Year-end 2002 Results

Revenues decreased slightly to $76.5 million in 2002, including hotel sale proceeds and commissions, from $77.2 million the prior year. Operating income declined to $2.0 million in 2002 from $5.6 million in 2001. Net loss for full-year 2002 was $(1.7) million, or $(0.34) per diluted share, compared to net income of $755,000, or $0.13 per diluted share, in 2001. The net loss included: (i) an extraordinary gain of $197,000, net of tax, from an insurance settlement; (ii) certain one-time expenses of approximately $683,000, pre-tax, relating to a change in management and recruitment of a new CEO and (iii) non-cash charges of approximately $642,000, pre-tax, for impairment adjustments on primarily non-core (non-AmeriHost Inn branded) hotels. The net loss was due primarily to further deterioration in results at the company�s non-core assets (non-AmeriHost Inn hotels) and margin pressure at all hotels due to higher insurance and energy costs, as well as room rate compression. 
 

Net income plus depreciation and amortization was $3.6 million in 2002, compared to $5.4 million in the 2001 like period. Net income plus deprecation is not defined by generally accepted accounting principles (GAAP), however, the company believes it provides relevant information about its operations and is important in understanding the company�s results, given its significant investment in real estate. Net income plus depreciation and amortization is defined as net income before extraordinary items, adjusted to eliminate the impact of depreciation and amortization.

"The prolonged sluggish economy and continuing concerns with geopolitical events had a significant impact on the lodging industry throughout the year," said Jerry H. Herman, Arlington Hospitality president and chief executive officer. "Despite one of the most difficult operating periods in hotel industry history, the company�s same-room revenue per available room (RevPAR) for its 66 owned AmeriHost Inn hotels rose 3.7 percent in 2002 to $33.86, compared to a 0.6 percent decline for the mid-scale without food and beverage segment, according to Smith Travel Research," he pointed out. Occupancy rose to 59.1 percent, while average daily rate declined to $57.26. "We attribute the RevPAR improvement to our drive-to locations, primarily in smaller towns, which have been less impacted by the general economy, and to aggressive marketing by our hotels."

Fourth Quarter 2002 Results

Revenues improved to $19.6 million from $18.2 million during the 2001 fourth quarter. Fourth quarter 2002 operating loss was $(1.7) million, compared to operating income of $466,162 in the 2001 fourth quarter. For the three months ended December 31, 2002, the company reported a net loss of $(1.9) million, or $(0.39) per diluted share, compared to a net loss of $(634,000), or $(0.13) per diluted share during the same period a year earlier. The net loss was due primarily to the seasonality of the company�s business and other factors as discussed above. In addition, the net loss includes: (i) an extraordinary gain of $197,000, net of tax, from an insurance settlement; (ii) certain one-time expenses of approximately $300,000, pre-tax, relating to a change in management and recruitment of a new CEO and (iii) non-cash charges of approximately $542,000, pre-tax, for impairment adjustments on primarily non-core hotels. 

Hotel Sales

Selling AmeriHost and non-strategic hotels from its portfolio is a key component of the company�s growth strategy. In 2002, the company was involved in the sale of seven AmeriHost properties and one non-core hotel, compared to nine hotels the prior year. Four of the seven AmeriHost hotels were 100 percent owned by the company and sold in the aggregate for gross proceeds of $9.6 million, resulting in a gain of $1.4 million and a $7.1 million reduction in debt for the company.

"We are evaluating ways to accelerate the turnover of our assets and reinvest the proceeds in new projects." Herman said. "In 2003 year-to-date, the company and a joint venture in which the company has an ownership interest, already has sold three AmeriHost Inns and have an additional four hotels under contract for sale." The company expects to consummate these transactions during the next six months. Although the company has these hotels under contract for sale with non-refundable cash deposits in most cases, certain conditions to closing remain and there can be no assurance that these sales will be consummated as anticipated.

Hotel Development

Herman noted that the company also continued to develop hotels in 2002, one of its core growth strategies. During the year, the company began construction on three AmeriHost Inns; opened four AmeriHost Inns, including one property for a joint venture in which the company has an ownership interest; and one property for an unrelated third party. In addition, the company acquired one AmeriHost Inn hotel from a joint venture in which it had a minority interest. The company currently is building two AmeriHost Inn hotels, which are expected to open in the 2003 second quarter.

"We believe we are at or near the bottom of the cycle and are examining a number of new development opportunities so that we can be on the leading edge when the economy begins to rebound," Herman said. "We have extensive experience in developing for third parties, as well as for our own account, and want to maximize the significant opportunities we see ahead. Our focus will be to expand primarily through joint ventures, which will allow us to maximize the number of properties in development, subject to rigorous market and investment analysis."

Cendant Relationship

Herman commented that the company will continue to aggressively assist Cendant Corporation (NYSE: CD), the franchisor of AmeriHost Inn hotels, in expansion of the brand. Arlington Hospitality sold the AmeriHost Inn brand name to Cendant in 2000. During 2002, the Company received $2.0 million in development incentive fees and royalty sharing fees as a result of its agreement with Cendant, a portion of which is accounted for as deferred income. "We have very attractive incentives to develop and sell AmeriHost Inn properties, and we will accelerate our activity as conditions warrant.

"The AmeriHost chain has approximately 100 properties, which gives the brand the economies of scale to market more aggressively, including national advertising. In addition, Cendant has indicated that it will launch a guest frequency program later in the year to build guest loyalty. We believe these and other initiatives by Cendant will increase brand awareness and, as a result, will enhance returns and the value of the properties. In addition, the AmeriHost product is a growing brand comprised primarily of new-construction properties, which are in top physical condition, making these branded hotels highly attractive for acquisition," he said.

Other 2002 Highlights

• Development proficiency�In 2002, the company opened four properties in an average construction time of 125 days per hotel, after pouring the foundation slab. This speed of completion, coupled with a low average construction cost of $39,500 to $42,500 per room, makes Arlington Hospitality one of the most efficient and cost-effective hotel developers in the mid-market, limited-service segment.
• Balance sheet strength�Total shareholders� equity was approximately $17.4 million, or $3.50 per outstanding common share, at December 31, 2002. In addition, the company had approximately $10.9 million in deferred income as of December 31, 2002, or $1.31 per outstanding share after tax, which represents cash already received by the company and will be amortized into income in future periods for financial reporting purposes pursuant to GAAP. 
• Corporate governance�Since June 2002, Arlington Hospitality has adopted strong corporate governance changes that enhance the independent composition and independent functioning of the company�s board. Key elements include mandating that a super-majority of two-thirds of the board and 100 percent of its key committees be composed of independent directors. To date, five new directors have been elected to the seven-member board. The board meets regularly in non-management executive session, and the chairman of the board position has been made independent and separate from the chief executive officer. In February 2003, an independent director was named vice chairman as part of the board�s program to improve succession planning.

Management depth�Jerry Herman, a 20-year hotel and real estate veteran, joined the company as chief executive officer and member of the board in early January 2003. In January, Herman purchased 40,000 shares of restricted common stock of the company at a price of $3.16 per share. 

"We are deep into the process of redefining our growth strategies and goals, not only for 2003 but for the long-term," said Herman. "As previously reported, for the first two months of 2003 our RevPAR was down 2.9 percent, in line with industry results for the mid-priced without food and beverage hotel segment."

Looking ahead, Herman commented: "While we have not yet established specific goals, our core growth strategies for the future will be:

• Develop AmeriHost Inn hotels primarily via joint ventures and for third parties
• Accelerate the sale of non-core, non-AmeriHost Inn hotels 
• Accelerate the sale of company-owned AmeriHost Inn hotels and reinvest the proceeds in new development, primarily via joint ventures
• Expand the relationship with Cendant to accelerate the flow of franchise and development fees
• Improve operations and returns from existing hotels.

"We have a solid team in place, which has many years of combined hotel experience, a great product and compelling economics to expand the AmeriHost Inn brand," said Herman. "While the short-term operating climate remains difficult, we are increasingly optimistic about our long-term growth potential as our plans begin to take shape."
 
 

Arlington Hospitality, Inc. is a hotel development and management company that builds, operates and sells mid-market hotels, primarily the AmeriHost Inn brand. Arlington Hospitality, Inc. currently owns or manages 71 properties in 17 states, including 61 AmeriHost Inn hotels, for a total of 5,209 rooms, with two additional AmeriHost Inn & Suites hotels under construction. The AmeriHost Inn brand is a mid-market, limited service hotel brand, created by Arlington in 1989 and sold to Cendant Corporation in 2000. The brand has approximately 100 properties located in 20 states. For more information about Arlington Hospitality, visit the company�s web site at www.arlingtonhospitality.com.

The statements appearing in this press release can be construed as forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including without limitation, risks relating to the development and operation of hotels, the timing, consummation and final terms of hotel sales, the availability of capital to finance growth, geopolitical events, competition and the historical cyclicality of the lodging industry.