortgages in connection with the sale of hotels, offset by $31.6 million in proceeds from the mortgage financing of Consolidated hotels, and $671,504 in net proceeds from the Company's operating line-of-credit. At December 31, 1999, the Company had $7.6 million outstanding under its operating line-of-credit. The operating line-of-credit (i) has a limit of $8.5 million (ii) is collateralized by a security interest in certain of the Company's assets, including its interest in various joint ventures; (iii) bears interest at an annual rate equal to the lending bank's base rate plus 1/2% (with a minimum interest rate of 7.5%); and (iv) matures May 15, 2000. During 1999, the Company repaid $2.3 million of unsecured 7% Subordinated Notes with operational cash flow and proceeds from its line-of-credit. In March 1998, the Company's Board of Directors authorized the repurchase of its Common Stock from time to time on the open market. In addition, in 1999 the Company completed a Dutch Auction self tender offer to purchase up to 1,000,000 shares of its Common Stock. Through December 31, 1999, the Company repurchased approximately 1.2 million shares of the Company's Common Stock for approximately $4.8 million. The Company does not anticipate any significant additional repurchases during 2000. The Company expects cash from operations to be sufficient to pay all operating and interest expenses in 2000. YEAR 2000 The following disclosure is a Year 2000 readiness disclosure statement pursuant to the Year 2000 Readiness Disclosure Act. 25 In order to minimize or eliminate the effect of the Year 2000 risk on our business systems and applications, we identified, evaluated, implemented and tested changes to our computer systems, applications and software necessary to achieve Year 2000 compliance. Our computer systems and equipment successfully transitioned to the Year 2000 with no significant issues. Costs incurred to achieve Year 2000 compliance were not material. We continue to keep our Year 2000 project management in place to monitor latent problems that could surface at key dates or events in the future. We do not anticipate any significant problems related to these events. SEASONALITY The lodging industry, in general, is seasonal by nature. The Company's hotel revenues are generally greater in the second and third calendar quarters than in the first and fourth quarters due to weather conditions in the markets in which the Company's hotels are located, as well as general business and leisure travel trends. This seasonality can be expected to continue to cause quarterly fluctuations in the Company's revenues, and is expected to have a greater impact as the number of Consolidated hotels increases. Quarterly earnings may also be adversely affected by events beyond the Company's control such as extreme weather conditions, economic factors and other general factors affecting travel. In addition, hotel construction is seasonal, depending upon the geographic location of the construction projects. Construction activity in the Midwest may be slower in the first and fourth calendar quarters due to weather conditions. INFLATION Management does not believe that inflation has had, or is expected to have, any significant adverse impact on the Company's financial condition or results of operations for the periods presented. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 has been amended by SFAS No. 137, which delayed the effective date to periods beginning after June 15, 2000. The Company, to date, has not engaged in derivative and hedging activities. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use, including the requirement to capitalize and amortize specific costs. The adoption of this standard did not have a material effect on its capitalization policy. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 All statements contained herein that are not historical facts, including but not limited to, statements regarding the Company's hotels under construction and the operation of AmeriHost Inn(R) hotels are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company; competitive factors, such as the introduction of new hotels or renovation of existing hotels in the same markets; changes in travel patterns which could affect demand for the Company's hotels; changes in development and operating costs, including labor, construction, land, equipment, and capital costs; general business and economic conditions; and other risk factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's long-term debt obligations. The Company has some cash flow exposure on its long-term debt obligations to changes in market interest rates. The Company primarily enters into long-term debt obligations in connection with the development and financing of hotels. The Company maintains a mix of fixed and floating debt to mitigate its exposure to interest rate fluctuations. The Company's management believes that fluctuations in interest rates in the near term would not materially affect the Company's consolidated operating results, financial position or cash flows as the Company has limited risks related to interest rate fluctuations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements filed as a part of this Form 10-K are included under "Exhibits, Financial Statements and Reports on Form 8-K" under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements on accounting and financial disclosure matters which are required to be described by Item 304 of Regulation S-K. 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Company's executive officers and directors are: Name Age Position ---- --- -------- Michael P. Holtz 43 Chairman of the Board of Directors, President and Chief Executive Officer James B. Dale 36 Senior Vice President of Finance, Secretary, Treasurer and Chief Financial Officer Russell J. Cerqua 43 Director Reno J. Bernardo 68 Director Salomon J. Dayan 54 Director Jon K. Haahr 46 Director Thomas J. Romano 47 Director Michael P. Holtz has been a Director of the Company since August 1985. From 1985 to 1989, Mr. Holtz served as the Company's Treasurer and Secretary. In 1986, Mr. Holtz was promoted to Chief Operating Officer of the Company with direct responsibility for the Company's day-to-day operations. In 1989, Mr. Holtz was elected President and Chief Executive Officer of the Company. In 1999, in addition to his other responsibilities, Mr. Holtz was elected Chairman of the Board of Directors. Mr. Holtz is responsible for development and implementation of all Company operations including hotel development, finance and management. Mr. Holtz has over 20 years experience in the operation, development and management of hotel properties. James B. Dale was promoted to Chief Financial Officer in 1998, 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 Secretary by the Board of Directors. Prior to joining the Company, Mr. Dale was an Audit Manager with BDO Seidman, LLP, the Company's external auditors, with nearly nine years of experience in auditing, financial reporting and taxation. Mr. Dale is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. Russell J. Cerqua served as the Executive Vice President of Finance, Chief Financial Officer, Treasurer and Secretary of the Company from 1987 through 1998, where his primary responsibilities included internal and external financial reporting, corporate financing, development of financial management systems, and financial analysis. Mr. Cerqua continues to serve as a Director of the Company. Mr. Cerqua is currently the Chief Financial Officer of Metro Technologies, L.L.C. Prior to joining the Company, Mr. Cerqua was an audit manager with Laventhol & Horwath, the Company's former independent certified public accountants. Mr. Cerqua was involved in public accounting for over 9 years, with experience in auditing, financial reporting and taxation. Mr. Cerqua is a Certified Public Accountant. Reno J. Bernardo served as the Senior Vice President of Construction of the Company from 1987 through March 1994, when he retired. His primary responsibilities included managing construction of new properties and directing renovation projects. In 1989, Mr. Bernardo became a Director of the Company and continues to serve in this capacity. From 1985 to 1986, Mr. Bernardo was Vice President of Construction with Devcon Corporation, a hotel construction company. From 1982 to 1985, Mr. Bernardo was Project Superintendent with J.R. Trueman and Associates, a hotel 28 construction company, and a subsidiary of Red Roof Inns, where his responsibilities included supervision of the development and construction of several Red Roof Inns. Salomon J. Dayan, M.D. has been a director of the Company since August 1996. Since 1980, Dr. Dayan, a physician certified in internal and geriatric medicine, has been the Chief Executive Officer of Salomon J. Dayan Ltd., a multi-specialty medical group which he founded and which is dedicated to the care of the elderly in hospital and nursing home settings. Since 1986, Dr. Dayan has been the Medical Director and Executive Director of Healthfirst, a corporation which operates multiple medical ambulatory facilities in the Chicago, Illinois area, and since 1994 he has also been an assistant professor at Rush Medical Center in Chicago. Dr. Dayan is currently the Chairman of the Board of Directors of J. D. Financial, a bank holding company owning Pan American Bank. Dr. Dayan also has numerous investments in residential and commercial real estate. Jon K. Haahr has been a director of the Company since May 1999. Mr. Haahr is the Managing Director of Investment Banking for First Union Securities, Inc. Real Estate Group. Mr. Haahr joined First Union Investment Banking Department in 1987 and, prior to establishing the Real Estate Group, provided banking expertise to corporate finance clients in the financial services sector and in the area of closed-end funds. His experience includes six years at Continental Bank in Chicago where he was an officer of the bank providing corporate lending and capital markets services to middle market companies. Mr. Haahr is a member of the Board of Directors of the Center for Urban Land Economics Research at the University of Wisconsin Real Estate School, and speaks regularly at a variety of real estate industry events. Thomas J. Romano has been a director of the Company since September 1999. Mr. Romano is currently an Executive Vice President and Chief Credit Officer for the Bridgeview Bank Group. Mr. Romano is a member of the Executive Management Committee and is responsible for all lending activities for a significant loan portfolio. In addition, Mr. Romano manages the credit underwriting department. His experience includes nineteen years with First of America Bank where his responsibilities included the management of commercial lending functions and numerous branch locations. Mr. Romano is currently a member of the Lake County Muscular Dystrophy Association and a member of Robert Morris Associates. Dr. Dayan purchased approximately 10,000 shares of the Company's Common Stock in July, August and September 1999. These transactions were not reported to the SEC on Form 4 pursuant to Registration S-K until December 1999. 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, 1999, 1998 and 1997, of those persons who were, at December 31, 1999: 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 Bonus Awards Options(#)(1) Compensation(2) - ------------------------ ------ -------- ---------- ----------- -------------- --------------- Michael P. Holtz 1999 325,000 20,000 - - 17,500 Chairman of the Board, President 1998 325,000 20,000 - 256,100 12,633 and Chief Executive Officer 1997 334,615 - - 50,000 12,375 James B. Dale 1999 120,000 5,500 - 20,500 1,251 Senior Vice President Finance, 1998 98,462 - - - 1,031 Secretary, Treasurer, and Chief Financial Officer (1) All options were fully vested as of December 31, 1999, except for 25,100 options held by Mr. Holtz and 14,500 options held by Mr. Dale. 29 (2) Represents life insurance premiums paid by the Company on behalf of the Named Officers and the Company's 401(k) matching contributions of $2,500 and $1,251 for Messrs. Holtz and Dale, respectively. Amounts for 1998 include the Company's 401(k) matching contributions of $2,633 and $1,031 for Messrs. Holtz and Dale, respectively.
STOCK OPTIONS The following table summarizes the number and terms of stock options granted to each of the Named Officers during the year ended December 31, 1999. OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ----------------------------------------------------------- ----------------------------- % of Total Options Granted to Exercise or Options Employees in Base Price Expiration Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($) - --------------- ------------ --------------- ------------ ------------ ---------- --------- James B. Dale 18,000 11.8% $3.31 Jan. 2009 34,815 84,217 2,500 1.6 3.69 Oct. 2009 4,387 12,250 -------- ------ ------- ------ 20,500 13.4% 39,202 96,467 ====== ==== ====== ======
The following table provides information concerning the exercise of stock options during 1999, and the year-end value of unexercised options for each of the Named Officers and Directors 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, 1999 December 31, 1999 (1) Acquired Value --------------------------- ------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---------------- ----------- -------- ----------- ------------- ----------- ------------- Michael P. Holtz - - 701,000 25,100 $ 92,188 $ - James B. Dale - - 26,500 14,500 375 750 Russell J. Cerqua - - 198,958 1,000 28,809 - Reno J. Bernardo - - 3,000 1,000 - - Salomon J. Dayan - - 33,000 1,000 - - Jon K. Haahr - - - 1,000 - - Thomas J. Romano - - - - - - (1) The closing sale price of the Company's Common Stock on such date on the Nasdaq National Market was $3.38.
EMPLOYMENT AGREEMENT The Company's President and Chief Executive Officer, Michael P. Holtz, provides services to the Company under the terms of an employment agreement dated January 1, 1995, amended February 4, 1997 and amended November 23, 1999. On April 22, 1997, Mr. Holtz exercised his option to renew his agreement for an additional three-year period ending December 31, 2000. Pursuant to Amendment No. 3 dated November 23, 1999, the agreement renewed for an additional three-year period ending December 31, 2003. On January 1, 1998, Mr. Holtz received options to purchase a minimum of 256,100 shares of the Company's common stock at the market price on date of issuance under the Company's 1996 Omnibus Incentive Stock Plan, of which 110,000 vested immediately, 121,000 vested on July 1, 1999 and 25,100 will vest on July 1, 2000. Pursuant to Amendment No. 3, Mr. Holtz will receive 100,000 options each year, 30 with 50,000 vesting 90 days from the date of issuance and 50,000 vesting only if the Company attains certain financial performance criteria. Amendment No. 3 also provides for a cash bonus based upon financial performance, franchising growth and hotel operation performance. Under the terms of the amended employment agreement, stock awards were eliminated as a component of annual compensation. The employment agreement entitles the executive officer to receive severance payments, equal to two years' compensation, if his employment is terminated by the Company without cause or if he elects to terminate such employment for a "good reason," including a change of control of the Company. For purposes of the employment agreements, a change of control means (i) any change in the Company's Board of Directors such that a majority of the Board of Directors is composed of members who were not members of the Board of Directors on the date the employment agreement was made or (ii) removal of the executive from membership on the Board of Directors by a vote of a majority of the shareholders of the Company or failure of the Board of Directors to nominate the executive for re-election to Board membership. In 1998, Mr. Holtz agreed that a change in a majority of the members as described in (i) above shall no longer constitute a "good reason" for electing to terminate his employment agreement. The executive officer is also entitled to severance payments, equal to one year's compensation, if he voluntarily terminates his employment with the Company for a reason other than a "good reason" and provides appropriate notice of such resignation. COMPENSATION OF DIRECTORS Each nonemployee Director of the Company received an annual retainer fee of $9,000 ($750 per month) in 1999. Each nonemployee Director of the Company also received $250 for each Board of Directors meeting attended in person, $150 for each Board of Directors meeting conducted by telephone and $150 for each committee meeting. Each Director is reimbursed for all out-of-pocket expenses related to attendance at Board meetings. Each nonemployee Director of the Company receives an option to purchase 1,000 shares of Common Stock annually, pursuant to the 1996 Stock Option Plan for Nonemployee Directors. In addition, beginning in 2000, each Director will receive 2,500 options annually which vest only if the Company meets certain performance criteria, including earnings per share and EBITDA. All Director stock options are priced at the market price on the date of issuance. 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 17 2000, by (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's Directors, (iii) each of the Named Officers and (iv) all Directors and executive officers as a group. Shares Beneficially Owned As of March 17, 2000 --------------------- Name Number Percent - ----------------------------- ------------------ ---------- Michael P. Holtz 907,857 (1) 16.0% Wellington Management Company 615,000 (2) 12.4 Massachusetts Financial Services Company 527,000 (3) 10.6 Dimensional Fund Advisors, Inc. 408,100 (4) 8.2 Raymond and Liliane R. Dayan 364,774 (5) 7.3 Salomon J. Dayan 361,059 (1) 7.0 H. Andrew Torchia 354,989 (6) 6.9 Russell J. Cerqua 257,413 (1) 5.0 Reno J. Bernardo 34,612 (1) 0.7 James B. Dale 33,775 (1) 0.7 Jon K. Haahr 2,400 0.1 Thomas J. Romano 4,700 0.1 ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (7 PERSONS) 1,601,816 26.4% ============ ======= 31 ______________________ (1) Includes shares subject to options exercisable presently or within 60 days as follows: Mr. Holtz, 701,000 shares, Dr. Dayan, 157,676 shares, Mr. Cerqua, 198,958 shares, Mr. Bernardo, 3,000 shares, and Mr. Dale, 32,500 shares. (2) Based upon information provided in its Schedule 13G dated December 31, 1999, Wellington Management Company ("WMC"), in its capacity as investment advisor, may be deemed beneficial owner of 615,000 shares of the Company which are owned by numerous investment counseling clients. Of the shares shown above, WMC has shared voting power for 615,000 shares and shared investment power for 615,000 shares. (3) Based upon information provided in its Schedule 13G dated February 8, 2000, Massachusetts Financial Services Company ("MFS"), in its capacity as investment manager, may be deemed beneficial owner of 527,000 shares of the Company which are also beneficially owned by MFS Series Trust II - MFS Emerging Growth Stock Fund, shares of which are owned by numerous investors. MFS has sole voting and investment power for the 527,000 shares. (4) Based upon information provided in its Schedule 13G dated February 3, 2000, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as investment advisor, may be deemed beneficial owner of 408,100 shares of the Company which are owned by numerous investment counseling clients. Of the shares shown above, DFA has sole voting and investment power for 408,100 shares. (5) Based upon information provided in their Schedule 13D dated August 25, 1997, Mr. and Mrs. Dayan beneficially own 364,744 shares of the Company. Of the shares shown above, Mr. and Mrs. Dayan have sole voting and investment power for 364,774 shares. (6) Based upon information provided in his 13D dated December 2, 1996. Includes 375,832 shares owned by Urban 2000 Corp. Mr. Torchia is the 51% stockholder of Urban 2000 Corp. and disclaims beneficial ownership of all but an aggregate of 195,589 shares owned directly, or indirectly, by Urban 2000 Corp. Also includes 150,000 options currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In the past, certain of the Company's directors and executive officers have, directly or indirectly, invested in joint ventures with the Company. For example, Dr. Dayan, a director of the Company, has invested approximately $1.6 million in seven joint ventures since 1988. Dr. Dayan and each of the Company's directors and executive officers who have made such investments have done so on the same terms as all other investors in such joint ventures. Mr. Romano is an executive officer of Bridgeview Bank & Trust, which is the bank that maintains the Company's operating line-of-credit. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. Financial Statements: --------------------- The following consolidated financial statements are filed as part of this Report on Form 10-K for the fiscal year ended December 31, 1999. (a)(1) Financial Statements: Report of Independent Certified Public Accountants....... F-1 Consolidated Balance Sheets at December 31, 1999 and 1998................................................ F-2 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.................. F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.................. F-6 Notes to Consolidated Financial Statements............... F-8 (a)(2) Financial Statement Schedules: No financial statement schedules are submitted as part of this report because they are not applicable or are not required under regulation S-X or because the required information is included in the financial statements or notes thereto. (a)(3) Exhibits: The following exhibits were included in the Registrant's Report on Form 10-K filed on March 26, 1993, and are incorporated by reference herein: Exhibit No. Description ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of Amerihost Properties, Inc. 3.2 By-laws of Amerihost Properties, Inc. 4.2 Specimen Common Stock Purchase Warrant for Employees 4.3 Specimen 7% Subordinated Note 4.4 Specimen Common Stock Purchase Warrant for 7% Subordinated Noteholders 4.5 Form of Registration Rights Agreement for 7% Subordinated Noteholders 33 The following exhibits were included in the Registrant's Amendment No. 1 to Form S-2 filed on July 3, 1996, and are incorporated by reference herein: Exhibit No. Description ----------- ----------- 10.4 Employment Agreement between Amerihost Properties, Inc. and Michael P. Holtz The following exhibits were included in the Registrant's Proxy Statement for Annual Meeting of Shareholders filed on July 25, 1996, and are incorporated by reference herein: Exhibit No. Description ----------- ----------- 10.2 1996 Omnibus Incentive Stock Plan (Annex A) 10.3 1996 Stock Option Plan for Nonemployee Directors (Annex B) The following exhibits were included in the Registrant's Report on Form 10-K filed March 24, 1997; and are incorporated herein by reference: Exhibit No. Description ----------- ----------- 10.9 Amendment of Employment Agreement between Amerihost Properties, Inc. and Michael P. Holtz The following 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 Amerihost Properties, Inc., including exhibits thereto The following exhibits are included in this Report on Form 10-K filed March 23, 2000: Exhibit No. Description - ----------- ----------- 10.6 Amendment No. 3 of Employment Agreement between Amerihost Properties, Inc. and Michael P. Holtz 21.1 Subsidiaries of the Registrant 23.1 Consent of BDO Seidman, LLP 27.0 Financial Data Schedule Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended December 31, 1999. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERIHOST PROPERTIES, INC. By: /s/ Michael P. Holtz ------------------------ Michael P. Holtz Chief Executive Officer By: /s/ James B. Dale ------------------------ James B. Dale Chief Financial Officer March 21, 2000 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/ Michael P. Holtz /s/ Reno J. Bernardo - ---------------------------------- --------------------------------- Michael P. Holtz, Director Reno J. Bernardo, Director March 21, 2000 March 21, 2000 /s/ Russell J. Cerqua /s/ Jon K. Haahr - ---------------------------------- --------------------------------- Russell J. Cerqua, Director Jon K. Haahr, Director March 21, 2000 March 21, 2000 /s/ Salomon J. Dayan /s/ Thomas Romano - ---------------------------------- ----------------- Salomon J. Dayan, Director Thomas Romano, Director March 21, 2000 March 21, 2000 35 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors of Amerihost Properties, Inc. We have audited the accompanying consolidated balance sheets of Amerihost Properties, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amerihost Properties, Inc. and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1998 the Company adopted Statement of Position (SOP) Number 98-5, "Reporting on the Costs of Start-Up Activities." BDO Seidman, LLP Chicago, Illinois March 8, 2000 F-1 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
================================================================================================================= December 31, December 31, 1999 1998 ------------------ ------------------- ASSETS Current assets: Cash and cash equivalents $ 3,766,323 $ 4,493,834 Accounts receivable (including $213,911 and $290,859 from related parties) 2,901,615 2,931,216 Notes receivable, current portion (Note 2) 568,485 168,061 Prepaid expenses and other current assets 971,836 902,457 Refundable income taxes 56,876 1,261,194 Costs and estimated earnings in excess of billings on uncompleted contracts with related parties (Note 3) 834,820 649,858 --------------- -------------- Total current assets 9,099,955 10,406,620 --------------- -------------- Investments in and advances to unconsolidated hotel joint ventures (Notes 4 and 6) 7,332,806 5,331,247 --------------- -------------- Property and equipment (Notes 6, 7 and 13): Land 8,786,189 9,926,105 Buildings 56,670,991 65,506,004 Furniture, fixtures and equipment 17,758,161 14,799,111 Construction in progress 1,062,888 6,094,542 Leasehold improvements 1,990,822 1,156,174 Assets held for sale 7,967,318 9,075,179 --------------- -------------- 94,236,369 106,557,115 Less accumulated depreciation and amortization 15,466,013 15,219,135 --------------- -------------- 78,770,356 91,337,980 --------------- -------------- Notes receivable, less current portion (Note 2) 692,662 1,181,962 Deferred income taxes (Note 9) 4,327,000 3,904,000 Other assets, net of accumulated amortization of $1,871,416 and $2,325,451 (Note 5) 2,885,388 3,118,979 --------------- -------------- 7,905,050 8,204,941 $ 103,108,167 $ 115,280,788 =============== ==============
F-2 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
================================================================================================================= December 31, December 31, 1999 1998 ------------------- ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,623,390 $ 5,638,250 Bank line-of-credit (Note 6) 7,560,214 1,961,213 Accrued payroll and related expenses 777,725 1,180,674 Accrued real estate and other taxes 2,260,048 2,285,333 Other accrued expenses and current liabilities 1,127,504 756,308 Current portion of long-term debt (Note 7) 1,567,643 5,508,498 --------------- -------------- Total current liabilities 15,916,524 17,330,276 --------------- -------------- Long-term debt, net of current portion (Note 7) 58,781,609 66,332,566 --------------- -------------- Deferred income (Note 13) 14,001,231 13,164,007 --------------- -------------- Commitments (Notes 8, 12 and 13) Minority interests 228,235 138,131 --------------- -------------- Shareholders' equity (Notes 8 and 12): Preferred stock, no par value; authorized 100,000 shares; none issued - - Common stock, $.005 par value; authorized 25,000,000 shares; issued and outstanding 4,968,673 shares at December 31, 1999, and 6,089,550 shares at December 31, 1998 24,843 30,448 Additional paid-in capital 13,050,069 17,380,295 Retained earnings 1,542,531 1,341,940 --------------- -------------- 14,617,443 18,752,683 Less: Stock subscriptions receivable (Note 8) (436,875) (436,875) 14,180,568 18,315,808 $ 103,108,167 $ 115,280,788 =============== ============== See notes to consolidated financial statements.
F-3 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
====================================================================================================================== 1999 1998 1997 ------------------ ------------------- ----------------- Revenue (NOTE 10): Hotel operations: AmeriHost Inn(R)hotels $ 49,508,745 $ 33,095,525 $ 14,655,498 Other hotels 12,587,253 14,232,886 17,223,293 Development and construction 6,431,995 8,968,111 14,639,746 Management services 1,315,212 2,251,962 3,023,944 Employee leasing 5,992,580 10,069,705 13,123,035 Franchising 222,187 - - ---------------- --------------- --------------- 76,057,972 68,618,189 62,665,516 ---------------- --------------- --------------- Operating costs and expenses: Hotel operations: AmeriHost Inn(R)hotels 34,866,053 23,419,321 11,066,502 Other hotels 10,260,074 11,348,680 13,276,726 Development and construction 5,398,384 8,463,341 13,719,250 Management services 809,061 1,306,864 1,423,814 Employee leasing 5,747,351 9,748,110 12,798,585 Franchising 786,658 - - ---------------- --------------- --------------- 57,867,581 54,286,316 52,284,877 ---------------- --------------- --------------- 18,190,391 14,331,873 10,380,639 Depreciation and amortization 4,567,030 5,486,529 4,532,500 Leasehold rents - hotels (Note 13) 7,306,691 4,192,348 1,728,933 Corporate general and administrative 1,537,052 1,568,561 2,139,647 Operating income 4,779,618 3,084,435 1,979,559 Other income (expense): Interest expense (6,031,759) (6,113,369) (4,053,933) Interest income 877,194 521,250 755,115 Other income 555,749 227,822 136,018 Equity in net income and losses of affiliates (160,837) (240,868) (516,583) Gain on sale of assets 553,298 305,484 1,697,999 Non-recurring expenses (Note 16) - - (1,874,492) Income (loss) before minority interests and income taxes 573,263 (2,215,246) (1,876,317) Minority interests in operations of consolidated subsidiaries and partnerships (212,672) 267,801 172,874 Income (loss) before income taxes 360,591 (1,947,445) (1,703,443) Income tax (expense) benefit (Note 9) (160,000) 780,000 737,000 Income (loss) before extraordinary item and cumulative effect of change in accounting principle 200,591 (1,167,445) (966,443) Extraordinary item - early extinguishment of debt, net of income tax benefit (Note 17) - (332,738) - Cumulative effect of change in accounting principle, net of income tax benefit (Note 1) - (1,295,891) - Net income (loss) $ 200,591 $ (2,796,074) $ (966,443) ================ =============== ============== Income (loss) per share - Basic, before extraordinary item and accounting change $ 0.04 $ (0.19) $ (0.15) Net income (loss) per share - Basic $ 0.04 $ (0.45) $ (0.15) Income (loss) per share - Diluted, before extraordinary item and accounting change $ 0.02 $ (0.20) $ (0.19) Net income (loss) per share - Diluted $ 0.02 $ (0.45) $ (0.19) See notes to consolidated financial statements.
F-4 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
==================================================================================================================================== Common stock Stock --------------------- subscrip- Additional Retained tions Total paid-in earnings and notes shareholders' Shares Amount capital (Deficit) receivable equity ------ ------ ------- --------- ---------- ---------- BALANCE AT JANUARY 1, 1997 6,036,921 30,185 17,170,154 5,104,457 $(1,393,167) 20,911,629 Shares issued for compensation 9,350 47 49,092 - - 49,139 Exercise of common stock options 508,750 2,544 2,259,281 - - 2,261,825 Acquisition of common stock (157,073) (786 (1,094,964) - - (1,095,750) Compensation recognized relating to employee stock options granted - - 301,465 - - 301,465 Tax benefit relating to the exercise of non-qualified options - - 356,533 - - 356,533 Repayment of notes receivable from officers (Note 8) (185,023) (925) (1,180,906) - 956,292 (225,539) Net loss for the year ended December 31, 1997 - - - (966,443) - (966,443) BALANCE AT DECEMBER 31, 1997 6,212,925 31,065 17,860,655 4,138,014 (436,875) 21,592,859 Acquisition of common stock (Note 8) (123,550) (618) (480,810) - - (481,428) Shares issued for compensation 175 1 450 - - 451 Net loss for the year ended December 31, 1998 - - - (2,796,074) - (2,796,074) BALANCE AT DECEMBER 31, 1998 6,089,550 $ 30,448 $17,380,295 $ 1,341,940 $(436,875) $18,315,808 Acquisition of common stock (Note 8) (1,121,002) (5,606) (4,330,558) - - (4,336,164) Shares issued for compensation 125 1 332 - - 333 Net income for the year ended December 31, 1999 - - - 200,591 - 200,591 BALANCE AT DECEMBER 31, 1999 4,968,673 $ 24,843 $13,050,069 $ 1,542,531 $(436,875) $14,180,568 ========= ========= =========== ============ ========== =========== See notes to consolidated financial statements.
F-5 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
====================================================================================================================== 1999 1998 1997 ------------------ ------------------- ----------------- Cash flows from operating activities: Cash received from customers $ 80,716,593 $ 71,281,629 $ 65,006,272 Cash paid to suppliers and employees (76,876,079) (58,610,075) (57,063,416) Interest received 729,089 976,771 546,889 Interest paid (6,076,002) (6,089,595) (3,994,403) Income taxes (paid) refunds received 621,319 (2,150,460) (939,572) Contract and employment termination costs - - (1,697,448) Net cash (used in) provided by operating activities (885,080) 5,408,270 1,858,322 --------------- --------------- --------------- Cash flows from investing activities: Distributions, and collections on advances, from affiliates 967,465 2,805,517 2,274,863 Purchase of property and equipment (2,102,832) (42,182,698) (29,343,109) Purchase of investments in, and advances to, minority owned affiliates (3,124,618) (2,790,036) (4,658,738) Acquisitions of partnership interests, net of cash acquired (260,648) (8,358,145) 156,067 Increase in notes receivable - - (6,000) Collections on notes receivable 138,876 1,465,378 139,050 Preopening and management contract costs - (223,230) (416,195) Proceeds from sale of assets 16,726,198 64,838,108 3,390,576 Net cash provided by (used in) investing activities 12,344,441 15,554,894 (28,463,486) --------------- --------------- --------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 7,203,482 31,593,918 34,813,511 Principal payments on long-term debt (20,328,540) (49,875,365) (8,880,899) Net proceeds from (repayments of) line of credit 5,599,002 671,504 (417,715) Decrease in minority interest (324,985) (731,691) (578,300) Proceeds from issuance of common stock 333 451 1,166,075 Aborted stock offering and merger costs - - (177,044) Common stock repurchases (4,336,164) (477,650) - Net cash (used in) provided by financing activities (12,186,872) (18,818,833) 25,925,628 Net (decrease) increase in cash and cash equivalents (727,511) 2,144,331 (679,536) Cash and cash equivalents, beginning of year 4,493,834 2,349,503 3,029,039 Cash and cash equivalents, end of year $ 3,766,323 $ 4,493,834 $ 2,349,503 =============== =============== ===============
F-6 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997 ------------------ ------------------- ----------- Reconciliation of net income (loss) to net cash (used in) provided by operating activities: Net income (loss) $ 200,591 $ (2,796,074) $ (966,443) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 4,567,030 5,486,529 4,532,500 Equity in net income (loss) of affiliates and amortization of deferred income 160,837 240,868 516,583 Minority interests in operations of subsidiaries 212,672 (267,801) (172,874) Amortization of deferred interest and loan discount 34,045 45,393 39,760 Bad debt expense (150,000) - 200,000 Compensation recognized through issuance of common stock and common stock options - - 350,604 Gains on sale of investments, property and equipment (528,297) (305,484) (1,697,999) Aborted stock offering and merger costs - - 177,044 Deferred income taxes (423,000) (4,012,000) 279,000 Amortization of deferred gain (1,462,096) (643,726) - Extraordinary item and cumulative effect of change in accounting principle - 2,157,195 - Changes in assets and liabilities, net of effects of acquisitions: Decrease in accounts receivable 156,910 1,017,942 1,613,450 Increase in prepaid expenses and other current assets (211,565) (612,070) (188,264) Decrease (increase) in refundable income taxes 1,204,318 1,081,540 (1,955,572) (Increase) decrease in costs and estimated earnings in excess of billings (184,962) 1,263,245 170,156 (Increase) decrease in other assets (358,890) 1,494,948 (1,137,535) Increase in assets held for sale (959,002) - - Decrease in accounts payable (3,035,113) (46,020) (557,958) (Decrease) increase in accrued payroll and other accrued expenses and current liabilities (37,645) 713,282 220,601 (Decrease) increase in accrued interest (78,288) (21,619) 14,137 Increase in deferred income 7,375 612,122 421,132 Net cash (used in) provided by operating activities $ (885,080) $ 5,408,270 $ 1,858,322 =============== ============== ============= See notes to consolidated financial statements.
F-7 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization: ------------- Amerihost Properties, Inc. and its subsidiaries (collectively, where appropriate, "Amerihost," or the "Company") was incorporated under the laws of Delaware on September 19, 1984. The Company is engaged in the development and construction of AmeriHost Inn(R) hotels, its proprietary hotel brand, the ownership, operation and management of both AmeriHost Inn(R) hotels and other hotels and the franchising of the AmeriHost Inn(R) brand. The AmeriHost Inn(R) brand was created by the Company to provide for the consistent, cost-effective development and operation of mid-price hotels in various markets. All AmeriHost Inn(R) hotels are designed and developed using the Company's 60 to 120 room, interior corridor and indoor pool prototype design and are located in tertiary and secondary markets. Principles of consolidation: ---------------------------- The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and entities in which the Company has a majority ownership interest. All significant intercompany accounts and transactions have been eliminated. Construction accounting: ------------------------ Development fee revenue from construction/renovation projects is recognized using the percentage-of-completion method over the period beginning with the execution of contracts and ending with the commencement of construction/renovation. Construction fee revenue from construction/renovation projects is recognized on the percentage-of-completion method, generally based on the ratio of costs incurred to estimated total contract costs. Revenue from contract change orders is recognized to the extent costs incurred are recoverable. Profit recognition begins when construction reaches a progress level sufficient to estimate the probable outcome. Provision is made for anticipated future losses in full at the time they are identified. Franchise fee revenue: ---------------------- Franchise fees consist of a non-refundable application fee, an initial franchise fee and monthly royalties based on the franchised hotel's revenue. The application fee is recognized upon receipt. The initial franchise fee is recognized as revenue when all material services or conditions relating to the sale have been substantially performed. The monthly royalty fee is recognized in the month in which the hotel revenue was earned. Cash equivalents: ----------------- The Company considers all investments with an initial maturity of three months or less to be cash equivalents. F-8 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Concentrations of credit risk: ------------------------------ Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, accounts receivable and notes receivable. The Company invests temporary cash balances in financial instruments of highly rated financial institutions generally with maturities of less than three months. A substantial portion of accounts receivable are from hotel guests staying at the Company's hotels located in the midwestern United States, where collateral is generally not required, from these same hotels for hotel management and payroll fees, and from hotel operators for the development and construction of hotels pursuant to written contracts. Fair values of financial instruments: ------------------------------------- The carrying values reflected in the consolidated balance sheet at December 31, 1999 reasonably approximate the fair values for cash and cash equivalents, accounts and contracts receivable and payable, and variable rate long-term debt. The note receivable is collateralized by shares of the Company's common stock, investments in hotels, a second mortgage on a hotel property, and personal guarantees. Construction/renovation and working capital notes are repaid to the Company within a relatively short period after their origination. The notes receivable bear interest at rates approximating the current market rates and the carrying value approximates their fair value. The Company estimates that the fair value of its fixed rate long-term debt at December 31, 1999 approximates the carrying value considering the property specific nature of the notes and in certain cases, the subordinated nature of the debt. In making such assessments, the Company considered the current rate at which the Company could borrow funds with similar remaining maturities and discounted cash flow analyses as appropriate. Investments: ------------ Investments in entities in which the Company has a non-majority ownership interest are accounted for using the equity method, under which method the original investment is adjusted for the Company's share of operations, and is reduced by distributions when received. Property and equipment: ----------------------- Property and equipment are stated at cost. Repairs and maintenance are charged to expense as incurred and renewals and betterments are capitalized. Depreciation is being provided for assets placed in service, principally by use of the straight-line method over their estimated useful lives. Leasehold improvements are being amortized by use of the straight-line method over the term of the lease. Construction period interest in the amount of $121,238, $176,920 and $548,469 was capitalized in 1999, 1998 and 1997, respectively, and is included in property and equipment. F-9 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIE (CONTINUED): For each classification of property and equipment, depreciable periods are as follows: Building 31.5-39 years Furniture, fixtures and equipment 5-7 years Leasehold improvements 3-10 years Assets held for sale include hotels which have opened during the last twelve months, and where the Company is actively attempting to sell the property. These assets which are sold within the first twelve months after opening are recorded as development revenue and expense on the date the assets are sold. Other assets: ------------- Investment in leases: Investment in leases represents the amounts paid for the acquisition of leasehold interests for certain hotels. These costs are being amortized by use of the straight-line method over the terms of the leases. Costs of management contracts acquired and preopening costs: The costs of management contracts acquired and preopening costs were being capitalized and amortized by use of the straight-line method prior to 1998. During 1998, the Company adopted Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities," which requires these costs to be expensed as incurred. As a result of the adoption of SOP 98-5, all previously capitalized costs, net of an income tax benefit of approximately $864,000, were written-off as a cumulative effect of a change in accounting principle. The pro forma effect on earnings of accounting for start-up activities pursuant to SOP No. 98-5 is as follows for 1997: 1997 --------------- Pro forma net income (loss) $ (1,729,842) Pro forma net income (loss) per share: Basic $ (0.28) Diluted $ (0.31) 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. F-10 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): 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 on the sale and leaseback of 30 hotels during 1998 and 1999 (Note 13). This gain is being recognized on a straight-line basis over the 10-year term of the lease as an adjustment to leasehold rent expense. 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 are recorded in income as earned. Income taxes: ------------- Deferred income taxes are provided on the differences in the bases of the Company's assets and liabilities as determined for tax and financial reporting purposes and relate principally to depreciation of property and equipment and deferred income. Earnings per share: ------------------- The Company calculates earnings per share in accordance with Financial Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per Share" (FAS 128). Basic earnings per share ("EPS") is calculated by dividing the income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. The Company excluded stock options which had an anti-dilution effect on the EPS computations. Diluted EPS gives effect to all dilutive potential common shares outstanding for the period. F-11 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The calculation of basic and diluted earnings per share for each of the three years ended December 31 is as follows: 1999 1998 1997 --------------- ---------------- --------------- Income (loss), before extraordinary item and cumulative effect of change in accounting principle $ 200,591 $ (1,167,445) $ (966,443) Extraordinary item (Note 13) - (332,738) - Accounting change (Note 1) - (1,295,891) - ------------ --------------- ------------- Net income (loss) 200,591 (2,796,074) (966,443) Impact of convertible partnership interests (88,117) (157,333) (325,291) -------------- -------------- -------------- Net income (loss) available to common shareholders $ 112,474 $ (2,953,407) $ (1,291,734) ============= ============== ============== 1999 1998 1997 --------------- ---------------- ---------------- Average common shares outstanding 5,566,957 6,180,279 6,282,874 Dilutive effect of: Convertible partnership interests 249,350 332,579 376,225 Stock options 40,373 - - Dilutive common shares outstanding 5,856,680 6,512,858 6,659,099 ============= ============== ============== Income (loss) per share - Basic, before extraordinary item and accounting change$ 0.04 $ (0.19) $ (0.15) Extraordinary item - (0.05) - Accounting change - (0.21) - Net income (loss) per share - Basic $ 0.04 $ (0.45) $ (0.15) ============= ============= ============= Income (loss) per share - Diluted, before extraordinary item and accounting change$ 0.02 $ (0.20) $ (0.19) Extraordinary item - (0.05) - Accounting change - (0.20) - $ Net income (loss) per share - Diluted $ 0.02 $ (0.45) $ (0.19) ============= ============= =============
F-12 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Advertising: ------------ The costs of advertising, promotion and marketing programs are charged to operations in the year incurred. These costs were approximately $1,514,000, $1,883,000 and $899,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Estimates: ---------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and reported amounts of revenue and expenses during the reported periods. Actual results may differ from those estimates. Reclassifications: ------------------ Certain reclassifications have been made to the 1997 and 1998 financial statements in order to conform to the 1999 presentation. Asset impairments: ------------------ The Company periodically reviews the carrying value of certain of its long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets. Impact of New Accounting Standards: ----------------------------------- In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 has been amended by SFAS No. 137, which delayed the effective date to periods beginning after June 15, 2000. The Company, to date, has not engaged in derivative and hedging activities. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use, including the requirement to F-13 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ capitalize and amortize specific costs. The adoption of this standard did not have a material effect on its capitalization policy. 2. NOTES RECEIVABLE: Notes receivable consists of: 1999 1998 --------------- --------------- Diversified Innkeepers, Inc. $ 1,261,147 $ 1,250,023 Other notes - 100,000 -------------- -------------- 1,261,147 1,350,023 Less current portion 568,485 168,061 -------------- -------------- Notes receivable, less current portion $ 692,662 $ 1,181,962 ============== ==============
In connection with the purchase of management contracts from Diversified Innkeepers, Inc. in a prior year, the Company accepted notes to provide financing to the shareholders of Diversified, collateralized by 125,000 shares of the Company's common stock, a limited partnership interest in a hotel, a second mortgage on another hotel property, and personal guarantees by the shareholders. The notes as modified provide for monthly payments of $16,250, including interest at the rate of 10% per annum, and are due the earlier of the termination of the related management contracts or September 30, 2000. The Company currently anticipates extending the due date for a portion of the note for a period of three years. 3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS: Information regarding contracts-in-progress is as follows at December 31, 1999 and 1998: 1999 1998 --------------- --------------- Costs incurred on uncompleted contracts $319,465 $ 1,747,128 Estimated earnings 515,355 503,912 -------------- -------------- 834,820 2,251,040 Less billings to date - 1,601,182 Costs and estimated earnings in excess of billings on uncompleted contracts $ 834,820 $ 649,858 ============== ==============
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES: The Company has ownership interests, ranging from 1% to 33.6%, 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 18 hotels at December 31, 1999 with a total balance of ($764,156), and investments in 19 hotels at December 31, 1998 with a total balance of ($180,467). F-14 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES (CONTINUED): The Company advances funds to hotels in which the Company has a minority ownership interest for working capital and construction purposes. The advances bear interest ranging from the prime rate to 10% per annum and are due on demand. The Company expects the partnerships to repay these advances through cash flow generated from hotel operations and mortgage financing. The advances were $8,096,963 and $5,511,714 at December 31, 1999 and 1998, respectively, and are included in investments in and advances to unconsolidated hotel joint ventures on the accompanying balance sheets. During 1999 and 1998, the Company acquired additional partnership interests in one and 15 hotels, respectively, which resulted in these hotels being 100% or majority owned by the Company subsequent to the acquisition dates. The following is a summary of the acquisitions: 1999 1998 ------------ ------------- Fair value of assets acquired $ 1,916,070 $ 39,451,675 Cash paid, net of cash acquired, and redemption of note receivable (260,648) (8,358,145) ----------- ------------- Liabilities assumed $ 1,655,422 $ 31,093,530 ============ =============
In addition, the Company purchased 11 hotels in 1998 from entities in which the Company held a minority ownership position, for a total purchase price of $26.7 million, including the assumption of $13.1 million in mortgage debt. All acquisitions have been accounted for by the purchase method of accounting. The purchase price was allocated to the acquired hotel assets, primarily property and equipment, based upon an estimate of fair values at the date of acquisition. The operating results of the acquired hotels are included in the Company's consolidated results of operations from the dates of acquisition. Presented below are the unaudited pro forma consolidated results of operations as though the hotels acquired in 1998 had been acquired as of the beginning of 1997: 1998 1997 --------------- --------------- Pro forma revenue $ 79,789,162 $ 81,478,912 Pro forma loss before extraordinary item and cumulative effect of change in accounting principle$ (1,857,930) $ (2,344,831) Pro forma net loss $ (3,486,559) $ (2,344,831) Pro forma loss per share - Basic, before extraordinary item and accounting change $ (0.30) $ (0.37) Pro forma net loss per share - Basic $ (0.56) $ (0.37) Pro forma loss per share - Diluted, before extraordinary item and accounting change $ (0.31) $ (0.40) Pro forma net loss per share - Diluted $ (0.56) $ (0.40)
F-15 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES (CONTINUED): The proforma financial information is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above date, nor are they indicative of future operating results. The following represents unaudited condensed financial information for all of the Company's investments in affiliated companies accounted for under the equity method at December 31, 1999, 1998 and 1997. 1999 1998 1997 -------------- --------------- --------------- Current assets $ 1,211,864 $ 2,174,945 $ 4,338,114 Noncurrent assets 35,420,633 38,398,391 88,712,619 Current liabilities 5,240,776 10,028,804 4,939,989 Noncurrent liabilities 31,494,212 27,363,973 75,359,216 Equity (102,491) 3,180,559 12,751,528 Gross revenue 15,210,884 14,995,050 33,427,950 Gross operating profit 4,853,626 4,787,471 12,100,004 Depreciation and amortization 2,422,002 2,653,699 6,025,447 Net loss (1,586,557) (630,097) (2,042,178)
5. OTHER ASSETS: Other assets, net of accumulated amortization, at December 31, 1999 and 1998 are comprised of the following: 1999 1998 --------------- --------------- Deposits, franchise fees and other assets $1,552,639 $1,542,712 Deferred loan costs 1,054,836 1,190,668 Investment in leases 277,913 385,599 -------------- -------------- Total $ 2,885,388 $ 3,118,979 ============== ==============
6. BANK LINE-OF-CREDIT: The Company has a $8,500,000 bank operating line-of-credit, of which $7,560,214 and $1,961,213 was outstanding at December 31, 1999 and 1998, respectively. The operating line-of-credit is collateralized by a security interest in certain of the Company's assets, including its interests in various joint ventures, bears interest at an annual rate equal to the bank's base lending rate (8.5% at December 31, 1999) plus one-half of one percent with a floor of 7.5%, and matures May 15, 2000. The line-of-credit note contains two financial covenants, one requiring a minimum net worth and the other requiring a maximum debt to net worth ratio. F-16 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 7. LONG-TERM DEBT: Long-term debt consists of: 1999 1998 --------------- -------------- Mortgage notes maturing 2001 through 2018, with a weighted average interest rate of 8.40% $ 60,265,543 $ 69,454,739 7% Subordinated Notes ($2,250,000 face amount) repaid in October 1999 - 2,215,955 Other 83,709 170,370 -------------- -------------- 60,349,252 71,841,064 Less current portion 1,567,643 5,508,498 -------------- -------------- $ 58,781,609 $ 66,332,566 ============== ==============
The mortgage notes are collateralized by certain hotel properties. The notes provide for monthly payments of principal and interest, with interest on the fixed rate notes ranging from 7.5% to 9.25% (weighted average interest rate of 8.04% at December 31, 1999), and interest on the floating rate notes ranging from prime minus 0.25% to prime plus 1.25% (weighted average interest rate of 8.76% at December 31, 1999). Certain of the mortgage notes provide for financial covenants, principally minimum net worth requirements and minimum debt to equity ratios. At December 31, 1999, the Company was not in compliance with the minimum debt service coverage ratio contained in a mortgage loan of approximately $1.7 million, however the Company has obtained a waiver with respect to the violation. In addition, two joint ventures where the Company has guaranteed the mortgage debt were not in compliance with the minimum debt to equity ratio covenant, or the minimum debt service coverage ratio covenant, contained in the mortgage loans. The joint ventures have obtained waivers from the lender regarding these violations. The aggregate maturities of long-term debt, excluding construction loans, are approximately as follows: Year Ending December 31, Amount ------------------------ --------- 2000 $ 1,567,643 2001 1,659,585 2002 5,299,026 2003 5,952,861 2004 5,998,466 Thereafter 39,871,671 ---------------- $ 60,349,252 ================ F-17 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 8. SHAREHOLDERS' EQUITY: Authorized shares: ------------------ The Company's corporate charter authorizes 25,000,000 shares of Common Stock with a par value of $0.005 per share and 100,000 shares of Preferred Stock without par value. The Preferred Stock may be issued in series and the Board of Directors shall determine the voting powers, designations, preferences and relative participating optional or other special rights and the qualifications, limitations or restrictions thereof. Common Stock: ------------- In 1998, the Company's Board of Directors authorized the repurchase of Common Stock from time to time on the open market. In addition, in 1999 the Company completed a Dutch Auction self tender offer to purchase for cash up to 1,000,000 shares of its Common Stock. Through December 31, 1999, the Company repurchased approximately 1.2 million shares of the Company's Common Stock for approximately $4.8 million. Stock options and warrants: --------------------------- In connection with a financial relations consulting agreement, the Company issued options in 1998 to acquire 5,000 shares of common stock at an exercise price of $4.50 per share, expiring March 2001. In connection with the issuance of debt, the Company has issued warrants for the purchase of common stock. At December 31, 1999, warrants to purchase 10,000 shares of common stock are outstanding at an exercise price of $3.56 per share. These warrants expired in January 2000. The Company has issued options to acquire shares of the Company's common stock to certain of its partners in various hotel joint ventures referred to in Note 4. At December 31, 1999, options to purchase 60,000 shares of common stock are outstanding with exercise prices ranging from $6.13 to $8.00 per share and are exercisable through April 2001. Limited partnership conversion rights: -------------------------------------- The Company is a general partner in three partnerships where the limited partners have the right at certain times and under certain conditions to convert their limited partnership interests into 249,350 shares of the Company's common stock. These conversion rights expire through April 2001. Stock subscriptions receivable: ------------------------------- In connection with the Diversified transaction (Note 2), the Company issued 125,000 stock options which were exercised in January 1993, in consideration for a secured promissory note in the amount of $436,875 with interest at 6.5% per annum, collateralized by the 125,000 shares of common stock issued upon the exercise of the options and limited partnership interests. The total principal balance is due the earlier of the date the stock is sold or the related management contracts are terminated. This note receivable has been classified as a reduction of shareholders' equity on the accompanying balance sheets. F-18 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 9. TAXES ON INCOME: The provisions for income taxes (benefit) in the consolidated statements of operations are as follows: 1999 1998 1997 -------------- --------------- -------------- Current $ 583,000 $ 3,232,000 $ (1,016,000) Deferred (423,000) (4,012,000) 407,000 Valuation allowance decrease - - (128,000) ------------- -------------- ------------- Income tax expense (benefit), before extraordinary item and cumulative effect of change in accounting principle 160,000 (780,000) (737,000) Extraordinary item - (231,000) - Accounting change (864,000) - - -------------- -------------- ------------- Income tax expense (benefit) $ 160,000 $ (1,875,000) $ (737,000) ============= ============== =============
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: 1999 1998 --------------- -------------- Deferred income recognized for tax purposes and deferred for financial reporting purposes $ 385,000 $ 396,000 Gain on sale/leaseback transaction recognized for tax purposes and deferred for financial reporting purposes 3,911,000 3,444,000 Start-up costs capitalized for tax purposes and expensed for financial reporting purposes 292,000 - Differences in the basis of property and equipment from partner acquisitions and due to majority owned partnerships consolidated for financial reporting purposes but not for tax purposes 818,000 619,000 ------------- ------------- 5,406,000 4,459,000 Cumulative depreciation differences (1,079,000) (555,000) -------------- ------------- Net deferred income tax asset $ 4,327,000 $ 3,904,000 ============== =============
F-19 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 9. TAXES ON INCOME (CONTINUED): The following reconciles income tax expense (benefit) at the federal statutory tax rate with the effective rate: 1999 1998 1997 ------------ ------------- ------------ Income taxes (benefit) at the federal statutory rate 34.0% (34.0%) (34.0%) State taxes, net of federal tax benefit 10.4% (6.0%) (1.8%) Decrease in valuation allowance - - (7.5%) ---------- ------------- ---------- Effective tax rate 44.4% (40.0%) (43.3%) ============ ============ ===========
10. RELATED PARTY TRANSACTIONS: The following table summarizes related party revenue from various unconsolidated partnerships in which the company has an ownership interest: 1999 1998 1997 -------------- --------------- -------------- Development/acquisition revenue $ 1,173,054 $ 8,968,111 $ 14,268,017 Hotel management revenue 1,005,201 1,705,202 1,817,210 Employee leasing revenue 4,001,188 7,763,485 7,980,384 Franchising 41,313 - - Interest income 601,477 530,364 335,172
During 1997, the Company paid $74,050 in fees and $1,289,141 in termination costs in connection with a consulting agreement which was terminated effective January 31, 1997. The consulting agreement was with a company owned by the Company's former chairman. 11. BUSINESS SEGMENTS: The Company's business is primarily involved in five segments: (1) hotel operations, consisting of the operations of all hotels in which the Company has a 100% or majority ownership or leasehold interest, (2) hotel development, consisting of development, construction and renovation activities, (3) hotel management, consisting of hotel management activities, (4) employee leasing, consisting of the leasing of employees to various hotels, and (5) AmeriHost Inn(R) hotel franchising. F-20 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 11. BUSINESS SEGMENTS (CONTINUED): Results of operations of the Company's business segments are reported in the consolidated statements of operations. The following represents revenues, operating costs and expenses, operating income, identifiable assets, capital expenditures and depreciation and amortization for each business segment, which is the information utilized by the Company's decision makers in managing the business: Revenues 1999 1998 1997 -------- -------------- --------------- ------------- Hotel operations $ 62,095,998 $ 47,328,411 $ 31,878,791 Hotel development 6,431,995 8,968,111 14,639,746 Hotel management 1,315,212 2,251,962 3,023,944 Employee leasing 5,992,580 10,069,705 13,123,035 Hotel franchising 222,187 - - ------------- -------------- ------------ $ 76,057,972 $ 68,618,189 $ 62,665,516 ================= ============= ============== Operating costs and expenses Hotel operations $ 45,126,127 $ 34,768,001 $ 23,723,516 Hotel development 5,398,384 8,463,341 13,719,250 Hotel management 809,061 1,306,864 2,043,526 Employee leasing 5,747,351 9,748,110 12,798,585 Hotel franchising 786,658 - - ------------- -------------- ------------- $ 57,867,581 $ 54,286,316 $ 52,284,877 ================= ============= ============== Operating income Hotel operations $ 5,249,019 $ 3,467,430 $ 2,422,728 Hotel development 1,009,720 426,426 838,452 Hotel management 448,710 543,748 647,230 Employee leasing 242,309 317,668 320,826 Hotel franchising (566,857) - - Corporate (1,603,283) (1,670,837) (2,249,677) ------------- --------------- ------------- $ 4,779,618 $ 3,084,435 $ 1,979,559 ============= ============== ============= Identifiable assets Hotel operations $ 94,606,864 $ 104,076,512 $ 82,530,247 Hotel development 1,272,184 2,309,240 2,824,933 Hotel management 674,489 899,660 1,612,596 Employee leasing 494,806 978,985 1,415,174 Hotel franchising 164,485 - - Corporate 5,895,339 7,016,391 4,285,148 ------------- -------------- ------------- $ 103,108,167 $ 115,280,788 $ 92,668,098 ============= ============== =============
F-21 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 11. BUSINESS SEGMENTS (CONTINUED): Capital Expenditures 1999 1998 1997 --------------------- -------------- --------------- -------------- Hotel operations $ 1,920,734 $ 42,039,772 $ 29,272,953 Hotel development 2,091 54,065 7,288 Hotel management 69,697 58,659 40,830 Employee leasing - 3,288 4,228 Hotel franchising 29,335 - - Corporate 80,975 26,914 17,810 ------------- -------------- ------------- $ 2,102,832 $ 42,182,698 $ 29,343,109 ============= ============== ============= Depreciation/Amortization Hotel operations $ 4,414,161 $ 4,900,632 $ 4,003,613 Hotel development 23,891 78,343 82,044 Hotel management 57,441 401,351 333,188 Employee leasing 2,921 3,927 3,624 Hotel franchising 2,387 - - Corporate 66,229 102,276 110,031 ------------- -------------- ------------- $ 4,567,030 $ 5,486,529 $ 4,532,500 ============= ============== =============
12. STOCK BASED COMPENSATION: The Company applies APB No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for options granted to employees. The Company established qualified incentive stock option plans for employees and directors. Under the plan for employees, on an annual basis, options for up to 3% of its common stock, as defined, can be granted. Under the plan for directors, a total of 50,000 options can be granted. The exercise price per share may not be less than the fair market value per share on the date the options are granted. Generally, options vest over a period of up to two years and are exercisable for a period of ten years from the date of grant. The Company has granted to various key employees, non-qualified options to purchase shares of common stock with exercise prices ranging from $3.56 to $6.50 per share. The exercise price is the market price on the date of grant. At December 31, 1999, options to purchase 1,029,333 shares of common stock are outstanding. These options are currently exercisable and expire through September 2007. In 1997, the Company granted to two officers, options to purchase 65,625 shares of common stock with an exercise price of $1.53 per share. These options are currently exercisable and expire in February 2007. Pursuant to APB Opinion 25, the Company recognized $301,465 in compensation expense in 1997 as a result of this below-market grant. F-22 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 12. STOCK BASED COMPENSATION (CONTINUED): The following table summarizes the employee stock options granted, exercised and outstanding: Weighted Average Shares Exercise Price ------ -------------- Options outstanding January 1, 1997 1,541,583 $ 4.46 Options exercised (433,750) 4.61 Forfeitures (43,000) 4.93 Options granted 181,125 4.62 ------------- ----------- Options outstanding December 31, 1997 1,245,958 4.42 Forfeitures (129,000) 5.82 Options granted 488,600 5.72 ------------- ---------- Options outstanding December 31, 1998 1,605,558 4.71 Forfeitures (156,500) 5.30 Options granted 157,000 3.44 ------------- ---------- Options outstanding December 31, 1999 1,606,058 $ 4.52 ============= ========== Options exercisable December 31, 1999 1,477,958 $ 4.58 ============= ==========
The weighted-average grant-date fair value of stock options granted to employees during the year and the weighted-average significant assumptions used to determine those fair values, using a modified Black-Sholes option pricing model, and the pro forma effect on earnings of the fair value accounting for employee stock options under Statement of Financial Accounting Standards No. 123 are as follows: 1999 1998 1997 -------------- -------------- ---------------- Grant-date fair value per share: Options issued at market $ 1.47 $ 2.76 $ 2.90 Options issued below market - - 4.96 Weighted average exercise prices: Options issued at market $ 3.47 $ 5.72 $ 6.37 Options issued below market - - 1.53 Significant assumptions (weighted-average): Risk-free interest rate at grant date 5.17% 5.74% 6.14% Expected stock price volatility 0.40 0.41 0.37 Expected dividend payout n/a n/a n/a Expected option life (years) (a) 6.00 6.00 5.63 Net income (loss): As reported $ 200,591 $ (2,796,074) $ (966,443) Pro forma $ (30,927) $ (3,422,385) $ (1,626,473)
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 12. STOCK BASED COMPENSATION (CONTINUED): 1999 1998 1997 -------------- -------------- ---------------- Net income (loss) per share - Basic: As reported $ 0.04 $ (0.45) $ (0.15) Pro forma $ (0.01) $ (0.55) $ (0.26) Net income (loss) per share - Diluted: As reported $ 0.02 $ (0.45) $ (0.19) Pro forma $ (0.02) $ (0.55) $ (0.29) (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, 1999: Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price --------------- ----------- ---------------- -------------- ----------- -------------- $ 1.53 to 4.38 986,625 6.46Years $ 3.51 883,625 $ 3.51 $ 5.75 to 7.81 619,433 7.71 6.15 594,333 6.16 -------------- ------- ---- ---- ------- ---- $ 1.53 to 7.81 1,606,058 6.94 $ 4.52 1,477,958 $ 4.58 ============== ========= ==== ======== ========= ========
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: Office lease: ------------- The Company entered into an operating lease for its existing office facilities which expires December 2011. The lease provides for monthly payments of approximately $28,500 plus common area maintenance and real estate tax prorations beginning in Janaury 2002. The lease also provides for an exclusive, two-year option to purchase the building for $6,400,000. Sale/leaseback of hotels: ------------------------- On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn(R) hotels to PMC Commercial Trust ("PMC") for $62.2 million. The Company completed the sale of four additional AmeriHost Inn(R) hotels to PMC in March 1999. Upon the respective sales to PMC, the Company entered into agreements to lease back the hotels for an initial term of ten years, with two five year renewal options. The lease payments are fixed at 10% of the sale price for the first three years. Thereafter, the lease payments are subject to a CPI increase with a 2% annual maximum. In 1998, the Company recorded an extraordinary loss of $333,000, net of income tax benefit of approximately $231,000, relating to the early extinguishment of mortgage debt on hotels sold in connection with the sale/leaseback transaction. F-24 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED): Hotel leases: ------------- Including the sale/leaseback hotels, the Company leases 34 hotels as of December 31, 1999, 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 Company leases or subleases two of these hotels from partnerships in which the Company owns equity interests, up to 16.33%. These two leases also provide for additional rent payments ranging from $36,000 to $72,000 per annum, plus percentage rents equal to 10% of room revenues in excess of stipulated amounts. The leases and sub-leases expire through March 2009, except for the two leases from partnerships in which the Company owns an equity interest which expired December 31, 1999. The Company is continuing to operate these hotels under the same terms as provided in the original leases. The four leases, other than the PMC leases, provide for an option to purchase the hotel. Some of the purchase prices are based upon a multiple of gross room revenues for the preceding twelve months with a specified maximum, and the others are based on a fixed amount. At December 31, 1999, the aggregate purchase price for these leased hotels was approximately $14,030,000. During 1997, the Company exercised options to purchase two hotels previously under lease. Total rent expense for all operating leases was approximately $7,542,000, $4,407,000 and $1,939,000 in 1999, 1998 and 1997, respectively, including approximately $811,038, $993,000 and $1,103,000 in 1999, 1998 and 1997, 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, ------------------------ 2000 $ 8,217,650 2001 8,227,400 2002 8,390,808 2003 8,462,934 2004 8,449,259 Thereafter 33,724,960 -------------- $ 75,473,011 ============= Limited partnership guaranteed distributions: --------------------------------------------- The Company is a general partner in three partnerships where the Company has guaranteed minimum annual distributions to the limited partners in the amount of 10% of their original capital contributions. F-25 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED): Guarantees: ----------- The Company has provided approximately $16.0 million in guarantees as of December 31, 1999 on mortgage loan obligations for 11 joint ventures in which the Company holds a minority equity interest, which expire at various dates through February 2019. Other partners have also guaranteed portions of the same obligations. The partners of one of the partnerships have entered into a cross indemnity agreement whereby each partner has agreed to indemnify the others for any payments made by any partner in relation to the guarantee in excess of their ownership interest. The Company is secondarily liable for the obligations and liabilities of the limited partnerships and limited liability corporations in which it holds a general partnership or managing member ownership interest as described in Note 4. Construction in progress: ------------------------- As of December 31, 1999, the Company had entered into non-cancelable sub-contracts for approximately $2.4 million in connection with the construction of four hotels, representing a portion of the total estimated construction costs for these hotels. These commitments will be funded through construction and long-term mortgage financing currently in place. Employment agreements: ---------------------- The Company has entered into an employment agreement with an executive officer expiring December 31, 2003, providing for an annual base salary of $325,000. The employment agreement provides for a cash bonus based upon financial performance, franchising growth, and hotel operations performance; stock options, a portion of which vest only if the Company achieves certain financial performance criteria; and severance pay should the officer be terminated without cause. 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-26 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ================================================================================ 14. SUPPLEMENTAL CASH FLOW DATA: The following represents the supplemental schedule of noncash investing and financing activities for the years ended December 31, 1999, 1998 and 1997: 1999 1998 1997 -------------- --------------- --------------- Notes receivable received from sale of hotel $ 100,000 ============= Reduction of notes receivable and related interest in exchange for common stock $ 3,779 $ 1,181,831 ============== ============= Reduction of notes payable assumed by buyer upon sale of hotel $ 62,141 ============= Liabilities assumed in connection with acquisition of hotel partnership interests $ 1,655,422 $ 31,093,530 ============ ==============
15. NON-RECURRING EXPENSES: The Company expensed $1,697,448 in 1997 in costs associated with (i) the termination of a consulting agreement with a company owned by the former Chairman of the Board of Directors and a former director, and (ii) the termination of an employment agreement with this former director. In addition, the Company expensed $177,044 in costs associated with a potential merger or acquisition which was not consummated. The Company considers these costs non-operational costs which are non-recurring in nature. EX-10.6 2 AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT -------------------- This Amendment No. 3 to Employment Agreement (this "Agreement") is made and entered into as of the 23rd day of November, 1999, by and between Amerihost Properties, Inc. (the "Company") and Michael P. Holtz ("Executive"). WITNESSETH: WHEREAS, the Company and Executive entered into that certain Employment Agreement (the "Original Employment Agreement"), dated April 7, 1995, by and between the Company and Executive, which Original Employment Agreement previously was amended by that certain Amendment No. 1 to Employment Agreement (the "First Amendment) dated as of February 4, 1997 and again was amended by that certain Amendment No. 2 to Employment Agreement (the "Second Amendment) dated April 13, 1999 by and between the Company and Executive (the Original Employment Agreement and the First and Second Amendment, collectively, the "Employment Agreement"); and WHEREAS, pursuant to the Employment Agreement, Executive is currently employed by the Company as its President and Chief Executive Officer; and WHEREAS, the Company and Executive desire to continue Executive's employment by the Company is such positions, pursuant to the terms of the Employment Agreement, as modified hereby. NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements of the parties herein contained, the parties hereto hereby agree as follows: 1. The base pay of $325,000 shall remain constant during the term of this Amendment. 2. The Agreement will automatically renew for a period of three years unless the Company notifies the Executive in writing at least 12 months prior to the termination of this Agreement. 3. Beginning with the calendar year 2000, the Executive will also be compensated under the following bonus plan: a. The Executive will be paid a bonus of $12,500 if the Company realizes the annual EBITDAR and an additional $12,500 if the Company realizes the annual Earnings Per Share as defined in the approved budget each year. This will be paid within 10 days of the filing of the 10K for the period. b. The Executive will be paid a bonus for each franchise agreement executed by the Company. This will be earned and paid at the execution of the franchise agreement. The bonus is defined as follows: 0 to 10 franchise agreements................. No Bonus 11 to 20 franchise agreements.....................$1,000 per franchise Over 20 franchise agreements.............$ 1,500 per franchise c. The Executive will be paid a bonus on Same Room Revenue increases over the same quarter in the previous year. The Executive will be paid a bonus of $500.00 for each percentage point increase in Same Room Revenue over the prior period. This will be effective for the total AmeriHost Inn hotel brand and will be calculated and paid on a quarterly basis. 4. Compensation in Warrants: This section shall be modified that on January 1st of each ensuing calendar year this agreement is in affect, the Executive shall receive a total of 100,000 options at the market price on the day they are issued. These options will vest as follows: o 50,000 will vest in 90 days from the date issued o 50,000 will vest at the filing of the 10K for the Company if the Company attains its annual budgeted and Board approved Net Income, EBITDAR, or Operating Income for the year. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EXECUTIVE AMERIHOST PROPERTIES, INC. /s/Michael P. Holtz By: /s/Salomon J. Dayan - ------------------- ----------------------- Michael P. Holtz Salomon J. Dayan Chairman Compensation Committee EX-21.1 3 LISTING OF SUBSIDIARIES Exhibit 21.1 AMERIHOST PROPERTIES, INC. LISTING OF SUBSIDIARIES
State of Incorporation Ownership Entity or Organization Percentage - ---------------------------------- ------------------- ------------ Amerihost Development, Inc. Illinois 100.00% Amerihost Lodging Group, Inc. Delaware 100.00% Amerihost Management, Inc. Illinois 100.00% Amerihost Staffing, Inc. Illinois 100.00% AP Equities of Arkansas, Inc. Arkansas 100.00% AP Equities of Florida, Inc. Florida 100.00% AP Equities of Indiana, Inc. Indiana 100.00% AP Equities of Ohio, Inc. Ohio 100.00% AP Hotels of Georgia, Inc. Georgia 100.00% AP Hotels of Illinois, Inc. Illinois 100.00% AP Hotels of Michigan, Inc. Delaware 100.00% AP Hotels of Mississippi, Inc. Mississippi 100.00% AP Hotels of Ohio, Inc. Delaware 100.00% AP Hotels of Pennsylvania, Inc. Pennsylvania 100.00% AP Hotels of Texas, Inc. Delaware 100.00% AP Hotels of West Virginia, Inc. West Virginia 100.00% AP Lodging of Ohio, Inc. Ohio 100.00% AP Properties of Ohio, Inc. Ohio 100.00% API of Indiana, Inc. Indiana 100.00% Hammond Investors, Inc. Indiana 100.00% Niles, Illinois Hotel Corporation Illinois 100.00% Shorewood Hotel Investments, Inc. Illinois 100.00% Shorewood Investors, Inc. Illinois 100.00% AP Hotels of West Virginia, Inc. West Virginia 100.00% AmeriHost Inns of Illinois, Inc. Illinois 100.00% AmeriHost Inns of Ohio, Inc. Ohio 100.00% AP Hotels of Wisconsin, Inc. Wisconsin 100.00% AP Hotels of Iowa, Inc. Iowa 100.00% API/Crawfordsville, Inc. Indiana 100.00% API/Cloverdale, Inc. Indiana 100.00% API/Marysville, Inc. Ohio 100.00% API/Plainfield, Inc. Indiana 100.00% AP Hotels of California, Inc. California 100.00% AmeriHost Inns of Michigan, Inc. Michigan 100.00% AP Hotels of Missouri, Inc. Missouri 100.00% AP Properties of Mississippi, Inc. Mississippi 100.00% AP Hotels of Tennessee, Inc. Tennessee 100.00% AP Hotels of Oklahoma, Inc. Oklahoma 100.00% AP Hotels/Altoona, PA, Inc. Pennsylvania 100.00% API/Athens, OH, Inc. Ohio 100.00% API/Hammond, IN, Inc. Indiana 100.00% API/Lancaster, OH, Inc. Ohio 100.00% API/Logan, OH, Inc. Ohio 100.00% API/Metropolis, IL, Inc. Illinois 100.00% AP Hotels/Parkersburg, WV, Inc. West Virginia 100.00% API/Washington C.H., OH, Inc. Ohio 100.00% AmeriHost Inns of America, Inc. Delaware 100.00% AmeriHost Inns, Inc. Delaware 100.00% AmeriHost Inn Franchising, Inc. Delaware 100.00% API/Columbia City, IN, Inc. Indiana 100.00% Sullivan Motel Associates Limited Partnership. Indiana 56.00% White River Junction, VT 393 Limited Partnership Vermont 83.30% Metropolis, IL 1292 Limited Partnership Illinois 54.90% Dayton, Ohio 1291 Limited Partnership Ohio 61.50% Altoona, PA 792 Limited Partnership Pennsylvania 62.78% New Philadelphia, Ohio 1092 Limited Partnership Ohio 50.35%
EX-23.1 4 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Amerihost Properties, Inc. Arlington Heights, Illinois We hereby consent to the incorporation by reference in the Company's previously filed Registration Statements on Form S-3 (file nos. 33-72742 and 33-32333) and on Form S-8 (file no. 33-32331) of our report dated March 8, 2000 relating to the consolidated financial statements of Amerihost Properties, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. BDO Seidman, LLP Chicago, Illinois March 8, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 12-MOS 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 DEC-31-1997 DEC-31-1999 DEC-31-1998 DEC-31-1997 3,766,323 4,493,834 2,349,503 0 0 0 4,304,920 3,749,135 6,813,330 0 0 0 0 0 0 9,099,955 10,406,620 11,715,346 94,236,369 106,557,115 79,661,323 15,466,013 15,219,135 9,345,991 103,108,167 115,280,788 92,668,098 15,916,524 17,330,276 13,923,027 0 0 0 0 0 0 0 0 0 24,843 30,448 31,065 14,155,725 18,285,360 21,561,794 103,108,167 115,280,788 92,668,098 76,057,972 68,618,189 62,665,516 76,057,972 68,618,189 62,665,516 57,867,581 54,286,316 52,284,877 57,867,581 54,286,316 52,284,877 13,410,773 11,247,438 8,401,080 0 0 0 6,031,759 6,113,369 4,053,933 360,591 (1,947,445) (1,703,443) 160,000 (780,000) (737,000) 200,591 (1,167,445) (966,443) 0 0 0 0 (332,738) 0 0 (1,295,891) 0 200,591 (2,796,074) (966,443) 0.04 (0.45) (0.15) 0.02 (0.45) (0.19) Restated
-----END PRIVACY-ENHANCED MESSAGE-----