Lodgian 10-K 2006
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file no. 1-14537
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act
Securities registered pursuant to Section 12(g) of the Act
Title of Each Class
Class A warrants
Class B warrants
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein and will not be contained, to the best of registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the registrant as of June 30, 2005, was $252,271,879 based on the closing price of $10.27 per share on the American Stock Exchange on such date. For purposes of this computation, all directors, executive officers and 10% shareholders are treated as affiliates of the registrant.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o
The registrant had 24,752,203 shares of Common Stock, par value $.01, outstanding as of March 1, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III of this Form 10-K.
For the Year Ended December 31, 2005
TABLE OF CONTENTS
When we use the terms Lodgian, we, our, and us, we mean Lodgian, Inc. and its subsidiaries.
We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms, as reported by Hotel Business in the 2006 Green Book issue published in December 2005. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as Crowne Plaza, Hilton, Holiday Inn, and Marriott. As of March 1, 2006, we operated 75 hotels with an aggregate of 13,468 rooms, located in 28 states and Canada. Of the 75 hotels we operated as of March 1, 2006, 67 hotels, with an aggregate of 12,144 rooms, are part of our continuing operations, while eight hotels, with an aggregate of 1,324 rooms, are held for sale. Five of the eight hotels with an aggregate of 868 rooms were identified for sale in the first two months of 2006. Our current portfolio of 75 hotels, all of which we consolidate in our financial statements, consists of:
Our hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale and upscale market segments of the lodging industry. We operate all but two of our hotels under franchises obtained from nationally recognized hospitality franchisors. We operate 46 of our hotels under franchises obtained from InterContinental Hotels Group as franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn Express brands. We operate 16 of our hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, Residence Inn by Marriott, and SpringHill Suites by Marriott brands. We operate another 11 hotels under other nationally recognized brands and two hotels are non-branded. We believe that franchising under strong national brands affords us many benefits such as guest loyalty and market share premiums.
Our management consists of an experienced team of professionals with extensive lodging industry experience led by our president and chief executive officer, Edward J. Rohling, who has been in the lodging industry for over twenty-three years. Our vice president of hotel operations has been in the hospitality industry for over twenty years and our vice president of sales and marketing has twenty years of industry experience.
Our operations team is responsible for the management of our properties. Our vice president of hotel operations is responsible for the supervision of our general managers, who oversee the day-to-day operations of our hotels. Our corporate office is located in Atlanta, Georgia. The centralized management services provided by our corporate office include sales and marketing, purchasing, finance and accounting, information technology, renovations, human resources, legal services, and quality programs.
Our corporate finance and accounting team coordinates the financial and accounting functions of our business. These functions include internal audit, insurance, payroll and accounts payable processing, tax and property accounting services. The corporate operations team oversees the budgeting and forecasting for our hotels and also identifies new systems and procedures to employ within our hotels to improve efficiency and profitability. The corporate sales and marketing team coordinates the sales forces for our hotels, designs sales training programs, tracks future business under contract and identifies, employs and monitors marketing programs aimed at specific target markets. The corporate renovations team handles the interior design of all our hotels. Each hotels product quality and the refurbishment of existing properties are also managed from
our corporate headquarters. The legal team coordinates all contract reviews and provides the hotels with legal support as needed.
Our information technology team maintains our computer systems, which provide real-time tracking of each hotels daily occupancy, average daily rate (ADR), room, food, beverage and other revenues, revenue per available room (RevPAR) and all hotel expenses. By having current information available, we are better able to respond to changes in each market by focusing sales efforts and we are able to make appropriate adjustments to control expenses and maximize profitability as new current information becomes available.
Creating cost and guest service efficiencies in each hotel is a top priority. With a total of 75 hotels in our portfolio as of March 1, 2006, our purchasing team is able to realize significant cost savings due to economies of scale and is able to secure volume pricing from our vendors that may not be available to smaller hotel companies.
Lodgian, Inc. was formed as a new parent company in a merger of Servico, Inc. and Impac Hotel Group, LLC in December 1998. Servico was incorporated in Delaware in 1956 and was an owner and operator of hotels under a series of different entities. Impac was a private hotel ownership, management and development company organized in Georgia in 1997 through a reorganization of predecessor entities. After the effective date of the merger, our portfolio consisted of 142 hotels.
Between December 1998 and the end of 2001, a number of factors, including our heavy debt load, lack of available funds to maintain the quality of our hotels, a weakening U.S. economy, and the severe decline in travel in the aftermath of the terrorist attacks of September 11, 2001, combined to place adverse pressure on our cash flow and liquidity. As a result, on December 20, 2001, Lodgian and substantially all of our subsidiaries that owned hotels filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. At the time of the Chapter 11 filing, our portfolio consisted of 106 hotels. Following the effective date of our reorganization, we emerged from Chapter 11 with 97 hotels after eight of our hotels were conveyed to a lender in satisfaction of outstanding debt obligations and one hotel was returned to the lessor of a capital lease of the property. Of the 97 hotels, 78 hotels emerged from Chapter 11 on November 25, 2002, 18 hotels emerged from Chapter 11 on May 22, 2003 and one property never filed under Chapter 11. Effective November 22, 2002, the Company adopted fresh start reporting. As a result, all assets and liabilities were restated to reflect their estimated fair values at that time.
In 2003, we implemented a portfolio improvement strategy to upgrade our hotel assets and reduce debt costs that included the identification of 19 hotels, our only office building and three land parcels as held for sale. In 2003, we sold one hotel and the office building. During 2004, we sold 11 hotels and two land parcels and acquired one hotel in December 2004, the SpringHill Suites by Marriott in Pinehurst, North Carolina. In 2005, we sold eight hotels and identified five additional hotels as held for sale. One hotel previously identified as held for sale was reclassified into continuing operations in the fourth quarter 2005 as management no longer expected the hotel to be sold within one year. This reclassification was required based on generally accepted accounting principles (GAAP). One minority-owned hotel, which was accounted for using the equity method of accounting, was transferred to a receiver on November 15, 2005 and, on February 3, 2006, the hotel was deeded to the lender. Two hotels, located in Manhattan and Lawrence, Kansas, were transferred to the bond trustee (Trustee) on January 30, 2006 and January 31, 2006, respectively, pursuant to the terms of the settlement agreement entered into in August 2005. Between January 1, 2006 and March 1, 2006, we identified five additional hotels as held for sale. Thus, at March 1, 2006, our continuing operations portfolio consisted of 67 hotels and our discontinued operations portfolio consisted of eight hotels and one land parcel.
Our business is conducted in one reportable segment, which is the hospitality segment. During 2005, we derived approximately 98% of our revenues from hotels located within the United States and the balance from our one hotel located in Windsor, Canada.
We operate substantially all of our hotels under nationally recognized brands. In addition to benefits in terms of guest loyalty and market share premiums, our hotels benefit from franchisors central reservation systems, their global distribution systems and their brand Internet booking sites. Reservations made by means of these franchisor facilities generally accounted for approximately 39% of our total reservations in 2005.
We enter into franchise agreements, generally for terms of between 5 and 20 years, with hotel franchisors. The franchise agreements typically authorize us to operate the hotel under the franchise name, at a specific location or within a specified area, and require that we operate the hotel in accordance with the standards specified by the franchisor. As part of our franchise agreements, we are generally required to pay a royalty fee, an advertising/marketing fee, a fee for the use of the franchisors nationwide reservation system and certain other ancillary charges. Royalty fees range from 2.7% to 6.0% of gross room revenues, advertising/marketing fees range from 0.9% to 4.0%, reservation system fees range from 0% to 2.3%, and club and restaurant fees from 0.2% to 4.9%. In the aggregate, royalty fees, advertising/marketing fees, reservation fees and other ancillary fees for the various brands under which we operate our hotels range from 5.2% to 11.9% of gross room revenues. In 2005, franchise fees for our continuing operations were 9.2% of room revenues.
Set forth below is a summary of our franchise affiliations as of March 1, 2006, along with the brands associated with each hotel and number of hotels and rooms represented by each franchisor, in continuing operations and discontinued operations:
During 2004, we entered into new franchise agreements for all 15 of our Marriott-branded hotels owned at that time and we agreed to pay a fee aggregating approximately $0.5 million, of which $0.1 million has been paid, and $0.4 million is payable in 2007, subject to offsets.
During the term of our franchise agreements, the franchisors may require us to upgrade facilities to comply with their current standards. Our current franchise agreements terminate at various times and have differing remaining terms. As franchise agreements expire, we may apply for a franchise renewal. In connection with a renewal, a franchisor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facility, or the franchisor may elect at its sole discretion, not to renew the franchise.
If we do not comply with the terms of a franchise agreement, following a notice and an opportunity to cure, the franchisor has the right to terminate the agreement, which could lead to a default and acceleration under one or more of our loan agreements, which would materially and adversely affect us. In the past, we have been able to cure most cases of non-compliance and most defaults within the cure periods. If we perform an economic analysis of a hotel and determine it is not economically justifiable to comply with a franchisors requirements, we will either select an alternative franchisor, or operate the hotel without a franchise affiliation or sell the hotel. Generally, under the terms of our loan agreements, we are not permitted to operate hotels without an approved franchise affiliation. See Risk Factors Risks Related to Our Business.
As of March 1, 2006, we have been notified that we were not in compliance with some of the terms of eight of our franchise agreements and have received default and termination notices from franchisors with respect to an additional seven hotels summarized as follows:
We believe that we will cure the non-compliance and defaults as to which our franchisors have given us notice before the applicable termination dates, but we cannot provide assurance that we will be able to complete our action plans (which we estimate will cost approximately $5.4 million) to cure the alleged defaults of noncompliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or noncompliance. If a franchise agreement is terminated, we will either select an alternative franchisor, operate the hotel independently of any franchisor or sell the hotel. However, terminating or changing the franchise affiliation of a hotel could require us to incur significant expenses, including franchise termination payments and capital expenditures, and in certain circumstances could lead to acceleration of parts of our indebtedness. This could adversely affect us.
In addition, as part of our bankruptcy reorganization proceedings, we entered into stipulations with each of our major franchisors setting forth a timeline for completion of capital expenditures for some of our hotels. However, as of March 1, 2006, we have not completed the required capital expenditure for eight continuing operations hotels in accordance with the stipulations, and we estimate the cost of complying with these stipulations to be $3.3 million. As of March 1, 2006, approximately $2.0 million is deposited in escrow with the Companys lenders to be applied to these capital expenditure obligations, pursuant to the terms of the respective loan agreements with these lenders. A franchisor could, nonetheless, seek to declare its franchise agreement in default of the stipulations and could seek to terminate the franchise agreement. We have scheduled or have begun renovations on eight of these hotels, aggregating $1.4 million of the $3.3 million.
In addition, our loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more such agreements. The 15 hotels that are in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of $265.3 million of mortgage debt as of March 1, 2006.
Sales and Marketing
We market our hotels through local and national marketing programs. In all of our hotels, we execute local marketing strategies using our corporate and local sales and marketing resources to drive revenue growth. All of our franchised properties participate in national marketing programs that our brand partners develop and promote. The mandatory participation in these brand marketing programs is supported through our regional revenue teams who ensure each propertys program enrollment. The regional revenue team supports each property by working with the property director of sales to evaluate the results of our local and national marketing strategies. Although we develop annual marketing plans to define our long term objectives, we make periodic modifications to these plans in order to address changes in local market conditions. At most of our properties we maintain a sales organization which is structured based on market demand, customer needs
and local preferences. Each propertys sales team generally consists of a director of sales who leads a team of experienced sales and catering managers. The number of sales and catering managers varies by property based upon the size and market potential of each hotel. We also develop company-wide sales and marketing strategies which are implemented at the property level through the support of the regional revenue teams. The regional revenue teams also assist in the evaluation of the results of our programs to ensure we are spending our sales and marketing program funds as efficiently and effectively as possible. Our property revenue teams react promptly to local market changes and market trends in order to adjust current and future marketing programs to meet each hotels competitive needs. The property revenue team is also responsible for developing and implementing marketing programs targeted at specific customer segments within their respective markets.
Our core market consists of business travelers who tend to visit a given geographical area several times in a year. We believe that business travelers are attracted to our hotels because of their convenient locations, their proximity to corporate headquarters, manufacturing plants, convention centers or other major commercial facilities, their availability of ample meeting space and our service levels. Our sales force markets to organizations that need a high volume of room nights and that have a significant number of individuals traveling in the markets where we have hotels. Our hotels group meeting facilities include flexible space readily adaptable to groups of varying size, up-to-date audio-visual equipment and on-site catering facilities.
In addition to the business market, our targeted customers include leisure travelers looking for comfortable and convenient lodging at an affordable price.
Our franchised hotels use the centralized reservation systems of our franchisors, which are among the more advanced reservation systems in the lodging industry. The franchisors reservation systems receive reservation requests entered (1) on terminals located at all of their respective properties, (2) at reservation centers utilizing 1-800 phone access, (3) through global distribution systems, and (4) through Internet booking sites including franchisors own websites. These reservation systems immediately confirm reservations or indicate accommodations available at alternate hotels in the respective franchisors systems. Confirmations are transmitted automatically to the hotel for which the reservations are made. These systems are effective in directing customers to our franchised hotels and accounted for approximately 39% of our revenues in 2005.
As of March 1, 2006, we operate four hotels in joint ventures in which we have a 50% or greater voting equity interest and exercise control. On April 18, 2005, we acquired for $0.7 million our joint venture partners 40% interest in the Crowne Plaza hotel located in Macon, Georgia, which is now consolidated as a wholly-owned subsidiary. In each joint venture, we share decision making authority with our joint venture partner and may not have sole discretion with respect to a hotels disposition.
Through a partnership, we owned a 30% interest in the Holiday Inn City Center located in Columbus, OH. The debt on the hotel exceeded the fair value of the hotel. The partnership ceased making regular debt service payments to the lender in August 2005 but made interest payments to the lender as cash flow was available to do so. The lender filed a foreclosure petition on September 7, 2005. On November 15, 2005, the hotel was surrendered to a receiver and on February 3, 2006 the hotel was deeded to the lender. The hotel was accounted for under the equity method of accounting. The receivable to Lodgian from this entity and the investment in this subsidiary were written off in 2005 for a total expense of $0.9 million.
We believe that occupancy and ADR, and consequently RevPAR, in our continuing operations hotels will increase as a result of the continued improvement in lodging industry supply and demand fundamentals, our hotel renovation and repositioning program, and our strong management team. We believe our planned capital expenditures and operational improvements will continue to generate increased revenues and enhance our financial performance. We will continue to monitor the performance of our continuing operations hotels to improve operating results.
Based on the recent trends in lodging industry fundamentals, we believe it is an opportune time in the lodging industry cycle to own and manage hotels. We believe our revenue growth and resulting improvements in our results of operations will be derived from the improvements we have made in our product quality and the renewed focus on our service levels.
Competition and Seasonality
The hotel business is highly competitive. Each of our hotels competes in its market area with numerous other hotel properties operating under various lodging brands. National chains, including in many instances chains from which we obtain franchises, may compete with us in various markets. Our competition is comprised of public companies, privately-held equity fund companies, and small independent owners and operators. Competitive factors in the lodging industry include, among others, room rates, quality of accommodation, service levels, convenience of locations and amenities customarily offered to the traveling public. In addition, the development of travel-related Internet websites has increased price awareness among travelers and price competition among similarly located, comparable hotels.
Demand for accommodations, and the resulting revenues, varies seasonally. The high season tends to be the summer months for hotels located in colder climates and the winter months for hotels located in warmer climates. Aggregate demand for accommodations in our portfolio is lowest during the winter months. Levels of demand are also dependent upon many factors that are beyond our control, including national and local economic conditions and changes in levels of leisure and business-related travel. Our hotels depend on both business and leisure travelers for revenue.
We also compete with other hotel owners and operators with respect to the acquisition of hotels and in the obtainment of desirable franchises for upscale and midscale hotels in targeted markets.
The Lodging Industry
The lodging industry showed signs of recovery in 2004 and 2005 with full-year RevPAR growth of 7.8% and 8.4%, respectively, according to Smith Travel Research as reported in January 2006.
The U.S. lodging industry enjoyed nine consecutive years of positive RevPAR growth from 1992 through 2000 after the economic recession of 1991. The periods of greatest RevPAR growth over this time period generally occurred when growth in room demand exceeded new room supply growth. Smith Travel Research recently predicted annual U.S. lodging industry RevPAR growth of 8.0% in 2006 with an annual increase in demand of 3.0% outpacing annual net change in supply of 1.2%.
Smith Travel Research classifies the lodging industry into six chain scale segments by brand according to their respective national average daily rate or ADR. The six segments are defined as: luxury, upper upscale, upscale, midscale with food and beverage, midscale without food and beverage and economy. We operate hotel brands in the following five chain scale segments:
We believe that our hotels and brands will perform competitively with the U.S. lodging industry as fundamentals improve. The table below illustrates the 2005 actual RevPAR growth of the chain segments represented by our brands as compared to the U.S. lodging industry averages as reported by Smith Travel
Research. Despite an estimated $4.0 million in room revenue displacement in 2005 for eleven hotels under renovation, Lodgians continuing operations hotel RevPAR increased 8.2% as compared to 8.4% for the industry as a whole.
Source: Smith Travel Research
Smith Travel Research is forecasting a U.S. average 8.0% RevPAR growth in 2006. These are only industry forecasts and they may not necessarily apply to our portfolio of hotels. We believe this continued upturn in the lodging business cycle will allow us to enhance our growth by focusing on our portfolio improvement strategy.
We own and manage our hotels. Accordingly, we retain responsibility for all aspects of the day-to-day management for each of our hotels. We establish and implement standards for hiring, training and supervising staff, creating and maintaining financial controls, complying with laws and regulations related to hotel operations, and providing for the repair and maintenance of the hotels. Because we own and mange our hotels we are able to directly control our labor costs, we can negotiate purchasing arrangements without fees to third parties, and as an owner and operator we are motivated to focus our results on bottom-line profit performance instead of solely on top-line revenue growth. Accordingly, we are focused on maximizing returns for our shareholders.
Our hotel portfolio, as of March 1, 2006, by franchisor, is set forth below:
As of December 31, 2005, thirteen of our continuing operations hotels are located on land subject to long-term leases. Two of the hotels that were listed as held for sale in the first two months of 2006, and are located on land subject to long-term leases. Additionally, the two Kansas hotels transferred to the bond Trustee in February 2006 were located on land subject to long-term leases. Generally, these leases are for terms in excess of the depreciable lives of the buildings. We also have the right of first refusal on several leases if a third party offers to purchase the land. We pay fixed rents on some of these leases; on others, we have fixed rent plus additional rents based on a percentage of revenue or cash flow. Some of these leases are also subject to periodic rate increases. The leases generally require us to pay the cost of repairs, insurance and real estate taxes.
In 2005, we sold eight hotels. We identified an additional five hotels as held for sale in 2005. One hotel that was previously classified in discontinued operations was reclassified into continuing operations in the fourth quarter 2005 as management no longer believed the hotel would be sold within one year. At December 31, 2005, 75 hotels were part of our continuing operations (including one hotel that we do not consolidate) and three hotels and one land parcel were classified in discontinued operations. In the first two months of 2006, we identified five additional hotels as held for sale. On February 1, 2006, two hotels were surrendered to the Trustee and one minority-owned hotel, that we accounted for under the equity method of accounting, was deeded to the lender on February 3, 2006. Accordingly, as of March 1, 2006, our portfolio consisted of 75 hotels, 67 of which are reflected in continuing operations and eight of which are classified as held for sale in discontinued operations.
The following four tables exclude four of our hotels as noted below:
The two tables below present data on occupancy, ADR and RevPAR for the hotels in our portfolio, with four hotels excluded as noted above, for the years ended December 31, 2005, December 31, 2004 and December 31, 2003 by market segment as well as the capital expenditures for the year ended December 31, 2005.
The Categories in the tables above are based on the Smith Travel Research Chain Scales and are defined as:
The two tables below present data on occupancy, ADR and RevPAR for the hotels in our portfolio, with four hotels excluded as previously noted, for the years ended December 31, 2005, December 31, 2004 and December 31, 2003 by geographic region and the capital expenditures for the year ended December 31, 2005.
The regions in the table above are defined as:
Of the 77 hotels that we consolidate as of December 31, 2005, 72 hotels were pledged as collateral to secure long-term debt. The following table summarizes the book values of these 77 hotel assets along with the related long-term debt (including current portion) which they collateralize, as of December 31, 2005. Book value means the value at which the asset is reflected in our Consolidated Financial Statements. Financial statement book values are presented in accordance with GAAP, but do not necessarily represent fair market values.
We maintain the following types of insurance:
We are self-insured up to certain amounts with respect to our insurance coverages. We establish liabilities for these self-insured obligations annually, based on actuarial valuations and our history of claims. If these
claims exceed our estimates, our future financial condition and results of operations would be adversely affected. As of December 31, 2005, we had accrued $12.4 million for these expenses.
There are other types of losses for which we cannot obtain insurance at all or at a reasonable cost, including losses caused by acts of war. If an uninsured loss or a loss that exceeds our insurance limits were to occur, we could lose both the revenues generated from the affected property and the capital that we have invested. We also could be liable for any outstanding mortgage indebtedness or other obligations related to the hotel. Any such loss could materially and adversely affect our financial condition and results of operations.
We believe that we have adequate reserves and sufficient insurance coverage for our business.
Our hotels are subject to certain federal, state and local regulations which require us to obtain and maintain various licenses and permits. These licenses and permits must be periodically renewed and may be revoked or suspended for cause at any time.
Occupancy licenses are obtained prior to the opening of a hotel and may require renewal if there has been a major renovation. The loss of the occupancy license for any of the larger hotels in our portfolio could have a material adverse effect on our financial condition and results of operations. Liquor licenses are required for hotels to be able to serve alcoholic beverages and are generally renewable annually. We believe that the loss of a liquor license for an individual hotel would not have a material effect on our financial condition and results of operations. We are not aware of any reason why we should not be in a position to maintain our licenses.
We are subject to certain federal and state labor laws and regulations such as minimum wage requirements, regulations relating to working conditions, laws restricting the employment of illegal aliens, and the Americans with Disabilities Act (ADA). As a provider of restaurant services, we are subject to certain federal, state and local health laws and regulations. We believe that we comply in all material respects with these laws and regulations. We are also subject in certain states to dramshop statutes, which may give an injured person the right to recover damages from us if we wrongfully serve alcoholic beverages to an intoxicated person who causes an injury. We believe that our insurance coverage relating to contingent losses in these areas is adequate.
Our hotels are also subject to environmental regulations under federal, state and local laws. These environmental regulations have not had a material adverse effect on our operations. However, such regulations potentially impose liability on property owners for cleanup costs for hazardous waste contamination. If material hazardous waste contamination problems exist on any of our properties, we would be exposed to liability for the costs associated with the cleanup of those sites.
At December 31, 2005, we had 3,604 full-time and 1,673 part-time employees. We had 107 full-time employees engaged in administrative and executive activities and the balance of our employees manage, operate and maintain our properties. At December 31, 2005, 429 of our full and part-time employees located at six hotels were covered by collective bargaining agreements. These agreements expire between 2006 and 2008. We consider relations with our employees to be good.
From time to time, as we conduct our business, legal actions and claims are brought against us. The outcome of these matters is uncertain. However, we believe that all currently pending matters will be resolved without a material adverse effect on our results of operations or financial condition. Claims relating to the period before we filed for Chapter 11 protection are limited to the amounts approved by the Bankruptcy Court for settlement of such claims and were payable out of the disputed claims reserves provided for by the Bankruptcy Court. On July 26, 2004, all remaining shares of mandatorily redeemable 12.25% cumulative Preferred Stock (Preferred Stock) were redeemed and a liability of $2.2 million replaced the Preferred Stock shares that were previously held in the disputed claims reserve for the Joint Plan of Reorganization.
Accordingly, when this liability was established it reduced additional paid-in capital and did not flow through our consolidated statement of operations. On June 30, 2005, we completed the final distribution for our bankruptcy claims and released the remaining unused accrual balance of $1.3 million with a corresponding adjustment to Additional Paid-in Capital in our consolidated statement of stockholders equity.
SEC Filings and Financial Information
This Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our Proxy Statement on Schedule 14A, and amendments to those reports are available free of charge on our website (www.Lodgian.com) as soon as practicable after they are submitted to the Securities and Exchange Commission (SEC).
You may read and copy any materials the Company files with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information about us.
Financial information about our revenues and expenses for the last three fiscal years and assets and liabilities for the last two years may be found in the Consolidated Financial Statements, beginning on page F-1.
We make forward looking statements in this report and other reports we file with the SEC. In addition, management may make oral forward-looking statements in discussions with analysts, the media, investors and others. These statements include statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words believes, anticipates, expects, intends, plans, estimates, projects, and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current views with respect to future events and the impact of these events on our business, financial condition, results of operations and prospects. Our business is exposed to many risks, difficulties and uncertainties, including the following:
Any of these risks and uncertainties could cause actual results to differ materially from historical results or those anticipated. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained and caution you not to place undue reliance on such statements. We undertake no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances or their impact on our business, financial condition, results of operations and prospects.
The following represents risks and uncertainties which could either individually or together cause actual results to differ materially from those described in the forward-looking statements. If any of the following risks actually occur, our business, financial condition, results of operations, cash flow, liquidity and prospects could be adversely affected. In that case, the market price of our common stock could decline and you may lose all or part of your investment in our common stock.
Risks Related to Our Business
We operate substantially all of our hotels pursuant to franchise agreements for nationally recognized hotel brands. The franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. The standards are also subject to change over time. Compliance with any new and existing standards could cause us to incur significant expenses and investment in capital expenditures.
If we do not comply with standards or terms of any of our franchise agreements, those franchise agreements may be terminated after we have been given notice and an opportunity to cure the non-compliance or default. As of March 1, 2006, we have been notified that we were not in compliance with some of the terms of eight of our franchise agreements and have received default and termination notices from franchisors with respect to an additional seven hotels. We cannot assure you that we will be able to complete our action plans (which we estimate will cost approximately $5.4 million) to cure the alleged defaults of noncompliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or noncompliance.
In addition, as part of our bankruptcy reorganization proceedings, we entered into stipulations with each of our major franchisors setting forth a timeline for completion of capital expenditures for some of our hotels. However, as of March 1, 2006, we have not completed the required capital expenditures for eight continuing operations hotels in accordance with the stipulations and we estimate that the cost of completing these required capital expenditures is $3.3 million. As of March 1, 2006, approximately $2.0 million is deposited in escrow with the Companys lenders to be applied to the capital expenditure obligations, pursuant to the terms of the respective loan agreements signed with these lenders. Nonetheless, a franchisor could therefore seek to declare its franchise agreement in default and could seek to terminate the franchise agreement.
If a franchise agreement is terminated, we will either select an alternative franchisor or operate the hotel independently of any franchisor. However, terminating or changing the franchise affiliation of a hotel could require us to incur significant expenses, including franchise termination payments and capital expenditures associated with the change of a brand. Moreover, the loss of a franchise agreement could have a material adverse effect upon the operations or the underlying value of the hotel covered by the franchise because of the loss of associated guest loyalty, name recognition, marketing support and centralized reservation systems provided by the franchisor. Loss of a franchise agreement may result in a default under, and acceleration of, the related mortgage debt. In particular, we would be in default under the Refinancing Debt if we experience either:
A single franchise agreement termination could materially and adversely affect our revenues, cash flow and liquidity.
In addition, our loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more such agreements. The 15 hotels that are either in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of $265.3 million of mortgage debt at March 1, 2006.
In connection with our equity offering in June 2004, we entered into new franchise agreements for all 15 of our Marriott-branded hotels at that time and agreed to pay a fee aggregating approximately $0.5 million, of which $0.1 million has been paid, and $0.4 million is payable in 2007, subject to offsets.
Our current franchise agreements, generally of 5 to 20 years duration, terminate at various times and have differing remaining terms. As a condition to renewal of the franchise agreements, franchisors frequently contemplate a renewal application process, which may require substantial capital improvements to be made to the hotel and increases in franchise fees. A significant increase in unexpected capital expenditures and franchise fees would adversely affect us.
In order to maintain our hotels in good condition and attractive appearance, it is necessary to replace furnishings, fixtures and equipment periodically, generally every five to seven years, and to maintain and repair public areas and exteriors on an ongoing basis. If we do not make needed capital improvements, we could lose our share of the market to our competitors and our hotel occupancy and room rates could fall. Furthermore, the process of renovating a hotel can be disruptive to operations, and a failure to properly plan and execute renovations and schedule them during seasonally slower sales months can result in renovation displacement, an industry term for a temporary loss of revenue caused by the renovation. We also risk termination of
franchise agreements at the affected properties due to non-compliance with the terms of the franchise agreements.
As of December 31, 2005, we had $414.3 million of total long-term debt outstanding including both continuing and discontinued operations, $394.4 million of which is associated with our continuing operations, net of the current portion of long-term debt. We are subject to the risks normally associated with significant amounts of debt, such as:
Our outstanding debt instruments subject us to financial covenants, including leverage and coverage ratios. Our compliance with these covenants depends substantially upon the financial results of our hotels. In particular, our debt agreements with Merrill Lynch Mortgage require minimum debt yield and minimum debt service coverage ratios. The floating rate debt (Floating Rate Debt) provides that when either (i) the debt yield for the hotels securing the respective loans for the trailing 12-month period is below 9% during the first year, 10% during the next 18 months, and 11%, 12% and 13% during each of the next three extension periods, or (ii) to the extent extended, the debt service coverage ratio is less that 1.3x in the second extension period or 1.35x in the third extension period, excess cash flows produced by the mortgaged hotels securing the applicable loan (after payment of operating expenses, management fees, required reserves, service fees, principal and interest) must be deposited in a restricted cash account. For the fixed rate debt (Fixed Rate Debt), when the debt yield ratio for the hotels for the trailing 12-month period is below 9% during the first year, 10% during the next year and 11%, 12% and 13% during each of the next three years, excess cash flows produced by the mortgaged hotels securing the applicable loan (after payment of operating expenses, management fees, required reserves, service fees, principal and interest) must be deposited in a restricted cash account. These funds can be used for the prepayment of the applicable loan in an amount required to satisfy the applicable test, capital expenditures reasonably approved by the lender with respect to the hotels securing the applicable loan, and scheduled principal and interest payments due on the Floating Rate Debt of up to $0.9 million or any Fixed Rate Loan of up to $525,000, as applicable. Funds will no longer be deposited into
the restricted cash account when the debt yield ratio and, if applicable, the debt service coverage ratio are sustained above the minimum requirements for three consecutive months and there are no defaults.
Additionally, as of December 31, 2005, we were not in compliance with the debt service coverage ratio requirement of the loan from Column Financial secured by one of our hotels in Phoenix, Arizona. The primary reason the debt service coverage ratio is below the required threshold is that the property underwent an extensive renovation in 2004 in order to convert the property from a Holiday Inn Select to a Crowne Plaza hotel. The renovation caused substantial revenue displacement which, in turn, negatively affected the financial performance of this hotel. Under the terms of the Column Financial loan agreement, until the required DSCR is met, the lender is permitted to require the borrower to deposit all revenues from the mortgaged property into an account controlled by the lender. Accordingly, in December 2004, we were notified by the lender that we were in default of the debt service coverage ratio and would have to establish a restricted cash account whereby all cash generated by the property be deposited into an account from which all payments of interest, principal, operating expenses and impounds (insurance, property taxes and ground rent) would be disbursed. The lender may apply excess proceeds after payment of expenses to additional principal payments. At December 31, 2005, $0.7 million was being retained in the restricted cash account. This property was refinanced on March 1, 2006 and, accordingly, the non-compliance issue with this loan has been resolved. (See Note 17. Subsequent Events).
As of December 31, 2005, through our wholly-owned subsidiaries, we owed approximately $10.1 million under industrial revenue bonds secured by Holiday Inns in Lawrence, Kansas and Manhattan, Kansas. For the year ended December 31, 2004, the cash flows of the two hotels were insufficient to meet the minimum debt service coverage ratio requirements. Accordingly, on March 2, 2005, we notified the Trustee of the industrial revenue bonds which finance the Holiday Inns in Lawrence, Kansas and Manhattan, Kansas that we would not continue to make debt service payments. The failure to make debt service payments is a default under the bond indenture and also a default under the ground leases for these properties. On August 31, 2005, we reached a settlement agreement with the bond Trustee, under which we agreed to either sell the hotels to a third party or convey our rights and interests in the hotels to the Trustee and pay to the Trustee for the benefit of the bondholders the sum of $0.5 million in exchange for a full release. We paid $0.5 million in September 2005 and surrendered the hotels in February 2006. We no longer own or operate those hotels.
The restrictive covenants in our debt documents may reduce our flexibility in conducting our operations and may limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with our debt documents, including these restrictive covenants, may result in additional interest being due and would constitute an event of default, and in some cases with notice or the lapse of time, if not cured or waived, could result in the acceleration of the defaulted debt and the sale or foreclosure of the affected hotels. As noted above, under certain circumstances the termination of a hotel franchise agreement could also result in the same effects. A foreclosure would result in a loss of any anticipated income and cash flow from, and our invested capital in, the affected hotel. No assurance can be given that we will be able to repay, through financings or otherwise, any accelerated indebtedness or that we will not lose all or a portion of our invested capital in any hotels that we sell in such circumstances.
A significant portion of our capital needs are fulfilled by borrowings and some of the indebtedness is subject to variable interest rates, of which we had $86.5 million of variable rate debt at December 31, 2005. In the future, we may incur additional indebtedness bearing interest at a variable rate, or we may be required to refinance our existing fixed-rate indebtedness at higher interest rates. Accordingly, increases in interest rates will increase our interest expense and adversely affect our cash flow, reducing the amounts available to make payments on our indebtedness, fund our operations and our capital expenditure program, make acquisitions or pursue other business opportunities. We have reduced the risk of rising interest rates by entering into interest rate cap agreements for all our variable interest rate debt.
Our ability to make payments on and to refinance our indebtedness and to fund our operations, planned capital expenditures and other needs will depend on our ability to generate cash in the future. Various factors could adversely affect our ability to meet operating cash requirements, many of which are subject to the operating risks inherent in the lodging industry and, therefore, are beyond our control. These risks include the following:
The value of our hotels is heavily dependent on their cash flows. If cash flow declines, the hotel values may also decline and the ability to repay or refinance our debt could also be adversely affected. Factors affecting the performance of our hotels include, but are not limited to, construction of competing hotels in the markets served by our hotels, loss of franchise affiliations, the need for renovations, the effectiveness of renovations or repositioning in attracting customers, changes in travel patterns and adverse economic conditions.
We may not be able to fund our future capital needs, including necessary working capital, funds for capital expenditures or acquisition financing from operating cash flow. Consequently, we may have to rely on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all, which could materially and adversely affect our operating results, cash flow and liquidity. Any additional debt would increase our leverage, which would reduce our operational flexibility and increase our risk exposure. Our access to third-party sources of capital depends, in part, on:
Our growth strategy is focused on improving the operations of our continuing operations hotels with improved product quality as a result of our renovation program, improved services levels, and additional investment in our hotels, including repositionings and renovations, that will earn a sufficient return on the capital invested. Additionally, we periodically evaluate our portfolio of hotels to identify underperforming hotels that should be sold. We cannot assure you that the execution of our growth strategy will produce improved financial performance at the affected hotels. We compete for growth opportunities with national and regional hospitality companies, many of which have greater name recognition, marketing support and financial resources than we do. An inability to implement our growth strategy successfully would limit our ability to grow our revenue, net income and cash flow.
We currently have an ownership interest in four of our hotels through joint ventures. We generally will not be in a position to exercise sole decision-making authority regarding the hotels owned through such joint ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Joint venture partners may have business interests, strategies or goals that are inconsistent with our business interests, strategies or goals and may be, and in cases where we have a minority interest will be, in a position to take actions contrary to our policies, strategies or objectives. Joint venture investments also entail a risk of impasse on decisions, such as acquisitions or sales, because neither we nor our joint venture partner would have full control over the joint venture. Any disputes that may arise between us and our joint venture partners may result in litigation or arbitration that could increase our expenses and could prevent our officers and/or directors from focusing their time and effort exclusively on our business strategies. Consequently, actions by or disputes with our joint venture partners might result in subjecting hotels owned by the joint venture to additional risks. In addition, we may in certain circumstances be liable for the actions of our third-party joint venture partners.
We incurred cumulative net losses of $348.7 million from January 1, 1999 through December 31, 2005 and had an accumulated deficit of $69.6 million as of December 31, 2005. Our ability to improve our performance to achieve profitability is dependent upon a recovery in the general economy, combined with an improvement in the lodging industry specifically, and the successful implementation of our business strategy. Our failure to improve our performance could have a material adverse effect on our business, results of operations, financial condition, cash flow, liquidity and prospects. The economic downturn which commenced in early 2001 and the terrorist attacks of September 11, 2001 and the subsequent threat of terrorism resulted in a sharp decline in demand for hotels and affected our results in 2002 and 2003. The lodging industry experienced some recovery beginning in the second half of 2003 which has continued through 2005. These favorable trends need to continue into 2006 for us to generate positive cash flows essential to our growth and to the implementation of our business strategy. Although Smith Travel Research recently forecasted RevPAR growth for the U.S. lodging industry in 2006 due to rising occupancy and rates and an improving economy, this forecast does not necessarily apply specifically to our portfolio of hotels. Additionally, rising interest rates and energy costs, the troubled airline industry and continued threats to national security or air travel safety could adversely affect the industry, resulting in our inability to meet profit expectations.
The terrorist attacks of September 11, 2001 and the continued threat of terrorism, including changing threat levels announced by the U.S. Department of Homeland Security, have had a negative impact on the lodging industry and on our hotel operations. These events have caused a significant decrease in occupancy and ADR in our hotels due to disruptions in business and leisure travel patterns and concerns about travel safety. In particular, major metropolitan areas and airport hotels have been adversely affected by concerns about air travel safety and a significant overall decrease in the amount of air travel. We believe that uncertainty associated with subsequent terrorist threats and incidents, military conflicts and the possibility of hostilities with other countries may continue to hamper business and leisure travel patterns and our hotel operations for the foreseeable future, and if these matters worsen, the effects could become materially more adverse.
As of March 1, 2006, we have eight hotels and one land parcel listed as assets available for sale; however, real estate assets generally cannot be sold quickly. No assurance can be given that we will be able to sell any of these hotels or the land parcel on favorable terms or at all. Furthermore, even if we are able to sell these hotels, we may not be able to realize any cash proceeds from the sales after paying off the related debt, or the sale may not be timely to provide cash needed to fund our working capital, capital expenditures and debt service requirements. If we lose the franchise of any of these properties for sale, the value of the hotel could decline, perhaps substantially. The inability to sell these properties could severely hamper our strategy to own upscale and profitable hotels under popular brands, which could have adverse effects on our profitability.
Certain expenses associated with owning and operating a hotel are relatively fixed and do not proportionately reduce with a drop in revenues. Consequently, during periods when revenues drop, we would be compelled to continue to incur certain expenses which are fixed in nature. Moreover, we could be adversely affected by:
We may acquire or make investments in hotel companies or groups of hotels that we believe complement our business. We lack experience in making corporate acquisitions. As a result, our ability to identify prospects, conduct acquisitions and properly manage the integration of acquisitions is unproven. If we fail to properly evaluate and execute acquisitions or investments, it may have a material adverse effect on our results
of operations. In making or attempting to make acquisitions or investments, we face a number of risks, including:
We are self-insured up to certain amounts with respect to our insurance coverages. Many of our loan agreements require that we maintain our insurance coverages with carriers with at least a AA- rating from Standard & Poors. Various types of catastrophic losses, including those related to environmental, health and safety matters may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not cover the full current market value or replacement cost of our lost investment or building code upgrades associated with such an occurance. Inflation, changes in building codes and ordinances, environmental considerations and other factors might cause insurance proceeds to be insufficient to fully replace or renovate a hotel after it has been damaged or destroyed.
We cannot assure you that:
Should a material uninsured loss or a loss in excess of insured limits occur with respect to any particular property, we could lose our capital invested in the property, as well as the anticipated income and cash flow from the property. Any such loss would have an adverse effect on our results of operations, financial condition and liquidity. In addition, if we are unable to maintain insurance that meets our debt and franchise agreement requirements, and if we are unable to amend or waive those requirements, it could result in an acceleration of that debt and impair our ability to maintain franchise affiliations.
The lodging industry is highly competitive. No single competitor or small number of competitors dominates the industry. We generally operate in areas that contain numerous other competitors, some of which may have substantially greater resources than we have. Competitive factors in the lodging industry include, among others, oversupply in a particular market, franchise affiliation, reasonableness of room rates, quality of accommodations, service levels, convenience of locations and amenities customarily offered to the traveling public. There can be no assurance that demographic, geographic or other changes in markets will not adversely affect the future demand for our hotels, or that the competing and new hotels will not pose a greater threat to our business. Any of these adverse factors could materially and adversely affect us.
Adverse economic conditions in markets, such as Pittsburgh, Baltimore/ Washington, D.C., and Phoenix, in which we have multiple hotels, could significantly and negatively affect our revenue and results of operations. Our 14 hotels in these areas provided approximately 26.1% of our 2005 continuing operations revenue and approximately 21.5% of our 2005 continuing operations total available rooms. As a result of this geographic concentration of our hotels, we are particularly exposed to the risks of downturns in these markets, which could have a major adverse affect on our profitability.
Demand for accommodations varies seasonally. The high season tends to be the summer months for hotels located in colder climates and the winter months for hotels located in warmer climates. Aggregate demand for accommodations at the hotels in our portfolio is lowest during the winter months. We generate substantial cash flow in the summer months compared to the slower winter months. If adverse factors affect our ability to generate cash in the summer months, the impact on our profitability is much greater than if similar factors occur during the winter months.
As of March 1, 2006, we operate approximately 83% of our hotels under the InterContinental Hotels Group and Marriott flags, and therefore, are subject to potential risks associated with the concentration of our hotels under limited brand names. If either of these brands suffers a major decline in popularity with the traveling public, it could adversely affect our revenue and profitability.
There have been a number of changes in our senior management team during the last two years and since our emergence from bankruptcy. Our new chief executive officer was hired in July 2005, our chief operating officer resigned in September 2005 and our chief financial officer resigned in December 2005. On March 1, 2006, we hired James MacLennan as our new chief financial officer. If our management team is unable to develop successful business strategies, achieve our business objectives or maintain effective relationships with employees, suppliers, creditors and customers, our ability to grow our business and successfully meet operational challenges could be impaired.
Our ability to maintain or enhance our competitive position will depend to a significant extent on the efforts and ability of our executive and senior management, particularly our chief executive officer. Our future success and our ability to manage future growth will depend in large part upon the efforts of our management team and on our ability to attract and retain other highly qualified personnel. Competition for personnel is intense, and we may not be successful in attracting and retaining our personnel. Our inability to retain our current management team and attract and retain other highly qualified personnel could hinder our business.
Some of our hotel rooms are booked through third-party travel websites such as Travelocity.com, Expedia.com, Priceline.com and Hotels.com. If these Internet bookings increase, these intermediaries may be in a position to demand higher commissions, reduced room rates or induce other significant contract concessions from us. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as three-star downtown hotel) at the expense of brand identification. Although we expect to continue to derive most of our business through the traditional channels, if the revenue generated through Internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be adversely affected.
As of December 31, 2005, we had approximately $306 million of net operating loss carryforwards available for federal income tax purposes, which includes an estimated $8.7 million of 2005 tax losses. Approximately $8 million of losses expired unused at December 31, 2005. To the extent that we do not have sufficient future taxable income to be offset by these net operating loss carryforwards, any unused losses will expire between 2006 and 2024. Our ability to use these net operating loss carryforwards to offset future income is also subject to annual limitations. An audit or review by the Internal Revenue Service could result in a reduction in the net operating loss carryforwards available to us.
A number of states and local governments regulate the licensing of hotels and restaurants, including occupancy and liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. Operators of hotels are also subject to the Americans with Disabilities Act, and various employment laws, which regulate minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could increase our operating costs and reduce profitability.
Under various federal, state, local and foreign environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for non-compliance with applicable environmental and health and safety requirements and for the costs of investigation, monitoring, removal or remediation of hazardous or toxic substances. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances.
The presence of these hazardous or toxic substances on a property could also result in personal injury or property damage or similar claims by private parties. In addition, the presence of contamination, or the failure to report, investigate or properly remediate contaminated property, may adversely affect the operation of the property or the owners ability to sell or rent the property or to borrow funds using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of those substances at the disposal or treatment facility, whether or not that facility is or ever was owned or operated by that person.
The operation and removal of underground storage tanks is also regulated by federal, state and local laws. In connection with the ownership and operation of our hotels, we could be held liable for the costs of remedial action for regulated substances and storage tanks and related claims.
Some of our hotels contain asbestos-containing building materials (ACBMs). Environmental laws require that ACBMs be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. Third parties may be permitted by law to seek recovery from owners or operators for personal injury associated with exposure to contaminants, including, but not limited to, ACBMs. Operation and maintenance programs have been developed for those hotels which are known to contain ACBMs.
Many, but not all, of our hotels have undergone Phase I environmental site assessments, which generally provide a nonintrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental consultant. The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotel owner or others may be responsible. None of the Phase I environment site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on us. Nevertheless, it is possible that these assessments did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware.
Some of our hotels may contain microbial matter such as mold, mildew and viruses, whose presence could adversely affect our results of operations. Phase I assessments performed on certain of our hotels in connection with our refinancing completed at the time of our Chapter 11 bankruptcy emergence identified mold in four of our hotels. We have completed all necessary remediation for these properties. In addition, if any hotel in our portfolio is not properly connected to a water or sewer system, or if the integrity of such systems are breached, microbial matter or other contamination can develop. If this were to occur, we could incur significant remedial costs and we may also be subject to private damage claims and awards.
Any liability resulting from noncompliance or other claims relating to environmental matters could have a material adverse effect on us and our insurability for such matters in the future and on our results of operations, financial condition, liquidity and prospects.
We use significant amounts of electricity, gasoline, natural gas and other forms of energy to operate our hotels. A shortage in supply or a period of sustained high energy costs could negatively affect our results of operations. Additionally, a shortage of supply could impact our ability to operate our hotels and could adversely impact our guests experience at our hotels, and ultimately, our guest satisfaction scores and potentially our franchisor affiliations.
Risks Related to Our Common Stock
The rules of the American Stock Exchange allow the exchange to de-list securities if it determines that a companys securities fail to meet its guidelines in respect of corporate net worth, public float, number of shareholders, aggregate market value of shares or price per share. We cannot assure purchasers of our common stock that we will continue to meet the American Stock Exchange listing requirements. If our common stock is delisted from the American Stock Exchange, it would likely trade on the OTC Bulletin Board, which is a quotation service for securities which are not listed or traded on a national securities exchange. The OTC Bulletin Board is viewed by most investors as less desirable and a less liquid marketplace. Thus, delisting from the American Stock Exchange could make trading our shares more difficult or expensive for investors, leading to declines in share price. It would also make it more difficult for us to raise additional capital. In addition, we would incur additional costs to sell equity under state blue sky laws if our common stock is not traded on a national securities exchange.
The market price of our common stock could decline and fluctuate significantly in response to various factors, including:
We have not yet paid any dividends on our common stock, and we do not intend to do so in the foreseeable future. As a result, a stockholders only return on their investment, if any, will occur on the sale of our common stock.
Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent changes in our management or a change of control that you might consider favorable and may prevent you from receiving a takeover premium for your shares. These provisions include, for example:
In addition, we have entered into, and could enter into in the future, employment contracts with certain of our employees that contain change of control provisions.
We have no unresolved staff comments.
The information required to be presented in this section is presented in Item 1. Business.
The information required to be presented in this section is presented in Item 1. Business.
No matters were submitted to a vote of security holders during the fourth quarter of 2005.
On April 27, 2004, our Board of Directors authorized a reverse stock split of our Companys common stock in a ratio of one-for-three (1:3) with resulting fractional shares paid in cash. The reverse split affected all our issued and outstanding common shares, warrants, stock options, and restricted stock. The record date for the reverse split was April 29, 2004 and our new common stock began trading under the split adjustment on April 30, 2004. All stock information has been retroactively restated to reflect the 1:3 reverse stock split.
Our common stock is traded on the American Stock Exchange under the symbol LGN. Prior to November 21, 2001, our common stock traded on the New York Stock Exchange under the symbol LOD. Subsequent to November 21, 2001, our common stock traded on the Over-the-Counter Bulletin Board under the trading symbol LODN.OB. Subsequent to November 25, 2002, the common stock traded on the Over-the-Counter Bulletin Board under the symbol LDGIV.OB until January 28, 2003, when it began trading on the American Stock Exchange under the symbol LGN. The following table sets forth the high and low closing prices of our common stock on a quarterly basis for the past two years:
At March 1, 2006, we had approximately 2,886 holders of record of our common stock.
Our Preferred Stock also began trading on the American Stock Exchange on January 28, 2003 under the symbol LGN.pr. All outstanding shares of the Preferred Stock were either exchanged for common stock or redeemed for cash in 2004 and are no longer traded on any stock exchange.
We have not declared or paid any dividends on our common stock, and our board of directors does not anticipate declaring or paying any cash dividends in the foreseeable future. We anticipate that all of our earnings, if any, and other cash resources will be retained to fund our business and build cash reserves and will be available for other strategic opportunities that may develop. Future dividend policy will be subject to the discretion of our board of directors, and will be contingent upon our results of operations, financial position, cash flow, liquidity, capital expenditure plan and requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal and regulatory restrictions on the payment of dividends and other factors that our board of directors deems relevant.
The Preferred Stock issued on November 25, 2002 (the date on which the first of the plans of reorganization became effective) accrued dividends at the rate of 12.25% per annum. As required by the Preferred Stock agreement, we paid the dividend due on November 21, 2003 by issuing additional shares of
Preferred Stock, except for fractional shares, which we paid in cash. Immediately following the effective date of our equity offering on June 25, 2004, we exchanged 3,941,115 shares of our common stock for 1,483,558 shares of Preferred Stock (the Preferred Share Exchange) held by (1) certain affiliates of, and investment accounts managed by, Oaktree Capital Management (Oaktree), LLC, (2) BRE/ HY Funding LLC (BRE/ HY), and (3) Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), based on a common stock price of $10.50 per share. In the Preferred Share Exchange, Oaktree, BRE/ HY and Merrill Lynch received 2,262,661, 1,049,034 and 629,420 shares of our common stock, respectively. As part of the Preferred Share Exchange, we recorded a $1.6 million loss on preferred stock redemption for the 4% prepayment premium on the shares of Preferred Stock that were exchanged for common stock. Also, from the proceeds of the public equity offering, on July 26, 2004, we redeemed all 4,048,183 remaining shares of our Preferred Stock for approximately $114.0 million. The 79,278 shares of Preferred Stock that were part of the disputed claims reserve were replaced with a liability of approximately $2.2 million on our consolidated balance sheet. Approximately $4.5 million was paid for the 4% prepayment premium on the Preferred Stock when all remaining outstanding shares were redeemed on July 26, 2004. On June 30, 2005, we completed the final distribution of our bankruptcy claims and released the remaining unused accrual balance of $1.3 million with a corresponding adjustment to Additional Paid-in Capital in our Consolidated Statement of Stockholders Equity.
On July 15, 2004, July 15, 2005 and September 8, 2005, a total of 66,666 restricted stock units previously issued to our CEO, Thomas Parrington, vested in three installments of 22,222 shares. Mr. Parrington, pursuant to the restricted unit award agreement between the Company and him, elected to have the Company withhold 21,633 shares to satisfy the employment tax withholding requirements associated with the vested shares. Accordingly, 21,633 shares were withheld and deemed repurchased by the Company and are shown as treasury stock on our balance sheet.
Equity Compensation Plan Information
The tables below summarize certain information with respect to our equity compensation plan as of December 31, 2005:
On November 25, 2002, the Company adopted a stock incentive plan (Stock Incentive Plan) which replaced the stock option plan previously in place. The Stock Incentive Plan, prior to the completion of the secondary stock offering on June 25, 2004, authorized the Company to award its directors, officers, or other key employees or consultants as determined by a committee appointed by the board of Directors, options and other equity incentives to acquire up to 353,333 shares of common stock. With the completion of the secondary stock offering on June 25, 2004, the total number of shares available for issuance under our stock incentive plan increased to 3,301,058 shares. In addition to the issuance of options to acquire 593,894 shares (out of which options for 40,497 shares were exercised), we have issued 121,415 restricted stock shares (net of 21,633 treasury shares) under the plan.
Awards made during 2005 pursuant to the Stock Incentive Plan are summarized below:
Selected Consolidated Financial Data
We present, in the table below, selected financial data derived from our historical financial statements for the five years ended December 31, 2005. On November 22, 2002, in connection with our emergence from Chapter 11 and in accordance with generally accepted accounting principles, we restated our assets and liabilities to reflect their estimated fair values at that date, referred to as fresh start reporting. As a result, our financial statements for the period subsequent to November 22, 2002 are those of a new reporting entity, and are not comparable with the financial statements for the period prior to November 22, 2002. For this reason, we use the term Successor when we refer to periods subsequent to November 22, 2002 and the term Predecessor when we refer to the periods prior to November 22, 2002.
In addition, in accordance with generally accepted accounting principles, our results of operations distinguish between the results of operations of those properties which we plan to retain in our portfolio for the foreseeable future, referred to as continuing operations, and the results of operations of those properties which have been sold or have been identified for sale, referred to as discontinued operations.
You should read the financial data below in conjunction with Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data included in this Form 10-K.
The income statement financial data for the years ended December 31, 2005, December 31, 2004, and December 31, 2003, and selected balance sheet data for the years ended December 31, 2005 and December 31, 2004, were extracted from the audited financial statements included in this Form 10-K, which commences on page F-1.
You should read the discussion below in conjunction with the consolidated financial statements and accompanying notes. Also, the discussion which follows contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed above under the caption Risk Factors.
We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms, as reported by Hotel Business in the 2006 Green Book issue published in December 2005. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as Crowne Plaza, Holiday Inn, Marriott and Hilton. As of March 1, 2006, we operated 75 hotels with an aggregate of 13,468 rooms, located in 28 states and Canada. Of the 75 hotels we operated as of March 1, 2006, 67 hotels, with an aggregate of 12,144 rooms, are part of our continuing operations, while eight hotels, with an aggregate of 1,324 rooms, are held for sale. Five of the eight hotels, with an aggregate of 868 rooms, were classified as held for sale in the first two months of January 2006 and are, therefore, included in continuing operations at December 31, 2005. Our portfolio of hotels, all of which we consolidate in our financial statements, consists of:
In 2003, we developed a strategy of owning and operating a portfolio of profitable, well-maintained and appealing hotels at superior locations in strong markets. We have implemented this strategy by:
In accordance with this strategy, and our efforts to reduce debt and interest costs, in 2003 we identified 19 hotels, our only office building and three land parcels for sale. In 2003, we sold one hotel and the office building. In 2004, we sold 11 hotels and two land parcels. In 2005, we sold 8 hotels. In 2005, we also identified an additional five hotels as held for sale. In the first two months of 2006, we identified an additional five hotels as held for sale. Since the start of our portfolio improvement strategy in November 2003, we have listed 29 hotels, one office building and three land parcels for sale and we have sold 20 hotels, two land parcels and the office building. The total aggregate sales price of these sales was $95.1 million and, of the $91.2 million in aggregate net proceeds, we used $71.7 million to pay down debt and the balance for general corporate purposes including capital expenditures. One hotel previously included in discontinued operations was reclassified into continuing operations in the fourth quarter 2005 as management no longer expected the hotel to be sold within one year. Additionally, on February 1, 2006, our two Kansas properties were surrendered to the Trustee pursuant to the settlement agreement signed in August 2005. On February 3, 2006, our minority-owned hotel in Columbus, OH, accounted for under the equity method of accounting, was deeded to the lender. As detailed below, after the surrender of these three hotels in the first two months of 2006 and the identification of five additional hotels as held for sale in the first two months of 2006, as of March 1, 2006, our portfolio consisted of 75 hotels, with 67 hotels in continuing operations and eight hotels and one land parcel in discontinued operations.
Below is a summary of our results of operations, presented in more detail in Results of Operations-Continuing Operations:
At December 31, 2005, three hotels and one land parcel were held for sale. At December 31, 2004, seven hotels and one parcel of land were held for sale.
The combined condensed statement of operations for discontinued operations as of December 31, 2005 includes the results of operations for the three hotels and one land parcel held for sale and the eight hotels that were sold in 2005. The combined condensed statement of operations for discontinued operations as of December 31, 2004 includes the results of operations for the seven hotels and one land parcel held for sale, the 11 hotels that were sold in 2004 and the eight hotels sold in 2005.
The assets and liabilities related to these held for sale assets are separately disclosed in our consolidated balance sheet.
Where the carrying values of the assets held for sale exceeded their estimated fair values, net of selling costs, we reduced the carrying values and recorded impairment charges. Fair values were determined using market prices and where the estimated selling prices, net of selling costs, exceeded the carrying values, no adjustments were recorded. We classify an asset as held for sale when management approves and commits to a formal plan to actively market a property for sale. While we believe the completion of these dispositions is
probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all.
Between November 1, 2003 and March 1, 2006, we sold 20 hotels, our only office building and two land parcels for aggregate net proceeds of $91.2 million, of which we used $71.7 million to pay down debt and the balance for general corporate purposes including capital expenditures. For the eight assets sold in 2005, the total revenues for the year ended December 31, 2005 were $12.9 million, the direct operating expenses were $6.9 million, and the other hotel operating expenses were $5.6 million.
The results of operations of the other 74 hotels that we consolidate in our consolidated financial statements are reported in continuing operations as of December 31, 2005.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles (GAAP). As we prepare our financial statements, we make estimates and assumptions which affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. A summary of our significant accounting policies is included in Note 1 of the notes to our consolidated financial statements. We consider the following to be our critical accounting policies and estimates:
Consolidation policy All of our hotels are owned by operating subsidiaries. We consolidate the assets, liabilities and results of operations of those hotels where we own at least 50% of the voting equity interest and we exercise control. All of the subsidiaries are wholly-owned except for five joint ventures, one of which is not consolidated but is accounted for under the equity method of accounting.
When we consolidate hotels in which we own less than 100% of the voting equity interest, we include the assets and liabilities of these hotels in our consolidated balance sheet. The third party interests in the net assets of these hotels are reported as minority interest on our consolidated balance sheet. In addition, our consolidated statement of operations reflects the full revenues and expenses of these hotels and the third party portion of the net income or loss is reported as minority interest in our consolidated statements of operations. If the loss applicable to the minority interest exceeds the minoritys equity, we report the entire loss in our consolidated statement of operations.
When we account for an entity under the equity method of accounting, we record only our share of the investment on our consolidated balance sheet and our share of the net income or loss in our consolidated statement of operations. We own a 30% non-controlling equity interest in an unconsolidated joint venture and have historically included our share of this investment in other assets on our consolidated balance sheet. Our share of the net income or loss of the unconsolidated joint venture is shown in interest income and other in our consolidated statements of operations. In the third quarter 2005 we wrote off the investment in this minority-owned hotel as we had plans to surrender this hotel to its lender.
Deferral policy We defer franchise application fees on the acquisition or renewal of a franchise as well as loan origination costs related to new or renewed loan financing arrangements. Deferrals relating to the acquisition or renewal of a franchise are amortized on a straight-line basis over the period of the franchise agreement. We amortize deferred financing costs over the term of the loan using the effective interest method. The effective interest method incorporates the present values of future cash outflows and the effective yield on the debt in determining the amortization of loan fees. At December 31, 2005, these deferrals totaled $6.3 million for our continuing operations hotels. If we were to write these expenses off in the year of payment, our operating expenses in those years would be significantly higher.
Asset impairment We invest significantly in real estate assets. Property and equipment represent 83.5% of the total assets on our consolidated balance sheet at December 31, 2005. Accordingly, our policy on asset impairment is considered a critical accounting estimate. Under GAAP, real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Management periodically evaluates the Companys property and equipment to determine whether events or changes in circumstances indicate that a possible
impairment in the carrying values of the assets has occurred. The carrying value of a long-lived asset is considered for impairment when the undiscounted cash flows estimated to be generated by that asset over its estimated useful life is less than the assets carrying amounts. In determining the undiscounted cash flows we consider the current operating results, market trends, and future prospects, as well as the effects of demand, competition and other economic factors. If it is determined that an impairment has occurred, the excess of the assets carrying value over its estimated fair value is charged to operating expenses. We obtain fair values through broker valuations or appraisals. These broker valuations of fair value normally use the cap rate approach of estimated cash flows, a per key valuation approach, or a room revenue multiplier approach for determining fair value. If the projected future cash flow exceeds the assets carrying values, no adjustment is recorded. Impairment loss for an asset held for sale is recognized when the assets carrying value is greater than the fair value less estimated selling costs. See Note 3 for further discussion of the Companys charges for asset impairment.
As part of this evaluation, and in accordance with Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), we classify our properties into two categories, assets held for sale and assets held for use.
We consider an asset held for sale when the following criteria per SFAS No. 144 are met:
Upon designation of an asset as held for sale, we record the carrying value of the asset at the lower of its carrying value or its estimated fair value (which is determined after consultation with real estate brokers) less estimated selling costs, and we cease depreciation of the asset. The fair values of the assets held for sale are based on the estimated selling prices. We determine the estimated selling prices in conjunction with real estate brokers. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write-down respective hotel assets if their carrying values exceed the estimated selling prices less costs to sell. During 2005, we recorded $4.0 million of impairment losses on six assets held for sale. During 2004, we recorded $7.2 million of impairment losses on seven hotels and two land parcels held for sale.
With respect to assets held for use, we estimate the undiscounted cash flows to be generated by these assets. We then compare the estimated undiscounted cash flows for each hotel with their respective carrying values to determine if there are indicators of impairment. The carrying value of a long-lived asset is considered for impairment when the undiscounted cash flows to be generated by the asset over its estimated useful life is less than the assets carrying value. For those assets where there are indicators of impairment, we determine the estimated fair values of these assets using broker valuations or appraisals. The broker valuations of fair value normally use the cap rate approach of estimated cash flows, a per key approach or a room revenue multiplier approach for determining fair value. If the projected future cash flow exceeds the assets carrying value, no adjustment is recorded. During 2005, we recorded $8.3 million of impairment losses, with $7.9 million on six hotels held for use and $0.4 million for net book value write-offs for held for use assets that were replaced in 2005 and had remaining book value. During 2004, we recorded $4.9 million of impairment losses with $4.4 million in adjustments made to the carrying value on two hotels and $0.5 million for net book value write-offs for assets that were replaced in 2004 that had remaining book value.
Accrual of self-insured obligations We are self-insured up to certain amounts with respect to employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers compensation, automobile liability and other coverages. We establish reserves for our estimates of the loss that we will ultimately incur on reported claims as well as estimates for claims that have been incurred but not yet reported. Our reserves, which are reflected in other accrued liabilities on our consolidated balance sheet, are based on actuarial valuations and our history of claims. Our actuaries incorporate historical loss experience
and judgments about the present and expected levels of costs per claim. Trends in actual experience are an important factor in the determination of these estimates. We believe that our estimated reserves for such claims are adequate; however, actual experience in claim frequency and amount could materially differ from our estimates and adversely affect our results of operations, cash flow, liquidity and financial condition. As of December 31, 2005, we had an accrued balance of $12.4 million for these expenses.
Income Statement Overview
The discussion below focuses primarily on our continuing operations. In the continuing operations discussions, we compare the results of operations for the last three years for 75 consolidated hotels that as of December 31, 2005 are classified as assets held for use.
We categorize our revenues into the following three categories:
Transient revenues, which generally account for approximately 71% of room revenues, are revenues derived from individual guests who stay only for brief periods of time without a long-term contract. Demand from groups makes up approximately 24% of our room revenues while our contract revenues (such as contracts with airlines for crew rooms) account for the remaining 5%.
We believe revenues in the hotel industry are best explained by the following four key performance indicators:
To obtain available room nights for a year, we multiply the number of rooms in our portfolio by the number of days in the year. To obtain available room nights for a hotel sold during the year, we multiply the number of rooms in the hotel by the number of days between January 1 and the date the hotel was sold. We have adjusted available rooms accordingly, for the Crowne Plaza Melbourne, FL hotel, which was closed throughout 2005 due to hurricane renovations, the Crowne Plaza West Palm Beach, FL hotel that reopened December 29, 2005 after the completion of its hurricane repairs, and the Clarksburg, WV hotel, which closed in October 2005 as a result of damage caused from a water main break. The hotel reopened on January 31, 2006.
These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of our hotels experience lower occupancy levels in the fall and winter months, November through February, which generally results in lower revenues, lower net income and less cash flow during these months.
Operating expenses fall into the following categories:
Non-operating items include:
Results of Operations Continuing Operations
Room revenues increased $10.2 million or 4.4% due to higher occupancy and ADR. Occupancy increased 0.8% and ADR increased 6.3%. Total 2005 revenues increased $6.8 million or 2.2% despite the closure of two hotels (the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL) for hurricane repairs and displacement at eleven other hotels undergoing guest room renovation including the Holiday Inn Clarksburg, WV hotel that was closed in October 2005 for repair work related to a water main break. Displacement refers to lost revenue and profit due to rooms being out of order as a result of renovation or hurricane repairs. Estimated 2005 full year room and total revenue displacement for the Crowne Plaza West Palm Beach, FL and Crowne Plaza Melbourne, FL hotels, as calculated in the business interruption claims, are $12.6 million and $17.0 million. Revenue is considered displaced only when a hotel has sold all available rooms and denies additional reservations due to rooms being out of order. We feel this method is conservative, as it does not include estimated other or soft displacement associated with a renovation; for example, guests who depart earlier than planned due to the disruption caused by the renovation work, local customers or frequent guests who may choose an alternative hotel during the renovation, or local groups that may not solicit the hotel to house their groups during renovations. The eleven hotels undergoing guest room renovation resulted in $4.0 million in room revenue displacement and $5.0 million in total revenue displacement in 2005. Accordingly, for the twelve months ended December 31, 2005, total room revenue displacement was $16.6 million and total revenue displacement was $22.0 million.
For the fourth quarter 2005, total revenues increased $5.2 million or 7.3% despite the closure of two hotels (the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL) for hurricane repairs and displacement at five other hotels undergoing renovation including the Holiday Inn Clarksburg, WV hotel that was closed in October 2005 for repair work related to a water main break. Estimated fourth quarter 2005 room and total revenue displacement for the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL hotels, as calculated in the business interruption claims, are $2.7 million and $3.8 million, respectively. The five hotels under renovation resulted in $0.7 million in room revenue displacement and $0.9 million in total revenue displacement. Accordingly, for the three months ended December 31, 2005, total room revenue displacement was $3.4 million and total revenue displacement was $4.7 million.
The table below shows our occupancy, ADR, RevPAR and RevPAR Index (market share) for our continuing operations hotels for the twelve months ended December 31, 2005. To illustrate the impact of the two hotels closed throughout most of 2005 due to hurricane damage and the Holiday Inn Clarksburg, WV for repairs related to a water main break on our continuing operations, the impact of renovations underway and completed, and the impact of rebranding, we have presented this information into seven different subsets. These subsets indicate that our Marriott and Hilton branded hotels outperformed our IHG branded hotels. In addition, these subsets indicate that where we have recently completed a major renovation, we saw an increase in RevPAR that is greater than the average increase for all of our continuing operations hotels. During 2005 we had eleven hotels under renovation. Eight of the eleven hotels were IHG hotels. As a result, these eight IHG hotels had 117,149 room nights out of service. This is an average of 321 rooms per day which represents approximately 18.6% of the available inventory at these eight hotels. Capital expenditures for the twelve
months ended December 31, 2005 for these eight IHG hotels were $21.9 million. These renovations had a direct impact on the performance of these IHG hotels during the period.
(A) Other Brands and Independent Hotels include the Radisson New Orleans Airport Hotel in Kenner, LA that has seen dramatic increases in Occupancy and ADR, and correspondingly, RevPAR, since September 2005. For this grouping of hotels, after adjusting for the impact of the Radisson hotel, RevPAR would have increased 0.8% for the year and RevPAR Index would have decreased 3.8%.
Our competitive set RevPAR growth as compared to the lodging industry as a whole has been trending positive over the past eight quarters, which we believe is a result of the improving conditions in the markets in which we operate. As shown below, in the first quarter 2004 the Smith Travel Research (STR) market segments in which we operates grew RevPAR at only 58.4% of the U.S. industry average. By the third quarter 2005 and continuing into the fourth quarter 2005, the STR market segments in which we operate had RevPAR growth that exceeded the U.S. average at 101.2% and 101.0%, respectively. We are encouraged that the markets in which we operate are now performing at levels consistent with the national average. As we complete our renovations we will be positioned to improve our RevPAR indices.
RevPAR in Markets in Which Lodgian Operates
Food and beverage revenues declined $2.9 million or 4.1% from 2004 due to the continued closure of the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL hotels. After adjusting for the impact of the two hotels closed for hurricane renovations, food and beverage revenues were essentially the same as in 2004. Other revenues, which declined by $0.4 million or 4.1%, were affected by a decline in
telephone revenues as a result of the increased usage of cell phones by our guests as well as the availability of free high speed internet access at many of our hotels, and the continued closure of the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL hotels.
Rooms direct operating expenses increased $2.3 million or 3.6% from 2004 due to higher revenues. Total direct operating expenses increased $1.2 million or 1.0% from 2004 while total revenues increased $6.8 million or 2.2%. Total direct operating expenses as a percentage of total revenues were 38.9% in 2005 as compared to 39.3% in 2004 primarily as a result of cost containment initiatives undertaken in 2005.
Room expenses on an actual cost per occupied room basis increased from $21.93 in 2004 to $23.13 in 2005 or 5.5% primarily as a result of increases in payroll and benefit costs (up 3.7% or 42.5% of the total increase), guest and operating supplies and linen replacement costs due to mandatory program changes required by our franchisors (11.7% of the total increase), credit card, travel agent and other commissions (30.0% of the total increase), and enhanced complimentary food and beverage items to guests enrolled in our brand loyalty programs (17.5% of the total increase). Per occupied room payroll expenses excluding taxes and benefits were up 2.6% while payroll taxes and benefits increased 6.9% as a percent of payroll dollars. Health insurance costs as a percentage of payroll dollars increased approximately 36% in 2005 versus 2004.
Food and beverage expenses decreased $1.3 million or 2.5% from 2004 as a result of lower food and beverage revenues. The food and beverage profit margin declined 120 basis points as a result of the displaced ala carte and banquet revenues due to the ongoing property renovations as well as higher health insurance costs. After adjusting for the impact of the two closed Florida hotels, the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL, the food and beverage profit margin declined by 90 basis points from 2004.
Other hotel operating costs increased $7.3 million or 7.8% from 2004 as a result of increases in the following costs:
Property and other taxes, insurance and leases increased $1.1 million or 5.3% in 2005 primarily because in 2004 expenses were reduced by the settlement of a deferred ground rent obligation for $1.0 million less than what had been previously expensed.
Corporate and other expenses increased $4.2 million or 25.2% primarily due to $0.6 million in severance costs related to the resignations of our former CEO, COO and CFO including the acceleration of the unvested portion of our former CEOs restricted stock, $1.1 million of expenses related to hiring costs including signing bonus, restricted stock grants and moving allowance for our new president and chief executive officer, a $0.9 million write-off of the receivable from and the investment in the 30% minority-owned Holiday Inn City Center Columbus, OH. Additionally, we incurred approximately $1.0 million in added legal costs including
the $0.5 million settlement for the two Kansas hotels surrendered to the bond Trustee in early 2006. Additionally, expenses were higher year over year because in 2004 we recorded a reduction in our sales and use tax audit reserve that resulted in our 2004 expenses being $1.5 million lower. We realized savings in 2005 on lower Directors & Officers (D&O) premiums due to favorable trends in the D&O markets, lower post-emergence Chapter 11 expenses as we have now completed the bankruptcy claims distribution process, lower audit fees, including attestation fees, as a result of the second year of Sarbanes-Oxley (SOX), and lower costs related to SOX compliance. In 2005, costs related to Sarbanes-Oxley totaled approximately $0.8 million.
Casualty (gains) losses, net represent costs related to hurricane damage sustained in the 2004 and 2005 hurricane seasons offset by gains related to the final settlement of the property damage claims at five hotels. In 2005, we recognized a net casualty gain of $30.9 million. We recorded a $31.3 million in casualty gains on the settlement of property damage claims on five hotels: (1) the Crowne Plaza West Palm Beach, FL; (2) the Holiday Inn University Mall Pensacola, FL; (3) the Holiday Inn Winter Haven, FL; (4) the Crowne Plaza Melbourne, FL; and (5) the Holiday Inn Express University Mall Pensacola, FL, which was offset by $0.4 million of hurricane repair expenses on the Radisson New Orleans Airport Hotel in Kenner, LA and other continuing operations hotels. In 2004, we recorded $2.3 million in expenses related to the write-off the net book value of our damaged assets and hurricane repair costs.
Depreciation and amortization expenses increased $3.0 million or 11.2% primarily due to the completion of numerous renovation projects, thereby resulting in higher depreciation expense related to newly capitalized costs.
The impairment of long-lived assets of $8.3 million recorded during 2005 represents $7.9 million in reductions made to the carrying values of six hotels held for use, to bring them in line with their estimated fair values, and $0.4 million for furniture, fixtures and equipment net book value write-offs for items that were replaced in 2005. Consistent with our accounting policy on asset impairment and in accordance with SFAS No. 144, we periodically evaluate our real estate assets to determine if there has been any impairment in the carrying value. We record impairment charges if there are indicators of impairment and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying values. With respect to assets held for use, we estimate the undiscounted cash flows to be generated by these assets. We then compare the estimated undiscounted cash flows for each hotel with their respective carrying values to determine if there are indicators of impairment. If there are indicators of impairment, we determine the estimated fair values of these assets in conjunction with real estate brokers. These broker valuations of fair value normally use the cap rate approach of estimated cash flows, a per key approach, or a room revenue multiplier approach for determining fair value. As a result of these evaluations, we recorded impairment charges in 2005 as follows:
Business interruption proceeds relate to the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL hotels that were closed as a result of damage sustained in the 2004 hurricanes. Business interruption proceeds represent funds received or amounts for which proofs of loss had been signed for the periods from September 2004 to November 2005 for the Crowne Plaza West Palm Beach, FL hotel and September 2004 to December 2005 for the Crowne Plaza Melbourne, FL hotel. At December 31, 2005, $2.9 million was accrued for business interruption proceeds with a corresponding insurance receivable on our consolidated balance sheet.
The $9.4 million of Preferred Stock dividend costs in 2004 relate to dividends on the Preferred Stock issued on November 25, 2002, all of which were either exchanged for common stock immediately following our equity offering on June 25, 2004 or redeemed using proceeds of that offering on July 26, 2004.
Interest expense decreased $14.1 million or 33.7% in 2005 primarily due to increased costs in 2004 related to the following: 1) purchase of a $1.9 million swaption contract, 2) the write-off of $6.7 million of deferred loan costs due to the extinguishment of the Merrill Lynch Mortgage, Lehman Debt, and Macon Debt, 3) $2.7 million of prepayment penalties incurred for early retirement on the Merrill Lynch Mortgage debt, and 4) $0.8 million in loan origination costs incurred as part of the 2004 debt refinance.
The 2004 loss on preferred stock redemption of $6.1 million includes the 4% prepayment premium of $1.6 million that was recognized when we exchanged shares of our common stock for a portion of the outstanding shares of our Preferred Stock and the 4% prepayment premium of $4.5 million, which was paid when the remaining shares of our Preferred Stock were redeemed on July 26, 2004.
Minority interests represent the third party owners share of the net income (losses) of the joint ventures in which we have a controlling interest. The $10.3 million increase in minority interest adjustments primarily resulted from the casualty gain realized on the property damage settlement and the business interruption proceeds realized on the Crowne Plaza Melbourne, FL hotel.
The $9.7 million or 4.4% increase in room revenues resulted from increases in occupancy and ADR. Occupancy increased 1.8% and ADR increased 3.3%. While occupancy increased 1.8% from 2003, it was negatively impacted by renovations being performed at 16 hotels during 2004, by lost business leading up to the hurricanes that hit the Southeastern United States in the third quarter and by the continued closure of two hotels (the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL) as they underwent hurricane renovation work. We made substantial progress on our renovation program in 2004, but with many rooms out of service while under renovation, we experienced substantial room revenue displacement. The increase in ADR results from increasing demand for hotels as the economy improved and the shift away from Internet sales that involve more heavily discounted room rates. As we complete our renovation programs, we anticipate our occupancy and ADR performance will continue to improve.
Food and beverage revenues increased $1.6 million or 2.3% from 2003 despite the continued closure of our Crowne Plaza West Palm Beach, FL and Crowne Plaza Melbourne, FL hotels. Other revenues, which decreased by 2.8%, were affected by a decline in telephone revenues as a result of the increased usage of cell phones by our guests as well as the availability of free high speed internet access at many of our hotels, and the continued closure of our the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL hotels.
Direct operating expenses were higher due to higher revenues. Total direct operating expenses as a percentage of hotel revenues remained flat at 39.3% in 2004. Revenues increased 3.7% and total direct operating expenses increased 3.8%.
Room expenses on an actual cost per occupied room basis increased from $21.45 in 2003 to $21.93 in 2004 primarily as a result of increases in payroll and benefit costs (8.3% of the total increase), reservation equipment costs due to mandatory upgrades required by the InterContinental Hotel Group brands (18.8% of
the total increase), credit card, travel agent and other commissions (39.6% of the total increase), and enhanced complimentary food and beverage items to guest enrolled in our brand loyalty programs (16.7% of the total increase).
Food and beverage expenses increased $2.3 million or 4.9% from 2003 primarily as a result of increased revenues.
Other hotel operating costs increased $4.7 million or 5.3% from 2003 as a result of increases in the following costs:
Property and other taxes, insurance and leases decreased $3.1 million or 12.6% from 2003 primarily due to savings of $0.5 million for successful property tax assessment appeals; insurance premium and self-insured loss savings of $1.1 million due to favorable loss experience (exclusive of the hurricanes) and a stabilization of the insurance premium markets; and ground rent savings of $1.0 million due to the settlement of a deferred ground rent obligation.
Corporate and other expenses decreased $3.7 million or 17.9% from 2003 primarily as a result of reduced post-emergence legal, professional and other costs related to the Chapter 11 proceedings and a reduction in a
sales and use tax return audit reserve of $1.5 million due to favorable audit settlements. Costs incurred related to Sarbanes-Oxley compliance totaled approximately $1.4 million.
Casualty (gains) losses, net which represent costs related to hurricane damage, were $2.3 million higher in 2004 as a result of eight properties that incurred, in the aggregate, $5.6 million in costs of which $1.9 million was for hurricane repair expenses and approximately $3.7 million was for net book value write-offs of destroyed assets caused by the hurricanes that hit the Southeastern United States in August and September 2004, offset by expected insurance proceeds of $3.3 million. As of December 31, 2004, $2.0 million had been released by our insurance company as advances for repairs on the Crowne Plaza West Palm Beach, FL and the Crowne Plaza Melbourne, FL hotels. All advances are forwarded to our lenders and we receive reimbursements from the lender held escrows as we incur operating and capital expenditures. At December 31, 2004, we had received $1.4 million in reimbursements from our lenders. Until the ultimate claims are settled, we will continue to recognize the advances received from the insurance company as a liability without offset to the insurance receivable recorded on our consolidated balance sheet. Accordingly, at December 31, 2004, we have an insurance receivable balance of $3.3 million and a liability for insurance advances of $2.0 million.
Depreciation and amortization expenses decreased $1.8 million or 6.2% from 2003 as a result of our reduced asset base on the continuing operations hotels due to $8.4 million in asset write-downs for impairment charges in 2003 and the reduced depreciation charges for assets that had a fresh start life of one year and are now fully depreciated.
The impairment of long-lived assets of $4.9 million recorded during 2004 represents $4.4 million in adjustments made to the carrying values of two hotels held for use, to reduce them to their estimated fair values, and $0.5 million for furniture, fixtures and equipment net book value write-offs for items that were replaced in 2004. Consistent with our accounting policy on asset impairment and in accordance with SFAS No. 144, we periodically evaluate our real estate assets to determine if there has been any impairment in the carrying value. We record impairment charges if there are indicators of impairment, the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying values and the assets carrying values are in excess of their estimated fair values. With respect to assets held for use, we estimate the undiscounted cash flows to be generated by these assets. We then compare the estimated undiscounted cash flows for each hotel with their respective carrying values to determine if there are indicators of impairment. If there are indicators of impairment, we determine the estimated fair values of these assets in conjunction with real estate brokers. These broker valuations of fair value normally use the cap rate approach of estimated cash flows, a per key valuation approach, or a room revenue multiplier approach for determining fair value. As a result of these evaluations, we recorded impairment charges in 2004 as follows:
The 2003 $0.4 million gain on asset dispositions related to condemnation proceeds for land seized at two of our hotels.
The Preferred Stock dividend relates to dividends on the Preferred Stock issued on November 25, 2002. Dividends for the period January 1, 2003 to December 31, 2003 totaled $15.7 million. In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150), effective for us on July 1, 2003, dividends relating to the period after the effective date are reported as interest expense. Dividends for the period prior to the effective date continue to be shown as a deduction from retained earnings with no effect on our results of operations. As a result, the $8.1 million dividend accrued for the period July 1, 2003 to December 31, 2003 is reported in interest expense while the $7.6 million dividend accrued for the periods January 1, 2003 to June 30, 2003 is shown as a deduction from retained earnings. Preferred Stock dividends for 2004 were $9.4 million. A portion of the outstanding shares of Preferred Stock were exchanged for shares of our common stock immediately following our equity offering on June 25, 2004 and all remaining shares of our Preferred Stock shares were redeemed on July 26, 2004 using a portion of the proceeds of that offering.
Interest expense increased $14.1 million in 2004 due to the purchase of a $1.9 million swaption contract, the write-off of $6.7 million of deferred loan costs due to the extinguishment of the Merrill Lynch Mortgage, Lehman Debt, and Macon Debt, $2.7 million of prepayment penalties for early retirement on the Merrill Lynch Mortgage debt, the expensing of $0.8 million in loan origination costs incurred as part of the Refinancing Debt and additional mortgage interest in 2004 on the former Lehman hotels since we did not pay interest expense on these hotels during 2003 while they were in Chapter 11.
Loss on preferred stock redemption of $6.1 million includes the 4% prepayment premium of $1.6 million that was recognized when we exchanged shares of our common stock for some of the outstanding shares of Preferred Stock and the 4% prepayment premium of $4.5 million that we paid when we redeemed the balance of the outstanding Preferred Stock shares on July 26, 2004.
Reorganization items for 2003 of $1.4 million represent Chapter 11 expenses incurred between January 1, 2003 and May 22, 2003 relating to the 18 hotels which emerged from Chapter 11 on May 22, 2003.
Minority interests represent the third party owners share of the net losses of the joint ventures in which we have a controlling interest. The $0.6 million reduction in losses attributable to minority interests primarily resulted from the reduction in impairment charges at our Crowne Plaza Macon, GA hotel in 2004 as compared to 2003, partially offset by hurricane related losses in 2004 at our Crowne Plaza Melbourne, FL hotel.
Results of Operations Discontinued Operations
During 2005, we sold eight hotels, comprising an aggregate 2,073 rooms. The aggregate net proceeds from the sales were approximately $36 million of which $29.2 million was used to pay down debt and the balance
was used for capital expenditures and general corporate purposes. The aggregate gain from the sale of these assets was $6.9 million. During 2004, we sold 11 hotels, comprising 2,076 rooms, and two parcels of land. The aggregate net proceeds from these sales were approximately $42.5 million of which $37.4 million was used to pay down debt and the balance was used for capital expenditures and general corporate purposes. The aggregate gain from the sale of these assets was $9.2 million.
We recorded impairment on assets held for sale in 2005 and 2004. The impairment of long-lived assets held for sale of $4.0 million recorded in 2005 represents the write-down of five hotels and one land parcel held for sale. The fair values of the assets held for sale are based on the estimated selling prices less estimated costs to sell. We determine the estimated selling prices in conjunction with real estate brokers. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down respective hotel asset carrying values if their carrying values exceed the estimated selling prices less costs to sell. As a result of these evaluations, during 2005, we recorded impairment charges as follows:
The impairment of long-lived assets held for sale of $7.2 million recorded in 2004 represents $7.2 million in the write-down of nine hotels. Consistent with our accounting policy on asset impairment and in accordance with SFAS No. 144, the reclassification of these assets from held for use to held for sale necessitated a determination of fair value less costs of sale. The fair values of the assets held for sale are based on the estimated selling prices less estimated costs to sell. We determine the estimated selling prices in conjunction with real estate brokers. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down respective hotel asset carrying values if their carrying values exceed the estimated selling prices less costs to sell. As a result of these evaluations, during 2004, we recorded impairment charges as follows:
Historical operating results and gains are reflected as discontinued operations in our consolidated statement of operations. See notes Note 1 and Note 3 to the accompanying consolidated financial statements for further discussion.
Because we reported net losses for federal income tax purposes, we paid no federal income tax for the years ended December 31, 2005 and December 31, 2004. At December 31, 2005, we had available net operating loss carryforwards of approximately $306 million for federal income tax purposes, which will expire in 2006 through 2024, excluding an estimated tax net loss of $8.7 million for the year ended December 31, 2005. We estimate that $10.9 million of NOLs will expire in 2006. Our 2002 reorganization under Chapter 11 and our 2004 secondary stock offering resulted in ownership changes, as defined in Section 382 of the Internal Revenue Code. As a result of the most recent Section 382 ownership change, our ability to use these net operating loss carryforwards is subject to an annual limitation of $8.3 million. At December 31, 2005, we established a valuation allowance of $118.2 million to fully offset our net deferred tax asset. In addition, approximately $110.0 million of the $118.2 million of the deferred tax asset remaining is attributable to pre-emergence deferred tax assets and may be booked to additional paid in capital in future periods.
In addition, we recognized an income tax provision of $8.2 million for 2005, and $0.2 million for 2004.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is a widely-used industry measure of performance and also is used in the assessment of hotel property values. EBITDA is a non-GAAP measure and should not be used as a substitute for measures such as net income (loss), cash flows from operating activities, or other measures computed in accordance with GAAP. Depreciation and amortization are significant non-cash expenses for us as a result of the high proportion of our assets which are long-lived, including property, plant and equipment. We depreciate property, plant and equipment over their estimated useful lives and amortize deferred financing and franchise fees over the term of the applicable agreements. We believe that EBITDA provides pertinent information to investors as an additional indicator of our performance.
The following table presents EBITDA, a non-GAAP measure, for 2005, 2004 and 2003, and provides a reconciliation with our income (loss) from continuing operations, a GAAP measure:
Income (loss) from continuing operations, and accordingly, EBITDA from continuing operations, is calculated after deducting the following items:
Quarterly Results of Operations
The following table presents certain quarterly data for the eight quarters ended December 31, 2005. The data have been derived from our unaudited consolidated financial statements for the periods indicated. Our unaudited consolidated financial statements have been prepared on substantially the same basis as our audited consolidated financial statements included elsewhere in this report and include all adjustments, consisting primarily of normal recurring adjustments, that we consider to be necessary to present this information fairly, when read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The results of operations for certain quarters may vary from the amounts previously reported on our Forms 10-Q filed for prior quarters due to the timing of our classification of assets held for sale. The allocation of results of operations between our continuing operations and discontinued operations, at the time of the quarterly filings, was based on the assets held for sale, if any, as of the dates of those filings. This table represents the comparative quarterly operating results for the 75 hotels classified in continuing operations at December 31, 2005.
The following table presents EBITDA, a non-GAAP measure, for the past 8 quarters as of December 31, 2005, and provides a reconciliation with our (loss) income from continuing operations, a GAAP measure: