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Lodgian 10-K 2006 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Commission file
no. 1-14537
Lodgian, Inc.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code:
(404) 364-9400
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 registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. 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.
LODGIAN, INC.
Form 10-K
For the Year Ended December 31, 2005
TABLE OF CONTENTS
Table of Contents
PART I
When we use the terms Lodgian, “we,”
“our,” and “us,” we mean Lodgian, Inc. and
its subsidiaries.
Our Company
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
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 hotel’s product
quality and the refurbishment of existing properties are also
managed from
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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 hotel’s 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.
Corporate History
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.
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Franchise Affiliations
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 franchisor’s 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:
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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 franchisor’s
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:
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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 Company’s 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 property’s 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
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and local preferences. Each property’s 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 hotel’s 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.
Joint Ventures
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 partner’s
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 hotel’s 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.
Growth Strategy
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.
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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
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Research. Despite an estimated $4.0 million in room revenue
displacement in 2005 for eleven hotels under renovation,
Lodgian’s 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.
Properties
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:
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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.
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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.
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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.
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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.
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Insurance
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
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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.
Regulation
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.
Employees
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.
Legal Proceedings
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.
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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
stockholder’s 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 SEC’s 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:
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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 Company’s
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.
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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
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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
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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.
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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:
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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.
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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
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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.
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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.
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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 owner’s 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.
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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 company’s
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:
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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.
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PART II
Historical Data
On April 27, 2004, our Board of Directors authorized a
reverse stock split of our Company’s 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
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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.
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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. Management’s 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.
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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.”
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Executive Summary
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.
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Operating Summary
Below is a summary of our results of operations, presented in
more detail in “Results of Operations-Continuing
Operations”:
Discontinued 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
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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
minority’s 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 Company’s property and equipment to determine
whether events or changes in circumstances indicate that a
possible
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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 asset’s 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
asset’s 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 asset’s carrying values, no adjustment is
recorded. Impairment loss for an asset held for sale is
recognized when the asset’s carrying value is greater than
the fair value less estimated selling costs. See Note 3 for
further discussion of the Company’s 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 asset’s 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
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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.
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Operating expenses fall into the following categories:
Non-operating items include:
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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
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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.
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(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
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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.
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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
CEO’s 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
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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:
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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.
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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
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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
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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:
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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
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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:
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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.
Income Taxes
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.
EBITDA
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.
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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.
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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:
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