Item 1.
Business
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 according to Hotel Business. 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,”, “Four Points by Sheraton”, “Hilton,” “Holiday Inn,” “Marriott,” and “Wyndham”. As of March 1, 2009, we operated 41 hotels with an aggregate of 7,578 rooms, located in 23 states and Canada. Of the 41 hotels, 35 hotels, with an aggregate of 6,655 rooms, are held for use and the results of operations are classified in continuing operations, while 6 hotels, with an aggregate of 923 rooms, are held for sale and the results of operations of those hotels are classified in discontinued operations. Our portfolio of hotels, all of which we consolidate in our financial statements, consists of:
•
40 hotels that we wholly own and operate through subsidiaries; and
•
one hotel that we operate in a joint venture in the form of a limited partnership, in which a Lodgian subsidiary serves as the general partner, has a 51% voting interest and exercises significant control.
Our hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale, upscale and upper upscale market segments of the lodging industry. Most of our hotels are under franchises obtained from nationally recognized hospitality franchisors. We operate 21 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 12 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 7 hotels under other nationally recognized brands and one hotel is 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 Interim President and Chief Executive Officer, Peter T. Cyrus, who has over 30 years of experience in the lodging industry. In addition, our Vice President of Operations and our Vice President of Asset Management have each been in the hospitality industry for over twenty years.
Our Operations
Our operations team is responsible for the management of our properties. Our vice president of 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 finance and accounting, information technology, capital investment, human resources, and legal services.
The functions of our corporate finance and accounting team include internal audit, insurance, payroll and accounts payable processing, credit, tax, property accounting and financial reporting 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 capital investment team oversees the interior design and renovation of all our hotels. The capital investment process includes scoping, budgeting, return on investment analysis, design, procurement, and construction. Capital investment projects are approved when management determines that the appropriate return on investment will be achieved, following thorough planning, diligence, and analysis. The legal team coordinates contract reviews and provides the hotels with legal support as needed.
The 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 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 centralized purchasing oversight and partnership with a third party vendor for rebate program expertise, we are able to realize significant cost savings by securing volume pricing and administering national rebate programs from our vendors.
The corporate human resources staff works closely with management and employees throughout Lodgian to ensure compliance with employment laws and related government filings, counsel management on employee relations and labor relations matters, design and administer benefit programs, and develop recruiting and retention strategies.
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.
Since that time, we have sold hotels that did not fit our business strategy.
Our business is conducted in one reportable segment, which is the hospitality segment. During 2008, we derived approximately 98% of our consolidated revenues from hotels located within the United States and the balance from our one hotel located in Windsor, Canada.
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.
We enter into franchise agreements, generally for terms of 10 to 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. As a percentage of gross room revenues, royalty fees range from 4.0% to 6.0%, advertising/marketing fees range from 1.0% to 2.5%, reservation system fees range from 1.0% to 3.2%, and club and restaurant fees from 0.1% to 3.3%. 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 6.5% to 10.0% of gross room revenues. In 2008, franchise fees for our continuing operations were 9.6% of room revenues.
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 franchise renewals. 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.
When a hotel does not meet the terms of its franchise license agreement, a franchisor reserves the right to issue a notice of non-compliance to the franchisee. This notice of non-compliance provides the franchisee with a cure period which typically ranges from 3 to 24 months. At the end of the cure period, the franchisor will review the criteria for which the non-compliance notice was issued and either (1) cure the franchise agreement, returning to good standing, or (2) issue a notice of default and termination, giving the franchisee another opportunity to cure the non-compliant issue. At the end of the default and termination period, the franchisor will review the criteria for which the non-compliance notice was issued and either cure the default, issue an extension which will grant the franchisee additional time to cure, or terminate the franchise agreement. Termination of the franchise agreement 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 select an alternative franchisor, 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 “Item 1A.
Item 1A.
Risk Factors
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 “may”, “will”, “seeks”, “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “projects,”, “should” 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:
•
Our ability to refinance or extend the portion of our mortgage indebtedness that is scheduled to mature in 2009;
•
The effects of regional, national and international economic conditions;
•
Competitive conditions in the lodging industry and increases in room supply;
•
The effects of actual and threatened terrorist attacks and international conflicts in the Middle East and elsewhere, and their impact on domestic and international travel;
•
The effectiveness of changes in management and our ability to retain qualified individuals to serve in senior management positions;
•
Requirements of franchise agreements, including the right of franchisors to immediately terminate their respective agreements if we breach certain provisions;
•
Our ability to complete planned hotel dispositions;
•
Seasonality of the hotel business;
•
The effects of unpredictable weather events such as hurricanes;
•
The financial condition of the airline industry and its impact on air travel;
•
The effect that Internet reservation channels may have on the rates that we are able to charge for hotel rooms;
•
Increases in the cost of debt and our continued compliance with the terms of our loan agreements;
•
The effect of self-insured claims in excess of our reserves, or our ability to obtain adequate property and liability insurance to protect against losses, or to obtain insurance at reasonable rates;
•
Potential litigation and/or governmental inquiries and investigations;
•
Laws and regulations applicable to our business, including federal, state or local hotel, resort, restaurant or land use regulations, employment, labor or disability laws and regulations;
•
A downturn in the economy due to several factors, including but not limited to, high energy costs, natural gas and gasoline prices;
•
The impact of continued disruptions in the stock and credit markets and potential failures of financial institutions on our ability to access capital, and
•
The risks identified below under “Risks Related to Our Business” and “Risks Related to Our Common Stock”.
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 may be unable to refinance, extend or repay our substantial mortgage indebtedness maturing in July 2009, which could have a material adverse effect on our business, financial condition, results of operations and stock price.
As of December 31, 2008, we had $332.6 million of total mortgage obligations outstanding, including the current portion. This mortgage indebtedness is secured by interests in certain of our hotel properties. Approximately $148.5 million of this mortgage debt matures in May and December of 2009, both of which we currently expect to extend for additional one-year periods in accordance with the extension options set forth in the relevant loan documents. However, approximately $128 million of our mortgage debt is scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. We cannot currently predict whether our efforts to obtain an extension will be successful.
To address the pending maturities in July 2009, we are also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. To date, we have been unable to secure refinancing and, in light of the current credit markets generally and the real estate credit markets specifically, we expect it will remain difficult to refinance the mortgage debt prior to the July 2009 maturity date. We cannot currently predict whether these efforts will be successful.
Our ability to operate as a going concern is dependent upon our ability to extend, refinance or repay our July 2009 mortgage debt prior to or upon its maturity. For example, if we default on this mortgage debt our lenders could seek to foreclose on the properties securing the debt, which could cause the loss of any anticipated income and cash flow from, and our invested capital in, the hotels. Moreover, we could be required to utilize an increasing percentage of our cash flow to service any remaining debt or any new debt incurred with a refinancing, which would further limit our cash flow available to fund business operations and our strategic plan. If we are unable to refinance or extend the maturity of our July 2009 mortgage debt and maintain sufficient cash flow to fund our operations, our business, financial condition, results of operations and stock price may be materially adversely affected, and we may be forced to restructure or significantly curtail our operations or to seek protection from our lenders.
We may not be able to meet the requirements imposed by our franchisors in our franchise agreements and therefore could lose the right to operate one or more hotels under a national brand.
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, 2009, we have been or expect to be notified that we are in default and/or non-compliance with respect to three franchise agreements. We cannot assure you that we will be able to cure the alleged instances of non-compliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or non-compliance. If a franchise agreement is terminated, we may be required to incur significant costs, including franchise termination payments and capital expenditures, which in certain circumstances could lead to acceleration of portions of our indebtedness. 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 of our loan agreements. Therefore, the termination of one or more of our franchise agreements could materially and adversely affect our revenues, cash flow and liquidity. The hotels that are, or are expected to be, in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of $199.3 million of our mortgage debt as of March 1, 2009.
Refer to “Franchise Affiliations” above for specific information regarding the current status of our franchise agreements.
In addition, our current franchise agreements, generally for terms of 10 to 20 years, 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 related to renewal of franchise agreements would adversely affect our financial condition and results of operations.
Hotels typically require a higher level of capital expenditures, maintenance and repairs than other building types. If we are not able to meet the requirements of our hotels appropriately, our business and operating results will suffer.
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. When we make needed capital improvements, we can be more competitive in the market and our hotel occupancy and room rates can grow accordingly. Further, the process of renovating a hotel has the potential to be disruptive to operations. It is vital that we properly plan and execute renovations during lower occupancy and/or lower rated months in order to minimize “displacement”, an industry term for a temporary loss of revenues caused by rooms being out of service during a renovation. Additionally, if capital improvements are not made, franchise agreements could be at risk.
Market conditions and other factors may limit our ability to repay, extend or refinance our debt and fund our future capital needs. Even if we are able to refinance or extend our indebtedness, a substantial amount of indebtedness could limit our operational flexibility or otherwise adversely affect our financial condition.
We have a substantial amount of debt, which we may not be able to extend, refinance or repay. As of December 31, 2008, we had $332.6 million of total mortgage obligations outstanding, including the current portion, and 35 of our consolidated hotels were pledged as collateral for existing mortgage loans. These 35 hotels represented 88.2% of the book value of our consolidated property and equipment, net, as of December 31, 2008. As a result, we have limited flexibility to sell a property to satisfy our cash needs. In addition, our cash flow from operations may be insufficient to make required debt service payments and we may not be able to extend,
repay or refinance our maturing indebtedness on favorable terms or at all. Our ability to successfully refinance or extend our debt is also negatively affected by the current condition of the general economy, which has caused a real or perceived decline in the value of our properties, and of the credit markets, which has significantly reduced levels of commercial lending, in particular in the real estate capital markets.
If we are unable to refinance or extend the maturity of our maturing indebtedness, we may not be able to repay such indebtedness or make required debt service payments, resulting in a default of the debt. Debt defaults could lead us to sell one or more of our hotels on unfavorable terms or, in the case of secured debt, permit the lender to institute a foreclosure action, causing a loss of any anticipated income and cash flow from, and our invested capital in, the hotels. If we are unable to refinance or extend the maturity of our debt and maintain sufficient cash flow to fund our operations, our business, financial condition, results of operations and stock price will be materially adversely affected, and we may be forced to restructure or significantly curtail our operations or to seek protection from our lenders.
Even if we are able to refinance or extend our indebtedness, our indebtedness could still have important consequences to us. It is likely that refinanced or extended debt will contain terms, such as more restrictive operational and financial covenants and higher fees and interest rates, that are less attractive than the terms contained in the debt being refinanced or extended. Our substantial indebtedness may increase our vulnerability to downturns in our business, the lodging industry and the general economy. In addition, we may be required to dedicate a substantial and increasing portion of our cash flow from operations to debt service payments. This could reduce the availability of our cash flow to fund working capital, capital expenditures and other needs, and limit our ability to react to changes in our industry and capitalize on business opportunities. This may also place us at a competitive disadvantage to our competitors that may have greater financial strength than we do.
In addition, 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 be unable to obtain third-party 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.
The terms of our debt instruments place many restrictions on us, which reduce operational flexibility and create default risks.
Our outstanding debt instruments subject us to certain operational and financial covenants. Operational covenants include requirements to maintain certain levels of insurance and affiliations with nationally recognized hotel brands. The operational 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 certain of these restrictive covenants, may result in additional interest being due and could 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. 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.
We are also subject to certain financial covenants, including leverage and coverage ratios. As of December 31, 2008, the Company was in compliance with all of its financial debt covenants. However, our continued compliance with our financial covenants depends substantially upon the financial results of our hotels. Given the severe economic recession, we could breach certain of our financial covenants during 2009. The breach of a financial covenant, if not cured or waived by the lender, could lead, under the Merrill Lynch Fixed Rate loans and the Goldman Sachs loan, to the declaration of a “cash trap” by the lender whereby excess cash flows produced by the mortgaged hotels securing the applicable loan (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) could be placed in a restricted cash account. For the Merrill Lynch loans only, funds held in the restricted cash account may be used for capital expenditures reasonably approved by the loan servicer.
Increases in interest rates could have an adverse effect on our cash flow and interest expense.
A significant portion of our capital needs are fulfilled by borrowings, of which $169.5 million was variable rate debt at December 31, 2008. 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.
The value of our hotels and our ability to service our indebtedness is dependent upon the successful operation and cash flows of our hotels. Our ability to generate cash depends on many factors beyond our control and a cash shortfall could adversely affect our ability to fund our operations, planned capital expenditures and other needs.
Our ability to make payments on, extend or 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. In addition, the value of our hotels is heavily dependent on our cash flows. Various factors could adversely affect our ability to generate cash from operations. These risks include the following:
•
Effects of the severe global recession and the adverse conditions of the real estate and banking industries;
•
Changes in interest rates and changes in the availability, cost and terms of credit;
•
Cyclical overbuilding in the lodging industry;
•
Varying levels of demand for rooms and related services;
•
Competition in our markets from other hotels, motels and recreational properties, some of which may be owned or operated by companies having greater marketing and financial resources than we have;
•
Loss of franchise affiliations;
•
Decreases in air travel or other adverse changes in travel patterns;
•
Fluctuations in operating costs, including but not limited to, labor, food, and energy costs;
•
The need for renovations and the effectiveness of renovations or repositioning in attracting customers;
•
Changes in governmental laws and regulations that influence or determine wages or required remedial expenditures;
•
Natural disasters, including, but not limited to hurricanes;
•
Dependence on business and leisure travelers, who have been and continue to be affected by threats of terrorism, or other outbreaks of hostilities, and new laws to counter terrorism which result to some degree in a reduction of foreign travelers visiting the U.S.; and
•
The perception of the lodging industry and lodging companies in the debt and equity markets.
The global economic crisis and adverse economic conditions in the specific major metropolitan markets in which we do substantial business could materially and adversely affect our business and results of operations.
We depend in part on consumers spending discretionary funds on travel and leisure activities as well as the general health and volume of airline and business-related travel to generate revenues at our hotels. General economic conditions continue to weaken, and we expect the severe global economic recession to continue and potentially worsen in 2009. The unemployment rate is expected to continue to rise, consumer confidence and consumer and business spending have decreased dramatically and the stock market remains extremely volatile. Given these current and expected economic conditions and their impact on our occupancy and revenues, we believe there is a significantly increased risk that our operating performance will be materially adversely affected.
In addition to weakness in the general economy, adverse economic conditions in the specific markets in which we have multiple hotels, such as Pittsburgh, Baltimore/Washington, D.C. and Phoenix, could significantly and negatively affect our revenues and results of operations. The eight continuing operations hotels in these markets combined provided 29%, 30%, and 29% of our continuing operations revenues in 2008, 2007, and 2006, respectively. As a result of the geographic concentration of these hotels, we are particularly exposed to the risks of downturns in these markets, which could have a material adverse effect on our profitability.
Further, 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.
If we are not able to execute our strategic initiatives, we may not be able to improve our financial performance.
Our strategic initiatives are focused on improving the operations of our continuing operations hotels with improved product quality, improved services levels, and disciplined capital investment in our hotels, including repositionings and renovations, that will earn a sufficient return on the capital invested. The execution of these initiatives are dependent upon a number of factors, including but not limited to, our ability to dispose of the assets that do not fit into our core portfolio in a timely manner and at the desired selling prices. 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 strategic initiatives will produce improved financial performance at the affected hotels or for Lodgian in general. 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 successfully implement our strategic initiatives could limit our ability to grow our revenues, net income and cash flow.
We have a history of significant losses and we may not be able to successfully improve our performance to achieve profitability.
We had an accumulated deficit of $105.2 million as of December 31, 2008. Our ability to improve our performance to achieve profitability is dependent upon the state of the economy in general and the lodging industry in particular, as well as the successful implementation of our business strategy. In August 2007, we announced cost-reduction initiatives to improve future operating performance, which resulted in position eliminations at the corporate, regional, and hotel levels. In 2008, we eliminated additional positions at all levels. The reduction in staff, particularly at the hotel level, could have a negative impact on our guest satisfaction scores, which could ultimately impact our financial performance and/or result in the loss of one or more franchise agreements. In addition, 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. Furthermore, Smith Travel Research forecasted a 2.5% decline in RevPAR for the U.S. lodging industry in 2009, while PKF Hospitality Research projected a 7.8% decrease in RevPAR, the fifth largest annual decline since 1930. Rising energy costs, the financial condition of the airline industry in general and continued threats to national security or air travel safety, among other things, could adversely affect the industry, resulting in our inability to meet our internal profit expectations.
Force majeure events, including natural disasters, acts and threats of terrorism, the ongoing war against terrorism, military conflicts and other factors have had and may continue to have a negative effect on the lodging industry and our results of operations.
Force majeure events, including natural disasters, such as Hurricanes Katrina and Ike, which affected the Gulf Coast in August 2005 and September 2008, respectively, the terrorist attacks of September 11, 2001 and the continued threat of terrorism and 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 can cause a significant decrease in occupancy and ADR due to disruptions in business and leisure travel patterns and concerns about travel
safety. In particular, as it relates to terrorism, major metropolitan areas and airport hotels can be adversely affected by concerns about air travel safety and may see an overall decrease in the amount of air travel.
Our expenses may remain constant or increase even if revenues decline.
Certain expenses associated with owning and operating a hotel are relatively fixed and do not proportionately reduce with a decline in revenues. Consequently, during periods when revenues decline, we could continue to incur certain expenses which are fixed in nature. Moreover, we could be adversely affected by:
•
Rising interest rates;
•
Tightening of funding available to the lodging industry on favorable terms, or at all;
•
Rising energy costs, gasoline or heating fuel supply shortages;
•
Rising insurance premiums;
•
Rising property tax expenses;
•
Increase in labor and related costs; and
•
Changes in, and as a result, increases in the cost of compliance with new governmental regulations, including those governing environmental, usage, zoning and tax matters.
We may make acquisitions or investments that are not successful and that adversely affect our ongoing operations.
We may acquire or make investments in hotel companies or groups of hotels that we believe complement our business. If we fail to properly evaluate and execute acquisitions or investments, it may have a material adverse effect on our results of operations. In making or attempting to make acquisitions or investments, we face a number of risks, including:
•
Significant errors or miscalculations in identifying suitable acquisition or investment candidates, performing appropriate due diligence, identifying potential liabilities and negotiating favorable terms;
•
Reducing our working capital and hindering our ability to expand or maintain our business, including making capital expenditures and funding operations;
•
The potential distraction of our management, diversion of our resources and disruption of our business;
•
Overpaying by competing for acquisition opportunities with resourceful competitors;
•
Inaccurate forecasting of the financial impact of an acquisition or investment; and
•
Failure to effectively integrate acquired companies or investments into our Company and the resultant inability to achieve expected synergies.
Losses may exceed our insurance coverage or estimated reserves, which could impair our results of operations, financial condition and liquidity.
We are self-insured up to certain amounts with respect to our insurance coverages. 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 occurrence. 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:
•
the insurance coverages that we have obtained will fully protect us against insurable losses (i.e., losses may exceed coverage limits); or,
•
we will not incur losses from risks that are not insurable or that are not economically insurable.
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 could 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 the related debt and impair our ability to maintain franchise affiliations.
Competition in the lodging industry could have a material adverse effect on our business and results of operations.
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.
The lodging business is seasonal.
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 were to occur during the winter months.
We are exposed to potential risks of brand concentration.
As of March 1, 2009, we operated 33 of our 41 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 suffered a major decline in popularity with the traveling public, it could adversely affect our revenues and profitability.
We have experienced significant changes in our senior management team and Board of Directors.
There have been a number of changes in our senior management team. Since January 2008, the chief executive officer role has been filled by a member of the Board of Directors on an interim basis. Our current vice president of operations assumed this position in December 2008. If our management team is unable to develop and successfully execute our 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.
The composition of our Board of Directors has changed. From January 1, 2008 through March 1, 2009, two Board members resigned their positions (including the resignation of the former chief executive officer, who was also a director), while two new members joined the Board of Directors.
Our success is dependent on recruiting and retaining high caliber key personnel.
Our future success and our ability to manage future growth will depend in large part 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 key personnel. The inability to attract and retain highly qualified personnel could hinder our business.
The increasing use of third-party travel websites by consumers may adversely affect our profitability.
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 revenues generated through Internet intermediaries increase significantly, room revenues may flatten or decrease and our profitability may be adversely affected.
We will be unable to utilize all of our net operating loss carryforwards.
As of December 31, 2008, we had approximately $223.0 million of net operating loss carryforwards available for federal income tax purposes. 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 2018 and 2028. 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.
Many aspects of our operations are subject to government regulations, and changes in these regulations may adversely affect our results of operations and financial condition.
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.
Costs of compliance with environmental laws and regulations could adversely affect operating results.
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, 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, could 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 within the past several years, 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 environmental site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on us. Nevertheless, it is possible that these assessments did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware.
Some of our hotels may contain microbial matter such as mold, mildew and viruses, whose presence could adversely affect our results of operations. 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 might develop. If this were to occur, we could incur significant remedial costs and we might 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.
Risks Related to Our Common Stock
Our stock price may be volatile, and consequently, investors may be unable to resell their common stock at or above their purchase price.
The market price of our common stock could decline or fluctuate significantly in response to various factors, including:
•
Actual or anticipated variations in our results of operations;
•
Announcements of new services or products or significant price reductions by us or our competitors;
•
Market performance by our competitors;
•
Future issuances of our common stock, or securities convertible into or exchangeable or exercisable for our common stock, by us directly, or the perception that such issuances are likely to occur;
•
Sales of our common stock by stockholders or the perception that such sales may occur in the future;
•
The size of our market capitalization;
•
Loss of our franchises;
•
Default on our indebtedness and/or foreclosure of our properties;
•
Concentration of ownership;
•
The extent of institutional investor interest in us;
•
Changes in financial estimates by securities analysts; and
•
Domestic and international economic, legal and regulatory factors unrelated to our performance.
We may never pay dividends on our common stock, in which event our stockholders’ only return on their investment, if any, will occur on their sale of our common stock.
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 their sale of our common stock.
Our charter documents, employment contracts and Delaware law may impede attempts to replace or remove our management or inhibit a takeover, which could adversely affect the value 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:
•
Authorizing the issuance of preferred stock, the terms of which may be determined at the sole discretion of the board of directors;
•
Establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at meetings; and
•
Requiring all stockholder action to be taken at a duly called meeting, not by written consent.
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.
Item 1B.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Item 2.
Properties
The information required to be presented in this section is presented in “Item 1. Business.”
Item 3.
Item 3.
Legal Proceedings
The information required to be presented in this section is presented in “Item 1. Business.”
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2008.
PART II
Item 5.
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Historical Data
Our common stock is traded on the NYSE Alternext US under the symbol “LGN”. The following table sets forth the high and low sales prices of our common stock on a quarterly basis for the past two years:
At March 10, 2009, we had approximately 2,322 holders of record of our common stock.
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 pay principal and interest on our debt, fund our business operations, 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.
Stock Repurchase Programs
In May 2006, the Board of Directors of the Company approved a $15 million share repurchase program which expired in May 2007. Under this program, the Company repurchased 225,267 shares at an aggregate cost of $2.8 million during 2006. During 2007, the Company repurchased 146,625 shares at an aggregate cost of $1.9 million.
In August 2007, the Board of Directors of the Company approved a $30 million share repurchase program which was due to expire on August 22, 2009. Under this program, the Company repurchased 1.3 million shares at an aggregate cost of $15.2 million in 2007. During 2008, the Company repurchased 1.5 million shares at an aggregate cost of $14.9 million fulfilling the remaining authority under the program.
On April 11, 2008, the Board of Directors of the Company approved the repurchase of an additional $10 million of common stock over a period ending no later than April 15, 2009. As of December 31, 2008, the Company had repurchased approximately 554,000 shares at an aggregate cost of $4.4 million.
Equity Compensation Plan Information
The tables below summarize certain information with respect to our equity compensation plan as of December 31, 2008:
(1)
Column (a) excludes Class B warrants which are not a component of the Stock Incentive Plan.
(2)
All of these awards have been granted under the Stock Incentive Plan.
(3)
After taking into account the outstanding options, the exercised options and the shares of nonvested common stock, we have 2,499,921 shares of common stock available for grant under the Stock Incentive Plan.
On November 25, 2002, we 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 us to award our directors, officers, or other key employees or consultants as determined by a committee appointed by the Board of Directors, options to acquire and other equity incentives 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. As of December 31, 2008, we have issued options to acquire 981,332 shares (537,501 of which were forfeited), 12,413 shares of restricted stock (of which 4,719 shares were withheld to satisfy tax obligations), 66,666 shares of restricted stock units (of which 21,633 were withheld to satisfy tax obligations) and 350,566 shares of nonvested stock (of which 27,741 shares were forfeited and 18,246 of which were withheld to satisfy tax obligations).
Awards made during 2008 pursuant to the Stock Incentive Plan are summarized below:
Treasury Stock Repurchases
There were no purchases of our common stock during the three months ended December 31, 2008.
Performance Graph
The following stock performance graph compares the cumulative total stockholder return of our common stock between December 31, 2003 and December 31, 2008, against the cumulative stockholder return during such period achieved by the Dow Jones US Hotels Index and the Dow Jones Wilshire 5000 Index. The graph assumes that $100 was invested on December 31, 2003 in each of the comparison indices and in our common stock. The chart is adjusted to reflect a 1 for 3 reverse stock split which was effective on April 30, 2004.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Lodgian, Inc., The Dow Jones Wilshire 5000
Index And The Dow Jones US Hotels Index
*
$100 invested on 12/31/03 in stock & index-including reinvestment of dividends. Fiscal year ending December 31.
Copyright ©
2009 Dow Jones & Co. All rights reserved.
Item 6.
Item 6.
Selected Financial Data
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, 2008.
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. The historical income statements have been reclassified based on the assets sold or held for sale as of December 31, 2008.
You should read the financial data below in conjunction with “Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
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.”
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 according to Hotel Business. 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,”, “Four Points by Sheraton”, “Hilton,” “Holiday Inn,” “Marriott,” and “Wyndham”.
As of March 1, 2009, we operated 41 hotels with an aggregate of 7,578 rooms, located in 23 states and Canada. Of the 41 hotels, 35 hotels, with an aggregate of 6,655 rooms, are held for use and the results of operations are classified in continuing operations, while 6 hotels, with an aggregate of 923 rooms, are held for sale and the results of operations are classified in discontinued operations.
As of December 31, 2008, we had $332.6 million of total mortgage obligations outstanding, including the current portion. This mortgage indebtedness is secured by interests in certain of our hotel properties. Approximately $128 million of this mortgage debt is scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. To address the pending maturities, we are also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. To date, we have been unable to secure financing and, in light of the current credit markets generally and the real estate credit markets specifically, we expect it will remain difficult to refinance the mortgage debt prior to the July 2009 maturity date. We cannot currently predict whether our efforts to refinance or extend the maturing debt will be successful. See “Item 1A. Risk Factors” for additional information.
Total assets decreased from $624.7 million at December 31, 2007 to $555.4 million at December 31, 2008. The reduction was primarily due to lower cash balances (approximately $34 million) and lower book value of property and equipment due to hotels sold during 2008.
Long-term liabilities decreased from $355.7 million at December 31, 2007 to $194.8 million at December 31, 2008, mainly as a result of the reclassification of the maturing debt from long-term liabilities to current liabilities. In addition, the long-term liabilities associated with the assets that were reclassified to held for sale during 2008 were reclassified to Liabilities related to assets held for sale.
Overview of Continuing Operations
Below is a summary of our results of continuing operations, presented in more detail in “Results of Operations-Continuing Operations”:
•
Revenues decreased $2.1 million, or 0.9%. Rooms revenues decreased $1.1 million, or 0.6%, as ADR fell 1.2% and occupancy remained relatively flat, increasing 0.3%. Food and beverage revenues decreased $1.5 million, or 2.8%, driven largely by lower banquet revenues.
•
Operating income declined $12.1 million primarily as a result of impairment charges, casualty losses and margin erosion driven by the weakened economy.
Overview of Discontinued Operations
In December 2007, we announced a strategic initiative to reconfigure our hotel portfolio. We redefined our held for use portfolio, which contains 35 hotels. In accordance with this strategy and our previously announced disposition program, we sold 5 hotels in 2008. For the 5 hotels sold in 2008, total revenues were $7.3 million, direct operating expenses were $2.9 million, and other hotel operating expenses were $3.1 million for the year ended December 31, 2008, respectively.
The consolidated statements of operations for discontinued operations for the years ended 2008, 2007 and 2006 include the results of operations for the 6 hotels that were held for sale at December 31, 2008, as well as all properties that have been sold in accordance with SFAS No. 144.
The assets held for sale at December 31, 2008 and December 31, 2007 and the liabilities related to these assets are separately disclosed in the Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all of our held for sale assets as of December 31, 2008 remain properly classified in accordance with SFAS No. 144.
Where the carrying values of the assets held for sale exceeded the estimated fair values, net of selling costs, we reduced the carrying values and recorded impairment charges. During the year ended December 31, 2008, we recorded impairment charges of $10.8 million on assets held for sale.
Our continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria of SFAS No. 144. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.
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.
These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as discussed in “Item 1A. Risk Factors”, approximately $128 million of outstanding mortgage debt is scheduled to mature in July 2009 and the current severe economic recession has negatively impacted our operating results, which affects operating cash flows as well as our ability to refinance the maturing indebtedness. In the absence of an extension, refinancing or repayment of the July 2009 debt, these factors raise substantial doubt as to our ability to continue as a going concern. We have engaged mortgage bankers to facilitate the refinancing process and to assist in negotiations with prospective lenders. Management is also negotiating to extend the maturing mortgage debt. However, management can provide no assurance that we will be able to refinance or extend the debt. The financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities or any other adjustments that may be necessary if we are unable to continue as a going concern.
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 significant control. All of the subsidiaries are wholly-owned except for one joint venture, which meets the criteria for consolidation.
When we consolidate a hotel in which we own less than 100% of the voting equity interest, we include the assets and liabilities of the hotel in our consolidated balance sheet. The third party interest in the net assets of the hotel is reported as minority interest on our consolidated balance sheet. In addition, our consolidated statement of operations reflects the full revenues and expenses of the hotel 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.
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, 2008, these deferrals totaled $2.7 million for our held for use hotels. If we were to write-off these expenses in the year of payment, our operating expenses in those years would be significantly higher and lower in other years covered in the related agreement.
Asset impairment - We invest significantly in real estate assets. Property and equipment for our held for use assets represented 80.5% of the total assets on our consolidated balance sheet at December 31, 2008. Accordingly, our policy on asset impairment is considered a critical accounting estimate. Management periodically evaluates our property and equipment to determine whether events or changes in circumstances indicate that a possible impairment in the carrying values of the assets has occurred. As part of this evaluation, and in accordance with 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:
1. Management commits to a plan to sell the asset;
2. The asset is available for immediate sale in its present condition;
3. An active marketing plan to sell the asset has been initiated at a reasonable price;
4. The sale of the asset is probable within one year; and
5. It is unlikely that significant changes to the plan to sell the asset will be made.
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 less estimated selling costs, and we cease depreciation of the asset. Management’s estimate of the fair value of an asset is generally based on a number of factors, including letters of intent or other indications of value from prospective buyers, or, in the absence of such, the opinions of third-party brokers or appraisers. While management may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, our estimate is ultimately based on management’s determination and we remain responsible for the impact of the estimate on the financial statements. The estimated selling costs are generally 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.
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 estimated undiscounted cash flows to be generated by the asset over its estimated useful life are 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 by taking into consideration indicators of value including broker valuations or appraisals. While management may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, our estimate is ultimately based on management’s determination and we remain responsible for the impact of the estimate on the financial statements. 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 estimated fair value exceeds the asset’s carrying value, no adjustment is generally recorded. Additionally, if an asset is replaced prior to the end of its useful life, the remaining net book value is recorded as an impairment loss.
Accrual of self-insured obligations - We are self-insured up to certain amounts for employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers’ compensation, automobile liability and other coverages. We establish reserves for our estimates of the loss that we will ultimately incur on reported claims as well as estimates for claims that have been incurred but not yet reported. Our reserves, which are reflected in other accrued liabilities on our consolidated balance sheet, are based on actuarial valuations and our history of claims. Our actuaries incorporate historical loss experience and judgments about the present and
expected levels of costs per claim. Trends in actual experience are an important factor in the determination of these estimates. We believe that our estimated reserves for such claims are adequate; however, actual experience in claim frequency and amount could materially differ from our estimates and adversely affect our results of operations, cash flow, liquidity and financial condition. As of December 31, 2008, our reserve balance related to these self-insured obligations was $10.4 million.
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 the 35 consolidated hotels that, as of December 31, 2008, are classified as assets held for use.
Revenues
We categorize our revenues into the following three categories:
•
Rooms revenues - derived from guest room rentals;
•
Food and beverage revenues - derived from hotel restaurants, room service, hotel catering and meeting room rentals; and
•
Other revenues - derived from guests’ long-distance telephone usage, laundry services, parking services, in-room movie services, vending machine commissions, leasing of hotel space and other miscellaneous revenues.
Transient revenues, which accounted for approximately 69% of our 2008 room revenues, are revenues derived from individual guests who stay only for brief periods of time without a long-term contract. Demand from groups made up approximately 24% of our 2008 room revenues while our contract revenues (such as contracts with airlines for crew rooms) accounted for the remaining 7%.
We believe revenues in the hotel industry are best explained by the following key performance indicators:
•
Occupancy - computed by dividing total room nights sold by the total available room nights. To obtain available room nights for a particular period, we multiply the number of rooms in each hotel by the number of days the hotel was open;
•
Average Daily Rate (ADR) - computed by dividing total room revenues by total room nights sold; and
•
Revenue per available room (RevPAR) - computed by dividing total room revenues for a particular period by the total available room nights over the same period. Our calculation of total room revenues and the number of available rooms is adjusted, as appropriate, for the opening and closing of hotels in our portfolio. Our RevPAR can also be calculated by multiplying our occupancy for a particular period by our average daily rate over the same period.
These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of our hotels experience lower occupancy levels in the fall and winter months, November through February, which generally results in lower revenues, lower net income and less cash flow during these months.
Operating expenses
Operating expenses fall into the following categories:
•
Direct operating expenses - these expenses tend to vary with available rooms and occupancy. However, hotel level expenses contain significant elements of fixed costs and, therefore, do not decline proportionately with revenues. Direct expenses are further categorized as follows:
•
Rooms expenses - expenses incurred in generating room revenues;
•
Food and beverage expenses - expenses incurred in generating food and beverage revenues; and
•
Other direct expenses - expenses incurred in generating the revenue activities classified in “other revenues.”
We use certain “non-GAAP financial measures,” which are measures of our historical financial performance that are not calculated and presented in accordance with GAAP, within the meaning of applicable SEC rules. For instance, we use the term direct operating contribution to mean revenues less direct operating expenses as presented in the consolidated statement of operations. We assess profitability by measuring changes in our direct operating contribution and direct operating contribution percentage, which is direct operating contribution as a percentage of the applicable revenue source. These measures assist management in distinguishing whether increases or decreases in revenues and/or expenses are due to growth or decline of operations or from other factors. We believe that direct operating contribution, when combined with the presentation of GAAP operating income, revenues and expenses, provide useful information to management.
•
Other hotel operating expenses - these expenses include salaries for hotel management, advertising and promotion, franchise fees, repairs and maintenance and utilities;
•
Property and other taxes, insurance and leases - these expenses include equipment, ground and building rentals, insurance, and property, franchise and other taxes;
•
Corporate and other - these expenses include corporate salaries and benefits, legal, accounting and other professional fees, directors’ fees, costs for office space and information technology costs. Also included are costs related to compliance with Sarbanes-Oxley legislation;
•
Casualty (gains) losses, net - these expenses include hurricane and other repair costs and charges related to the assets written off that were damaged, netted against any gains realized on the final settlement of property damage claims;
•
Depreciation and amortization - depreciation of fixed assets (primarily hotel assets) and amortization of deferred franchise fees; and
•
Impairment of long-lived assets - charges required to write down the carrying values of long-lived assets to the fair values of assets where the estimated undiscounted cash flows over the life of the asset were less than the carrying value of the asset.
Non-operating items
Non-operating items include:
•
Business interruption insurance proceeds represent insurance proceeds for lost profits as a result of a business shutdown. Our 2008 business interruption proceeds relate primarily to the recovery of lost profits and reimbursement for additional expenses incurred at the Holiday Inn Hotel & Suites Marietta, which was closed as a result of the fire in January 2006.
•
Interest expense and other financing costs represent interest expense, which includes amortization of deferred loan costs and changes in the fair value of interest rate caps;
•
Interest income; and
•
Minority interests - our equity partner’s share of the income or loss of the hotel owned by joint venture that we consolidate.
Results of Operations - Continuing Operations
Results of operations for the years ended December 31, 2008 and December 31, 2007
Revenues - Continuing Operations
Rooms revenues decreased $1.1 million, or 0.6%, driven by a 1.2% decrease in ADR, partly offset by a 0.3% rise in occupancy. The decline in rooms revenues was the result of deteriorating economic conditions. In spite of the challenging economic environment, we outperformed the U.S. lodging industry as a whole in 2008 as our RevPAR decreased 0.9%, compared to a decrease of 1.9% for the U.S. lodging industry, according to Smith Travel Research. This was achieved largely because of our planned strategic shift toward the contract segment of business in order to react to market conditions.
Food and beverage revenues decreased $1.5 million, or 2.8%, driven by a decrease in our banquet revenues as businesses reduced their spending on conferences and other events. Other revenues grew $0.5 million, or 6.6%, due largely to fees for canceled events.
Revenue growth was negatively impacted by displacement. Displacement refers to lost revenues and profits due to rooms being out of service as a result of renovation. Revenue considered “displaced” only when a hotel has sold all available rooms and denies additional reservations due to rooms out of service. We feel this method is conservative, as it does not include estimated “soft” displacement costs associated with a renovation. During a renovation, there is significant disruption of normal business operations. In many cases, renovations result in the relocation of front desk operations, restaurant and bar services, and meeting rooms. In addition, the construction activity itself can be disruptive to our guests. As a result, guests may depart earlier than planned due to the disruption caused by the renovation work, local customers or frequent guests may choose an alternative hotel during the renovation, and local groups may not solicit the hotel to house their groups during renovations. These “soft” displacement costs are difficult to quantify and are excluded from our displacement calculation. Total revenue displacement during the year ended December 31, 2008 for the eleven hotels under renovation was $2.1 million. The largest amount of this displacement occurred at our former Holiday Inn Select DFW Airport hotel, which was converted to a Wyndham hotel and recently completed an extensive renovation. Total revenue displacement for the seven hotels under renovation during the year ended December 31, 2007 was $1.9 million.
Direct operating expenses - Continuing Operations
Rooms expenses increased $1.8 million, or 3.9%. Room expenses on a cost per occupied room (“POR”) basis increased from $26.64 in 2007 to $27.41 in 2008, an increase of 2.9%, primarily as a result of a $0.6 million increase in employee medical costs and increased seasonal labor as the hotels reduced full-time employees and increased contractors to allow greater flexibility in managing labor costs.
Food and beverage expenses decreased $0.5 million, or 1.3%, driven primarily by lower food and beverage revenues, partially offset by higher employee medical costs which increased $0.5 million in 2008. Food and beverage direct operating contribution decreased $1.1 million, or 5.9%.
Other expenses grew $0.3 million, or 5.5%, while the related direct operating contribution rose $0.2 million, an increase of 9.2%. In total, direct operating contribution decreased $3.7 million, or 2.4%.
Other operating expenses - Continuing Operations
Operating income decreased $12.1 million in 2008. Impairment charges increased $7.8 million due to a $4.8 million impairment at the Crowne Plaza Worcester, MA and the write-off of assets that were replaced during our recent hotel renovations, including certain building improvements and furniture, fixtures and equipment. Our renovations were largely related to hotel conversion projects and required franchisor improvements. In addition, in 2007, we recorded casualty gains of $1.9 million related to the settlement of a property damage claim at one of our hotels as compared to casualty losses of $1.1 million in 2008 primarily related to hurricane damage sustained at one of our hotels. Excluding these items, operating income decreased $1.3 million, or 7.4%. The remaining decrease was largely attributable to the decline in ADR.
Other hotel operating costs increased $1.3 million, or 1.9%. The increase is a result of the following:
•
General and administrative costs increased $0.5 million. As a percent of revenues, general and administrative expenses increased 30 basis points in 2008 to 6.3%. The increase was due in large part to higher employee medical costs. In addition, we benefited from sales tax credits and bad debt recoveries in 2007 that did not recur in 2008.
•
Advertising and promotion costs decreased $0.3 million, or 2.3%, driven by cost containment initiatives.
•
Franchise fees increased $0.2 million, or 1.0%, but remained relatively constant as a percentage of revenues.
•
Repairs and maintenance expenses increased $0.7 million, or 6.8%, primarily as a result of increased automotive maintenance costs and higher medical costs. As a percentage of total revenues, repairs and maintenance costs increased 30 basis points from 4.5% in 2007 to 4.8% in 2008.
•
Utilities costs increased $0.5 million, or 3.9%. This increase is driven largely by higher energy rates. As a percentage of total revenues, utilities costs increased 30 basis points to 5.5% in 2008.
•
Other expenses decreased $0.3 million, or 43.7%. In 2007, we incurred costs associated with a hotel brand conversion. Such costs were not incurred at the same level in 2008.
Property and other taxes, insurance and leases decreased $1.1 million in 2008 and decreased 40 basis points as a percentage of revenues, to 6.9%. The decrease was due largely to lower property insurance premiums and lower claims associated with our self-insurance programs for general liability and automobile coverage.
Corporate and other expenses decreased $4.6 million, or 21.4%, due largely to the following:
•
We realized $2.0 million in savings due to reductions in corporate staffing.
•
$1.4 million in lower public company related costs such as audit fees, Sarbanes-Oxley compliance costs and Director and Officer Insurance.
•
In January 2007, we announced a review of strategic alternatives to enhance shareholder value. During 2007, we incurred $1.5 million in related costs. Similar costs were not incurred in 2008.
•
These decreases were partially offset by $1.1 million in costs associated with the resignation of Mr. Edward Rohling, our former President and Chief Executive Officer.
Casualty (gains) losses, net represent costs related to hurricane and other property damage, offset by gains related to the final settlement of the related property damage claims. In 2008, we incurred net losses of $1.1 million almost entirely related to the damage at the Crowne Plaza Houston, TX, as a result of Hurricane Ike. In 2007, we recognized total net gains of $1.9 million related to the settlement of a property damage claim at our Radisson New Orleans Airport hotel, which was damaged in 2005 by Hurricane Katrina.
In August 2007, we announced cost-reduction initiatives to improve future operating performance. These initiatives resulted in position eliminations in our corporate staff as well as reductions in hotel staff at certain locations. As a result, we incurred restructuring costs totaling $1.2 million, which included severance and related costs. All of the terminations were completed and the related costs were paid as of December 31, 2007.
Depreciation and amortization expenses increased $3.2 million, or 11.0%, driven by the completion of several renovation projects in late 2007 and 2008. In accordance with generally accepted accounting principles, we begin recognizing depreciation expense when the asset is placed in service.
During 2008, we recorded $9.5 million of impairment losses related to assets held for use. Of this amount, $4.7 represented the write-off of assets that were replaced and had remaining book value. The remaining $4.8 million represented the write-down of the Crowne Plaza Worcester, MA to its estimated fair value upon reclassification to held for use in accordance with SFAS No. 144. In 2007, we recorded $1.6 million of impairment losses related to the write-off of assets that were replaced but had remaining book value.
Non-operating income (expenses) - Continuing Operations
Interest income and other decreased $2.9 million, or 73.3%, due to lower balances in our interest-bearing and escrow accounts throughout the year as well as lower interest rates.
Interest expense decreased $3.8 million, or 16.5% due to lower rates related to our variable rate debt and lower debt balances.
The $3.3 million loss on debt extinguishment related to the refinancing that occurred in April 2007.
Results of operations for the years ended December 31, 2007 and December 31, 2006
Revenues - Continuing Operations
Rooms revenues increased $9.0 million, or 5.2%, driven by a 3.8% increase in ADR and a 1.2% increase in occupancy. Our RevPAR increased 5.0%, while RevPAR for the U.S. lodging industry increased 5.7%. Excluding hotels under renovation in both years, our RevPAR increased 6.9%.
Food and beverage revenues increased $5.3 million, or 10.6%, driven by the successful execution of initiatives to improve our food and beverage operations. Other revenues grew $0.7 million, or 9.8%, largely as a result of new programs offered at our beachfront and resort hotels.
Revenue growth was negatively impacted by displacement. Total revenue displacement during the year ended December 31, 2007 for the seven hotels under renovation was $1.9 million. The largest amount of this displacement occurred at our former Holiday Inn Select DFW Airport hotel, which was recently converted to a Wyndham hotel and is undergoing an extensive renovation. Total revenue displacement for the year ended December 31, 2006 was $0.3 million.
Direct operating expenses - Continuing Operations
Rooms expenses increased $1.5 million, or 3.5%. Room expenses on a cost per occupied room (“POR”) basis increased from $26.08 in 2006 to $26.64 in 2007, an increase of 2.1%, primarily as a result of higher fee-based expenses including credit card and other commissions driven by revenue growth. Direct operating contribution for rooms increased $7.4 million, a growth rate of 5.8%. The increase in direct operating contribution is attributable to the realization of our labor management initiatives.
Food and beverage expenses increased $2.4 million, or 6.8%, driven primarily by higher food and beverage revenues. Food and beverage direct operating contribution grew $2.9 million, or 19.4%, largely as a result of the successful deployment of our revenue growth and labor management initiatives.
Other expenses grew $0.1 million, or 1.9%, while the related direct operating contribution rose $0.6 million, an increase of 35.4%. In total, direct operating contribution increased $10.9 million, or 7.6%. As a percentage of total revenues, direct operating contribution expanded 60 basis points, from 63.3% to 63.9%.
Other operating expenses - Continuing Operations
Other hotel operating costs increased $5.2 million, or 8.1%. The increase is a result of the following:
•
General and administrative costs increased $1.6 million. As a percent of revenues, general and administrative expenses increased 30 basis points in 2007 to 6.0%. The increase was due in large part to higher payroll costs (fewer vacant positions and higher caliber employees), legal and other professional fees, relocation, and travel and training costs.
•
Advertising and promotion costs increased $1.6 million, or 14.2%. As a percentage of revenues, advertising and promotional costs increased 30 basis points from 5.0% in 2006 to 5.3% in 2007. The increase is largely attributable to staffing related to sales and marketing programs designed to drive higher revenues.
•
Franchise fees increased $1.1 million, or 6.9%, primarily as a result of revenue growth. As a percentage of revenues, franchise fees remained flat year over year at 7.0%.
•
Repairs and maintenance expenses were essentially flat to the prior year, resulting from improved preventive maintenance programs and the execution of our capital expenditures plan. As a percentage of total revenues, repairs and maintenance costs decreased 30 basis points from 4.8% in 2006 to 4.5% in 2007.
•
Utilities costs increased $0.4 million, or 3.5%. This increase is driven largely by higher occupancy. As a percentage of total revenues, utilities costs decreased 20 basis points to 5.2% in 2007.
Property and other taxes, insurance and leases increased $0.3 million in 2007 and but decreased 30 basis points as a percentage of revenues, to 7.3%. The increase was the result of higher claims associated with our self-insurance programs.
Corporate and other expenses increased $0.7 million, or 3.4%, due largely to the following:
•
In January 2007, we announced a review of strategic alternatives to enhance shareholder value. During 2007, we incurred $1.5 million in related costs. Similar costs were not incurred in 2006.
•
$0.4 million related to the amortization of non-vested stock awards granted to our Board of Directors in February 2007. Two members of the Board did not stand for reelection at the April 2007 annual meeting of stockholders. In addition, one Board member resigned in August 2007 and another Board member resigned in December 2007. The Board of Directors elected to accelerate the vesting of the awards for all four of these members and the related expense was recorded. The stock awarded to the remaining members of our Board of Directors is being amortized over a three-year vesting period at an annualized rate of $0.1 million.
•
These increases in costs were largely offset by lower payroll and related expenses primarily as a result of the August 2007 restructuring plan.
Casualty (gains) losses, net represent costs related to hurricane and other property damage, offset by gains related to the final settlement of the related property damage claims. In 2007, we recognized total net gains of $1.9 million related to the settlement of a property damage claim at our Radisson New Orleans Airport hotel, which was damaged in 2005 by Hurricane Katrina.
In August 2007, we announced cost-reduction initiatives to improve future operating performance. These initiatives resulted in position eliminations in our corporate and regional staff as well as reductions in hotel staff at certain locations. As a result, we incurred restructuring costs totaling $1.2 million, which included severance and related costs. All of the terminations were completed and the related costs were paid as of December 31, 2007.
Depreciation and amortization expenses increased $1.4 million, or 4.9%, driven by the completion of several renovation projects in 2006 and 2007. In accordance with generally accepted accounting principles, we begin recognizing depreciation expense when the asset is placed in service.
During 2007, we recorded $1.6 million of impairment losses related to the write-off of assets that were replaced but had remaining book value.
Non-operating income (expenses) - Continuing Operations
Business interruption proceeds represent funds received or amounts for which proofs of loss have been signed. Business interruption proceeds in 2006 were recorded for the Crowne Plaza hotels in West Palm Beach and Melbourne, FL that were closed as a result of hurricane damage sustained in 2004.
Interest income and other increased $1.4 million, or 54.2%, due to higher balances in our interest-bearing and escrow accounts throughout the year as well as higher interest rates.
Interest expense increased $1.2 million following the refinancing that occurred in April 2007. We entered into a $130 million loan agreement with Goldman Sachs Commercial Mortgage Capital, L.P., defeased the entire $67.7 million balance of the Merrill Lynch Fixed Rate #2 Loan, and paid off the $55.8 million Merrill Lynch Floating Rate Loan. The refinancing decreased our overall interest expense, but resulted in higher interest expense for continuing operations and lower interest expense for discontinued operations based on the respective hotels that were encumbered by the debt facilities.
The $3.3 million loss on debt extinguishment was a result of the April 2007 refinancing.
Results of Operations - Discontinued Operations
In January 2008, we reclassified an additional 9 hotels as held for sale. In May 2008, we reclassified the former Holiday Inn Marietta, GA to held for sale. In June 2008, we reclassified the Crowne Plaza Worcester, MA, from held for sale to held for use. As of December 31, 2008, six hotels were held for sale.
In 2008, we finalized the casualty and business interruption claims for the former Holiday Inn Marietta, GA, which suffered a fire on January 15, 2006. We received proceeds totaling $6.1 million, of which $0.7 million related to business interruption and $5.4 million related to casualty claims. As a result of the settlement, we recognized business interruption insurance proceeds of $0.7 million and a total casualty gain of $5.6 million, after deducting related costs.
During 2008, we sold 5 hotels, or 851 rooms, for an aggregate sales price of $25.0 million, $7.9 million of which was used to pay down debt. The remaining proceeds, after paying settlement costs, were used for capital expenditures and general corporate purposes. We realized gains of approximately $6.1 million in 2008 from the sales of these assets. A list of the properties sold in 2008 is summarized below:
•
On April 17, 2008, we sold the Holiday Inn, a 158 room hotel located in Frederick, MD.
•
On May 13, 2008, we sold the former Holiday Inn, a 156 room hotel located in St. Paul, MN.
•
On August 14, 2008, we sold the former Holiday Inn, a 193 room hotel located in Marietta, GA.
•
On October 9, 2008, we sold the Holiday Inn, a 127 room hotel located in Glen Burnie, MD.
•
On December 16, 2008, we sold the Holiday Inn, a 217 room hotel located in Frisco, CO.
During 2007, we sold 23 hotels, or 4,109 rooms, for an aggregate sales price of $82.2 million, $2.0 million of which was used to pay down debt. The remaining proceeds, after paying settlement costs, were used for capital expenditures and general corporate purposes. We realized gains of approximately $4.0 million in 2007 from the sale of these assets. A list of the properties sold in 2007 is summarized below:
•
On January 15, 2007, we sold the University Plaza, a 186 room hotel located in Bloomington, IN.
•
On March 9, 2007, we sold the Holiday Inn, a 130 room hotel located in Hamburg, NY.
•
On June 13, 2007, we sold the following 16 hotels:
•
Holiday Inn, a 202 room hotel located in Sheffield, AL
•
Clarion, a 393 room hotel located in Louisville, KY
•
Crowne Plaza, a 275 room hotel located in Cedar Rapids, IA
•
Augusta West Inn, a 117 room hotel located in Augusta, GA
•
Holiday Inn, a 201 room hotel located in Greentree, PA
•
Holiday Inn, a 189 room hotel located in Lancaster East, PA
•
Holiday Inn, a 244 room hotel located in Lansing, MI
•
Holiday Inn, a 152 room hotel located in Pensacola, FL
•
Holiday Inn, a 228 room hotel located in Winter Haven, FL
•
Holiday Inn, a 100 room hotel located in York, PA
•
Holiday Inn Express, a 112 room hotel located in Dothan, AL
•
Holiday Inn Express, a 122 room hotel located in Pensacola, FL
•
Park Inn, a 126 room hotel located in Brunswick, GA
•
Quality Inn, a 102 room hotel located in Dothan, AL
•
Ramada Plaza, a 297 room hotel located in Macon, GA
•
Ramada Inn, a 197 room hotel located in North Charleston, SC
•
On July 12, 2007, we sold the Holiday Inn, a 159 room hotel located in Clarksburg, WV.
•
On July 20, 2007, we sold the Holiday Inn, a 208 room hotel located in Fort Wayne, IN.
•
On August 14, 2007, we sold the Holiday Inn, a 106 room hotel located in Fairmont, WV.
•
On December 18, 2007, we sold the Holiday Inn, a 146 room hotel located in Jamestown, NY.
•
On December 27, 2007, we sold the Vermont Maple Inn, a 117 room hotel located in Burlington, VT.
During 2006, we sold one land parcel and six hotels with an aggregate 929 rooms for an aggregate sales price of $27.1 million, $5.0 million of which was used to pay down debt. The remaining proceeds were used for capital expenditures and general corporate purposes. We realized gains of approximately $3.0 million in 2006 from the sale of these assets. Also in 2006, we surrendered two Holiday Inn hotels, located in Lawrence and Manhattan, KS, to a bond trustee pursuant to the settlement agreement entered into in August 2005. Further, a venture in which we own a minority interest and which owned the Holiday Inn City Center Columbus, OH transferred the hotel to the lender.
Summary statement of operations information for discontinued operations for the years ended December 31, 2008, 2007 and 2006 is as follows:
We recorded impairment on assets held for sale in 2008, 2007, and 2006, in accordance with our accounting policy.
During 2008, we recorded impairment charges totaling $10.8 million on 6 hotels as follows (amounts below are rounded individually):
•
$6.7 million on the Holiday Inn Select in Windsor, Ontario, Canada to reflect the current estimated selling price, net of selling costs;
•
$1.9 million on the Hilton Northfield, MI to reflect the current estimated selling price, net of selling costs;
•
$1.7 million on the Holiday Inn East Hartford, CT to reflect the current estimated selling price, net of selling costs;
•
$0.2 million on the closed French Quarter Suites Memphis, TN to reflect the current estimated selling price, net of selling costs;
•
$0.1 million on the former Holiday Inn St. Paul, MN to record the final disposition of the hotel; and
•
$0.1 million to record the final disposition of the Holiday Inn Frederick, MD as well as the disposal of replaced assets at various hotels;
In 2007, we recorded impairment charges totaling $9.9 million on 7 hotels as follows (amounts below are rounded individually):
•
$3.3 million on the Hilton Northfield, MI to reflect the estimated selling price;
•
$1.6 million on the Holiday Inn Select in Windsor, Ontario, Canada to reflect the estimated selling price;
•
$1.8 million on the Holiday Inn Frederick, MD to reflect the estimated selling price less costs to sell;
•
$1.3 million on the Holiday Inn Clarksburg, WV to reflect the estimated selling price less costs to sell and to record the final disposition of the hotel;
•
$0.8 million on the Vermont Maple Inn Colchester, VT to reflect the estimated selling price less costs to sell and to record the final disposition of the hotel;
•
$0.6 million on the Holiday Inn Jamestown, NY to reflect the estimated selling price less costs to sell and to record the final disposition of the hotel;
•
$0.1 million on the University Plaza Bloomington, IN to record the final disposition of the hotel, and
•
$0.4 million to record the disposal of replaced assets at various hotels.
In 2006, we recorded impairment charges totaling $23.2 million on 16 hotels as follows (amounts below are rounded individually):
•
$3.9 million on the Holiday Inn Manhattan, KS to record the loss on disposal of fixed assets;
•
$2.2 million on the Holiday Inn Lawrence, KS to record the loss on disposal of fixed assets;
•
$1.4 million on the Holiday Inn Sheffield, AL which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.3 million on the Holiday Inn McKnight, PA to reflect the lowered estimated selling price less, the write-off of capital improvements spent on this hotel for franchisor compliance that did not add incremental value or revenue generating capacity to the property, and the final disposition of the hotel;
•
$0.1 million on the Holiday Inn Valdosta, GA to reflect the estimated selling costs of the sale as this hotel was identified for sale during 2006, and to reflect the final disposition of the hotel;
•
$0.1 million on the Azalea Inn Valdosta, GA to reflect the estimated selling costs of the sale as this hotel was identified for sale during 2006, and to reflect the final disposition of the hotel;
•
$0.7 million on the University Plaza Bloomington, IN, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$1.3 million on the Ramada Plaza Macon, GA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less cost to sell;
•
$2.1 million on the Holiday Inn University Mall, FL, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$1.8 million on the Holiday Inn Express Pensacola, FL, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.8 million on the Holiday Inn Greentree, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.2 million on the Holiday Inn York, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.9 million on the Holiday Inn Lancaster, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$6.4 million on the Holiday Inn Lansing, MI, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.6 million on the Holiday Inn Clarksburg, WV, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.1 million on the Holiday Inn Jekyll Island, GA to record the disposal costs of furniture, fixtures and equipment incurred during the closing of the hotel; and
•
$0.3 million to record the disposal of replaced assets at various hotels.
Historical operating results and gains are reflected as discontinued operations in our consolidated statement of operations. See Note 1 and Note 3 to the accompanying consolidated financial statements for further discussion.
Income Taxes
We expect to have a taxable loss of $3.4 million for the year ended December 31, 2008. We reported a net taxable loss of $49.5 million for federal income tax purposes for the year ended December 31, 2007. We reported taxable income for federal income tax purposes for the year ended December 31, 2006. Because we have net operating losses (“NOLs”) available we paid no federal income taxes. At December 31, 2008, we have available net operating loss carryforwards of $223.0 million for federal income tax purposes, which will expire in years 2018 through 2028 if not utilized against taxable income. In addition, we have excess tax benefits related to current year stock option exercises subsequent to the adoption of FAS 123(R) of $1.0 million that are not recorded as a deferred tax asset as the amounts have not yet resulted in a reduction in current taxes payable. The benefit of these deductions will be recorded to additional paid-in capital at the time the tax deduction results in a reduction of current taxes payable. 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. Net operating loss carryforwards generated during the 2004 calendar year after June 24, 2004 as well as those generated during the 2005 and 2007 calendar year, are generally not subject to Section 382 limitations to the extent the losses generated are not recognized built in losses. At the June 24, 2004 ownership change date we had a Net Unrealized Built in Loss (“NUBIL”) of $150 million. As of December 31, 2008, $95.7 million of the NUBIL has been recognized. The amount of losses subject to Section 382 limitations is $171.5 million; losses not subject to 382 limitations are $51.5 million.
At December 31, 2008, a valuation allowance of $64.1 million fully offset our net deferred tax asset. As a result of our history of losses, we believed it was more likely than not that our net deferred tax asset would not be realized and, therefore, provided a valuation allowance to fully reserve against these amounts. Of this $64.1 million, the 2008 deferred tax asset was increased by $4.9 million with $6.0 million of the increase relating to impairment charges incurred for books, $(0.6) million related to prior year true-ups, and by $(0.5) million of additional deferred tax assets generated during the period. The balance of $64.1 million is primarily attributable to pre-emergence deferred tax assets and may be credited to additional paid-in capital in future periods.
In addition, we recognized an income tax provision of $0.1 million for 2008, $1.0 million for 2007, and $8.5 million for 2006. $7.9 million of the income tax provision for 2006 is for a non-cash charge related to the utilization of pre-emergence net operating losses in accordance with SOP 90-7 “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”.
In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 applies to all tax positions accounted for in accordance with SFAS No. 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, derecognition, and measurement is based on management’s best judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006.
We adopted the provisions of FIN 48 with respect to all of our tax positions as of January 1, 2007. While FIN 48 was effective on January 1, 2007, the new standards apply to all open tax years. The only major tax jurisdiction in which we file income taxes is Federal. The tax years which are open for examination are calendar years ended 1998, 1999, 2000, 2001, 2003 and 2004, due to losses generated that may be utilized in current or future filings. Additionally, the statutes of limitation for calendar years ended 2005, 2006 and 2007 and 2008 remain open. We have no significant unrecognized tax benefits; therefore, the adoption of FIN 48 had no impact on our financial statements. Additionally, no increases in unrecognized tax benefits are expected in the year 2008. Interest and penalties on unrecognized tax benefits will be classified as income tax expense if recorded in a future period.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which is a revision of SFAS No. 141 “Business Combinations”. SFAS No. 141(R) significantly changes the accounting for business combinations. Under this statement, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Additionally, SFAS No. 141(R) includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. We have $64.1 million of deferred tax assets fully offset by a valuation allowance. The balance of the $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the effective date for SFAS No. 141(R), such release will affect the income tax provision in the period of release.
Quarterly Results of Operations
The following table presents certain quarterly data for the eight quarters ended December 31, 2008. The data have been derived from our unaudited condensed 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 35 hotels classified as held for use at December 31, 2008.
Historically, our operations and related revenues and operating results have varied substantially from quarter to quarter. We expect these variations to continue for a variety of reasons, primarily seasonality. Due to the fixed nature of certain expenses, such as marketing and rent, our operating expenses do not vary as significantly from quarter to quarter.
Liquidity and Capital Resources
Working Capital
We use our cash flows primarily for operating expenses, debt service, capital expenditures and share repurchases. Currently, our principal sources of liquidity consist of cash flows from operations, proceeds from the sale of assets, and existing cash balances.
Cash flows from operations may be adversely affected by factors such as the current severe economic recession, which is causing a reduction in demand for lodging, and displacement from large scale renovations being performed at our hotels. To the extent that significant amounts of our accounts receivable are due from airline companies, a further downturn in the airline industry also could materially and adversely affect the collectibility of our accounts receivable, and hence our liquidity. At December 31, 2008, our consolidated airline receivables represented approximately 26% of our consolidated gross accounts receivable. A further downturn in the airline industry could also affect our revenues by decreasing the aggregate levels of demand for travel. Cash flows from operations may also be adversely affected if we are unable to extend or refinance our maturing mortgage debt, as discussed below. If we are unable to extend or refinance our maturing mortgage debt, we could trigger a default under the terms of the applicable mortgage debt agreement, forcing us to surrender the encumbered assets to the lender. This would, in turn, result in a decrease in our cash flows from operations. In addition, if we are able to extend or refinance our maturing mortgage debt, the terms of the extension could result in significantly higher debt service payments. We expect that the sale of certain assets will provide additional cash to pay down outstanding debt, fund a portion of our capital expenditures and provide additional working capital. As of March 1, 2009, we had 6 hotels held for sale. However, because of the deteriorating economic conditions, the proceeds from the sale of these assets could be lower than currently anticipated.
Our ability to make scheduled debt service payments and fund operations and capital expenditures depends on our future performance and financial results, the successful implementation of our business strategy, as well as the general condition of the lodging industry and the general economic, political, financial, competitive, legislative and regulatory environment. In addition, our ability to refinance or extend our maturing mortgage debt depends to a certain extent on these factors. Many factors affecting our future performance and financial results, including the severity and duration of macro-economic downturns, are beyond our control. See “Item 1A. Risk Factors.”
Assuming we are able to extend or refinance the mortgage debt that matures in July 2009, we intend to continue to use our cash flow to fund operations, scheduled debt service payments, and capital expenditures. At this point in time, we do not intend to pay dividends on our common stock.
In accordance with GAAP, all assets held for sale, including assets that would normally be classified as long-term assets in the normal course of business, were reported as “assets held for sale” in current assets. Similarly, all liabilities related to assets held for sale were reported as “liabilities related to assets held for sale” in current liabilities, including debt that would otherwise be classified as long-term liabilities in the ordinary course of business.
At December 31, 2008, we had a working capital deficit (current assets less current liabilities) of ($80.2) million compared to working capital of $54.7 million at December 31, 2007. Approximately $128 million of our outstanding mortgage debt is scheduled to mature in July 2009, without contractual extension options available to us. In addition, the current severe economic recession has negatively impacted our operating results, which affects operating cash flows as well as our ability to refinance the maturing indebtedness. In the absence of an extension, refinancing or repayment of the July 2009 debt, there is substantial doubt as to our ability to continue as a going concern. We have engaged mortgage bankers to facilitate the refinancing process and to assist in negotiations with prospective lenders. The terms of any refinancing or new borrowing would be determined by then-current market conditions and other factors, and could impose significant burdens on the Company’s financial condition and operating flexibility. In addition, the cost of such new financing is likely to be higher than the cost of the existing financing due to the current unfavorable condition of the current markets. Management is also negotiating with the servicers of the loans to extend the terms. However, management can provide no assurance that we will be able to refinance or extend the debt based on the state of the credit market during, or preceding, July, 2009.
Certain other mortgage debt will mature in 2009, but each has extension options available to us based upon certain conditions. Specifically, the loan with IXIS Real Estate Capital Inc. (“IXIS”) secured by the Holiday Inn in Hilton Head Island, SC was scheduled to mature on December 9, 2007. However, we exercised the first and second one-year extension options, which extended the maturity to December 9, 2009. In order to exercise the remaining one-year extension option, there must not be an existing event of default under the loan documents, we must purchase an interest rate protection agreement capping LIBOR at 6.05% and we must pay an extension fee equal to 0.25% of the outstanding principal. The outstanding loan balance at December 31, 2008 was $18.5 million. We have classified this loan as long-term in the Consolidated Balance Sheet as of December 31, 2008.
Additionally, we are a party to another loan agreement with IXIS secured by the Radisson and Crowne Plaza hotels located in Phoenix, AZ and the Crowne Plaza Pittsburgh Airport hotel. The original term of the loan expired on March 9, 2008. However, we exercised the first of three one-year extension options, which extended the maturity date of the loan to March 9, 2009. In March 2009, we exercised the second extension option, which extended the loan maturity to March 9, 2010. We contemporaneously entered into an interest rate cap agreement, which effectively caps the interest rate at 7.45%. This loan has one remaining extension option that, if exercised, would extend the loan maturity to March 9, 2011. In order to successfully extend the loan, there must be no existing event of default under the loan documents, the Company must purchase an interest rate protection agreement capping LIBOR at 6.00%, and the Company must pay an extension fee equal to 0.25% of the outstanding principal. The outstanding loan balance at December 31, 2008 was $21.0 million. We have classified this loan as long-term in the Consolidated Balance Sheet as of December 31, 2008.
We are also a party to a loan agreement with Goldman Sachs Commercial Mortgage Capital, L.P which is secured by 10 hotels. The initial term of this loan matures on May 1, 2009. However, three extensions of one year each are available to us. In order to exercise the first extension, which will extend the maturity date to May 1, 2010, there must not be an existing event of default under the loan documents and we must purchase an interest rate protection agreement capping LIBOR at 7.00%. No extension fee is payable in connection with the first extension option. In addition to the requirements above, an extension fee of 0.125% of the principal balance is payable in connection with the second and third extension options. The outstanding loan balance at December 31, 2008 was $130.0 million. We have classified this loan as long-term in the Consolidated Balance Sheet as of December 31, 2008.
While we believe that we will be able to extend the mortgage loans that contain extension options as described above, there can be no assurance that we will be able to do so.
For the year ended December 31, 2008, we expended $47.2 million in cash related to capital expenditures. During 2009, we expect to spend between $22 and $27 million in capital expenditures, depending on the determined
courses of action following our ongoing diligence and analysis. The planned capital expenditures relate largely to the completion of renovations associated with our recent franchise license renewals and other necessary projects including brand-mandated enhancements. We intend to use operating cash flows, when available, proceeds from asset sales and capital expenditure reserves with our lenders to fund these capital expenditures.
Our ability to meet our short-term and long-term cash needs is dependent on a number of factors, including the current severe economic recession, but most immediately our ability to extend or refinance our maturing mortgage indebtedness. As discussed above, approximately $128 million of our mortgage debt is scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. To address the pending maturities in July 2009, we are also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. To date, we have been unable to secure refinancing and, in light of the current credit markets generally and the real estate credit markets specifically, we expect it will remain difficult to refinance the mortgage debt prior to the July 2009 maturity date. As a result, our ability to meet our cash needs over the next 12 months and to operate as a going concern is dependent upon our ability to extend, refinance or repay our July 2009 mortgage debt prior to or upon its maturity. Moreover, our ability to extend or refinance our other mortgage debt in the future and to fund our long-term financial needs and sources of working capital are similarly subject to uncertainty. We can provide no assurance that we will have sufficient liquidity to be able to meet our operating expenses, debt service and principal payments, and planned capital expenditures over the next 12 months.
In the short term, we continue to diligently monitor our costs in response to the economic recession and will pursue our plan to refinance or extend the maturing mortgage debt as described above. Additionally, other factors will impact our ability to meet short-term and long-term cash needs. These factors include the severe global recession, market conditions in the lodging industry, improving our operating results, the successful implementation of our portfolio improvement strategy, our ability to extend the maturity dates of our other mortgage debt as it matures and our ability to obtain third party sources of capital on favorable terms as needed.
If we default on our mortgage debt our lenders could seek to foreclose on the properties securing the debt, which could cause our loss of any anticipated income and cash flow from, and our invested capital in, the hotels. Similarly, we could lose the right to operate hotels under nationally recognized brand names, and one or more of our franchise agreements could be terminated leading to additional defaults and acceleration under other loan agreements as well as obligations to pay liquidated damages if we do not find a suitable replacement franchisor. In addition, we could be required to utilize an increasing percentage of our cash flow to service any remaining debt or any new debt incurred with a refinancing, which would further limit our cash flow available to fund business operations and our strategic plan. If we are unable to refinance or extend the maturity of our mortgage debt and maintain sufficient cash flow to fund our operations, we may be forced to restructure or significantly curtail our operations or to seek protection from our lenders. See “Item 1A. Risk Factors” for further discussion of conditions that could adversely affect our estimates of future liquidity needs and sources of working capital.
Cash Flow
Discontinued operations were not segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the balance sheets and related statements of operations
Operating activities
Operating activities generated cash of $27.4 million in 2008 and $36.9 million in 2007. The decrease in cash generated by operations is attributable to lower revenues and operating margins, driven by the economic recession. Operating activities generated cash of $35.6 million in 2006.
Investing activities
Investing activities used $13.6 million of cash in 2008, but generated $30.5 million in 2007. We expended $47.2 million in capital improvements in 2008 compared to $41.5 million in 2007. Net proceeds from the sale of assets were $24.1 million in 2008 and $78.0 million in 2007. In 2007, we paid $16.4 million to acquire the minority partners’ interests in two of our hotels. Withdrawals from capital expenditure reserves with our lenders totaled
$5.2 million in 2008 and $4.9 million in 2007. In 2008, we received $4.1 million of net insurance proceeds for property damage claims primarily related to one hotel damaged by fire, offset in part by casualty costs at a hotel that was damaged by Hurricane Ike. In 2007, we received $0.1 million in advances (net of related expenditures) for property damage claims primarily related to one hotel damaged by fire. Restricted cash decreased $0.2 million in 2008 compared to $5.4 million in 2007.
Investing activities provided $0.8 million of cash in 2006. We expended $35.8 million for capital improvements and withdrew $9.4 million from capital expenditure reserves with our lenders. We received $22.9 million in net proceeds from the sale of assets and were advanced $3.2 million (net of related expenditures) for property damage claims primarily related to one hotel damaged by fire and three of our hurricane-damaged hotels. Restricted cash decreased $1.2 million in 2006.
Financing activities
Financing activities used cash of $47.6 million in 2008 compared with $61.5 million in 2007. In 2008, we purchased $19.9 million of treasury stock and made principal payments of $26.8 million, including $16.9 million to partially defease two of the Company’s mortgage loans and a $5.5 million payment to release one hotel as collateral in order to sell the hotel.
In 2007, we received $130.0 million in gross proceeds associated with the April 2007 refinancing, which is described below, and used the net proceeds to pay off existing debt. We made principal payments of $169.4 million, including the payoff of five loans which had reached their scheduled maturity dates and the payoff of existing debt in conjunction with the refinancing and/or the sale of encumbered assets. In addition, we purchased $16.8 million of treasury stock and paid defeasance costs of $4.2 million.
In 2006, we refinanced mortgages on the Holiday Inn Express Palm Desert, Crowne Plaza Worcester, Radisson Phoenix, Crowne Plaza Pittsburgh and the Crowne Plaza Phoenix Airport, resulting in gross proceeds of $45.0 million. Additionally, we made $49.8 million in principal payments and purchased $2.7 million of treasury stock.
Debt and contractual obligations
The following table provides information about our debt and certain other long-term contractual obligations:
(1)
Discussed in Note 9 in the notes to our consolidated financial statements.
(2)
As discussed in Note 9 in the notes to our consolidated financial statements, the Goldman Sachs loan matures in 2009, with the option to extend the loan for three additional one-year periods. Management has the intent and ability to exercise the first extension option, which will extend the maturity to 2010. Two further one-year extension options remain.
(3)
As discussed in Note 9 in the notes to our consolidated financial statements, one IXIS loan matured in December 2007. The Company exercised the first and second one-year extension options, which extended the maturity to December 2009. The table assumes the remaining extension option will be exercised, which will extend the maturity to December 2010. The second IXIS loan matured in March 2008. As of December 31, 2008, the Company had exercised the first of three one-year extension options, which extended the maturity to March 2009. The table assumes the second extension option (which was subsequently exercised in March 2009) will be exercised, which will extend the maturity to March 2010. One further one-year extension option remains.
(4)
Comprised of unsecured notes payable of $42,000 for pre-petition bankruptcy related tax obligations and $1.3 million of other obligations.
(5)
The computation of interest expense related to our variable rate debt assumes a LIBOR of 4.60% for all future periods.
We did not include franchise fees in the table above because substantially all of our franchise fees vary with revenues. Franchise fees for 2008 related to continuing operations are shown under the caption “Franchise Agreements and Capital Expenditures” Below.
Debt and Contractual Obligations
On June 25, 2004, we entered into four fixed rate loans with Merrill Lynch Mortgage Lending, Inc. (“Merrill Lynch”). The four loans, which totaled $260 million at inception, bear a fixed interest rate of 6.58%. Except for certain defeasance provisions, we may not prepay the loans except during the 60 days prior to maturity. One of the loans was defeased in 2007. The remaining three loans are currently secured by 17 hotels. The loans are not cross-collateralized. Each loan is non-recourse; however, we have agreed to indemnify Merrill Lynch in certain situations, such as fraud, waste, misappropriation of funds, certain environmental matters, asset transfers in violation of the loan agreements, or violation of certain single-purpose entity covenants. In addition, each loan will become full recourse in certain limited cases such as bankruptcy of a borrower or Lodgian. The Merrill Lynch loans, which totaled approximately $128 million at December 31, 2008, are scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. To address the pending maturities in July 2009, we are also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. To date, we have been unable to secure refinancing and, in light of the current credit markets generally and the real estate credit markets specifically, we expect it to remain difficult to refinance the mortgage debt prior to the July 2009 maturity date. We cannot currently predict whether these efforts will be successful. The outstanding loan balance is classified as current in the Consolidated Balance Sheet as of December 31, 2008.
On November 10, 2005, we entered into a $19.0 million loan agreement with IXIS Real Estate Capital Inc. (“IXIS”), which is secured by the Holiday Inn Hilton Head, SC. The loan agreement has a two-year initial term with three one-year extension options which are exercisable provided the loan is not in default. The loan bears a floating interest rate of 290 basis points above LIBOR. In December 2008, we exercised the second extension option, which extended the maturity to December 2009. We contemporaneously entered into a 24-month interest rate cap agreement, which effectively caps the interest rate at 7.90%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement. The loan is classified as long-term in the Consolidated Balance Sheet as of December 31, 2008 since management has the intent and ability to exercise the third extension option.
On February 1, 2006, we entered into a $17.4 million loan agreement with Wachovia Bank, National Association (“Wachovia”), which is secured by the Crowne Plaza Worcester, MA. The loan agreement has a five year term and bears a fixed rate of interest of 6.04%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement.
On February 1, 2006, we entered into a $6.1 million loan agreement with Wachovia, which is secured by the Holiday Inn Palm Desert, CA. The loan agreement has a five year term and bears a fixed rate of interest of 6.04%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement.
On March 1, 2006, we entered into a $21.5 million loan agreement with IXIS, which is secured by the Radisson Phoenix and Crowne Plaza Phoenix Airport hotels located in Phoenix, AZ along with the Crowne Plaza Pittsburgh Airport hotel located in Coraopolis, PA. The loan agreement has a two-year initial term with three one-year extension options which are exercisable provided the loan is not in default. The loan bears a floating rate of interest which is 295 basis points above LIBOR. In March 2008, we exercised the first of three one-year extension options, which extended the maturity to March 2009. In March 2009, we exercised the second extension option, which extended the loan maturity to March 9, 2010. We contemporaneously entered into a 24-month interest rate cap agreement, which effectively caps the interest rate at 7.45%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement. The loan is classified as long-term in the Consolidated Balance Sheet as of December 31, 2008 since management has the intent and ability to exercise the remaining extension option.
In April 2007, we entered into a $130 million loan agreement (the “Goldman Loan”) with Goldman Sachs Commercial Mortgage Capital, L.P. The Goldman Loan is secured by ten hotels and has an initial term of two years, with the option to extend the loan for three additional one-year periods. The loan bears interest at LIBOR plus 150 basis points. We purchased an interest rate protection agreement which caps the maximum interest rate at 8.5%. The loan is classified as long-term in the Consolidated Balance Sheet as of December 31, 2008 since management has the intent and ability to exercise the first extension option.
In June 2008, we paid $5.5 million on one of the Merrill Lynch fixed rate loans to release as collateral the former Holiday Inn Marietta, GA, which was subsequently sold.
In September 2008, we defeased $9.4 million of the $45.6 million balance of one of the Merrill Lynch fixed rate loans, which was secured by seven hotels. We purchased $9.7 million of US Government treasury securities (“Treasury Securities”) to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the hotel that originally served as collateral for the defeased portion of the loan. The hotel was classified as held for sale. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because we continue to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Consolidated Balance Sheet. As a result of the defeasance, we recorded a $0.5 million Loss on Debt Extinguishment in the statement of operations.
In October 2008, we defeased $7.5 million of the $60.7 million balance of one of the Merrill Lynch fixed rate loans, which was secured by eight hotels. We purchased $7.8 million of Treasury Securities to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the hotel that originally served as collateral for the defeased portion of the loan. The hotel was classified as held for sale and has since been sold. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because we continue to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Consolidated Balance Sheet. As a result of the defeasance, we recorded a $0.4 million Loss on Debt Extinguishment in the statement of operations. The entire amount was recorded in discontinued operations.
Summary of Long-term Debt
Set forth below, by debt pool, is a summary of our long-term debt (including current portion) with the applicable interest rates and the carrying values of the property and equipment which collateralize the long-term debt:
(1)
The rate represents the annual effective weighted average cost of debt at December 31, 2008.
(2)
Long-term debt obligations at December 31, 2008 and December 31, 2007 include the current portion of $125.0 million and $5.1 million, respectively.
Franchise Agreements and Capital Expenditures
We benefit from the superior brand qualities of Crowne Plaza, Holiday Inn, Marriott, Hilton and other brands. Included in the benefits of these brands are their reputation for quality and service, revenue generation through their central reservation systems, access to revenue through the global distribution systems, guest loyalty programs and brand Internet booking sites.
To obtain these franchise affiliations, we enter into franchise agreements with hotel franchisors that generally have terms of 10 to 20 years. 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 4.0% to 6.0% of gross room revenues, advertising/marketing fees range from 1.0% to 2.5%, reservation system fees range from 1.0% to 3.2%, and club and restaurant fees from 0.1% to 3.2%. 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 6.5% to 10.0% of gross room revenues. In 2008, franchise fees for our continuing operations were 9.6% of room revenues.
These costs vary with revenues and are not fixed commitments. Franchise fees incurred (which are reported in other hotel operating costs on our Consolidated Statement of Operations) for the years ended December 31, 2008, 2007, and 2006 were as follows:
During the term of the 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. For example, the terms of four (three of which are held for sale and one of which is held for use as of March 1, 2009), three (all of which are held for use), and two (all of which are held for use) of the franchise agreements for our hotels are scheduled to expire in 2009, 2010, and 2011, respectively. As franchise agreements expire, we may apply for a franchise renewal or request a franchise extension. In connection with renewals, the franchisor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facilities, or the franchisor may elect not to renew the franchise. The costs incurred in connection with these agreements (excluding capital expenditures) are primarily monthly payments due to the franchisors based on a percentage of room revenues.
If we do not comply with the terms of a franchise agreement, following notice and an opportunity to cure, the franchisor has the right to terminate the agreement, which could lead to a default under one or more of our loan agreements, and which could materially and adversely affect us.
Prior to terminating a franchise agreement, franchisors are required to notify us of the areas of non-compliance and give us the opportunity to cure the non-compliance. In the past, we have been able to cure most cases of non-compliance and most defaults within the cure periods, and those events of non-compliance and defaults did not cause termination of our franchises or defaults on our loan agreements. If we perform an economic analysis of the hotel and determine that it is not economically feasible to comply with a franchisor’s requirements, we will either select an alternative franchisor, operate the hotel without a franchise affiliation or sell the hotel. However, terminating or changing the franchise affiliation of a hotel could require us to incur significant expenses, including liquidated damages, and capital expenditures. Our loan agreements generally prohibit a hotel from operating without a franchise.
Refer to “Item 1. Business, Franchise Affiliations” for the current status of our franchise agreements.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 was effective in financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position FAS 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted the provisions of SFAS No. 157 for financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements at least annually. Since the Company’s existing fair value measurements are consistent with the provisions of SFAS No. 157, and are not significant, the partial adoption did not have a material impact on the Company’s financial statements. We have not applied the provisions of SFAS No. 157 to non-financial assets, such as property and equipment, which are measured at fair value for
impairment assessment. The adoption of the deferred portion of SFAS No. 157 on January 1, 2009 is not expected to have a material impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115” (“SFAS No. 159”). This Statement provides an opportunity to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We did not elect the fair value option for the measurement of financial assets and financial liabilities.
In December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141(R) significantly changes the accounting for business combinations. Under this statement, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Additionally, SFAS No. 141(R) includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We have $64.1 million of deferred tax assets fully offset by a valuation allowance. The balance of the $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the effective date for SFAS No. 141(R), such release will affect the income tax provision in the period of release.
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No. 160”), which is an amendment to ARB No. 51 “Consolidated Financial Statements”. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We are in the process of evaluating the impact that the adoption of SFAS No. 160 will have on our results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment to SFAS No. 133.” The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. The Statement is effective for fiscal years and interim periods beginning after November 15, 2008. We are in the process of evaluating the additional disclosures required by SFAS No. 161.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”) to address whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as specified in FASB Statement No. 128, “Earnings per Share”. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. We do not expect the adoption of FSP EITF 03-6-1 to have a material impact on our results of operations and financial condition.
In June 2008, the FASB issued FASB Staff Position No. FAS 133-1 and FIN 45-4 “Disclosures about Credit Derivatives and Certain Guarantees - An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP No. FAS 133-1”) to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP
also clarifies the FASB’s intent about the effective date of SFAS No. 161. This FSP clarifies the FASB’s intent that the disclosures required by Statement 161 should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008. FSP No. FAS 133-1 is effective for financial statements issued for fiscal years ending after November 15, 2008. The adoption of FSP No. FAS 133-1 did not have a material impact on our disclosures, results of operations and financial condition.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risks on our variable rate debt. At December 31, 2008 and December 31, 2007, we had outstanding consolidated variable rate debt including debt related to assets held for sale of approximately $169.5 million and $170.0 million, respectively.
On November 10, 2005, we refinanced the mortgage on our Holiday Inn Hilton Head, SC property for $19.0 million. In December 2008, we exercised the second of three one year extension options associated with this loan. We contemporaneously entered into a 24-month interest rate cap agreement which allowed us to effectively cap the interest rate at LIBOR of 5.00% plus 2.9%. When LIBOR is below 5.00% there is no settlement from the interest rate cap. We are exposed to interest rate risks on this loan for increases in LIBOR up to 5.00%, but we are not exposed to increases in LIBOR above 5.00% because settlements from the interest rate caps would offset the incremental interest expense. The notional principle amount of the interest rate cap outstanding was $18.8 million at December 31, 2008.
On March 1, 2006, we entered into a $21.5 million loan agreement with IXIS. In March 2008, we exercised the first of three one-year extension options. We contemporaneously entered into a 12-month interest rate cap agreement, which effectively caps the interest rate at LIBOR of 5.50% plus 2.95%. When LIBOR is below 5.50% there is no settlement from the interest rate cap. We are exposed to interest rate risks on this loan for increases in LIBOR up to 5.50%, but we are not exposed to increases in LIBOR above 5.50% because settlements from the interest rate caps would offset the incremental interest expense. The notional principal amount of the interest rate cap outstanding was $21.3 million at December 31, 2008.
In April 2007, we entered into a $130.0 million loan agreement with Goldman Sachs Commercial Mortgage Capital, L.P. In order to manage our exposure to fluctuations in interest rates with this loan, we entered into a 24-month interest rate cap agreement, which allowed us to obtain the financing at a floating rate and effectively cap the interest at LIBOR of 7.00% plus 1.50%. When LIBOR is below 7.00% there is no settlement from the interest rate cap. We are exposed to interest rate risks on this loan for increases in LIBOR up to 7.00%, but we are not exposed to increases in LIBOR above 7.00% because settlements from the interest rate caps would offset the incremental interest expense. The notional principal amount of the interest rate cap outstanding was $130.0 million at December 31, 2008.
The aggregate fair value of the interest rate caps as of December 31, 2008 was approximately nil. The fair values of the interest rate caps are recognized in the accompanying balance sheet in other assets. Adjustments to the carrying values of the interest rate caps are reflected in interest expense.
As a result of having these interest rate caps, we believe that our interest rate risk at December 31, 2008 and December 31, 2007 was minimal. The impact on annual results of operations of a hypothetical one-point interest rate reduction as of December 31, 2008 would be a reduction in net income of less than $0.1 million. These derivative financial instruments are viewed as risk management tools. We do not use derivative financial instruments for trading or speculative purposes. However, we have not elected the hedging requirements of SFAS No. 133.
At December 31, 2008, approximately $169.5 million of our outstanding debt instruments were subject to changes in LIBOR. Without regard to additional borrowings under those instruments or scheduled amortization, the annualized effect of a twenty five basis point increase in LIBOR would be a reduction in income before income taxes of approximately $0.4 million. The fair value of the fixed rate mortgage debt (book value of $163.1 million) at December 31, 2008 is estimated at $166.4 million.
The nature of our fixed rate obligations does not expose us to fluctuations in interest payments. The impact on the fair value of our fixed rate obligations of a hypothetical one-point interest rate increase on the outstanding fixed-rate debt as of December 31, 2008 would be a reduction of approximately $1.4 million.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The Consolidated Financial Statements are included as a separate section of this report commencing on page.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements with accountants during the periods covered by this report on Form 10-K.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure, Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
As of December 31, 2008, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out under the supervision and with the participation of our management team, including our chief executive officer and our chief financial officer. Based upon that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management conducted an assessment, including testing, using the criteria in Internal Control- Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Nonetheless, as of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, concluded, as of the date of the evaluation, that our internal control over financial reporting was effective based on the criteria in the COSO Framework. The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the effectiveness of the company’s internal control over financial reporting as of December 31, 2008 which is included herein.
Changes in Internal Control Over Financial Reporting. There were no changes in internal control over financial reporting that occurred during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lodgian, Inc.
Atlanta, Georgia
We have audited the internal control over financial reporting of Lodgian, Inc. and its subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Lodgian, Inc. and its subsidiaries as of December 31, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2008 and our report dated March 11, 2009 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s ability to continue as a going concern.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 11, 2009
Item 9B.
Item 9B.
Other Information
Not applicable.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Information about our Directors and Executive Officers is incorporated by reference from the discussion in our proxy statement for the 2009 Annual Meeting of Shareholders.
Item 11.
Item 11.
Executive Compensation
Information about Executive Compensation is incorporated by reference from the discussion in our proxy statement for the 2009 Annual Meeting of Shareholders.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information about security ownership of certain beneficial owners and management is incorporated by reference from the discussion in our proxy statement for the 2009 Annual Meeting of Shareholders.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Information about certain relationships and transactions with related parties is incorporated by reference from the discussion in our proxy statement for the 2009 Annual Meeting of Shareholders.
Item 14.
Item 14.
Principal Accountant Fees and Services
Information about principal accountant fees and services is incorporated by reference from the discussion in our proxy statement for the 2009 Annual Meeting of Shareholders.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
(a)
(1) Our Consolidated Financial Statements are filed as a separate section of this report commencing on page:
(2) Financial Statement Schedule:
All Schedules are omitted because they are not applicable or required information is shown in the Consolidated Financial Statements or notes thereto.
(3) Exhibits:
The information called for by this paragraph is contained in the Exhibits Index of this report, which is incorporated herein by reference.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 11, 2009.
LODGIAN, INC.
By:
/s/ Peter T. Cyrus
Peter T. Cyrus
Interim President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on March 11, 2009.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements and schedule of the registrant and its subsidiaries are submitted herewith in response to Item 8:
All schedules are inapplicable, or have been disclosed in the Notes to Consolidated Financial Statements and, therefore, have been omitted.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lodgian, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of Lodgian, Inc. and its subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Lodgian, Inc. and its subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has been unable to refinance approximately $128 million of its debt on a long-term basis which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109),” on January 1, 2007, and the provisions of Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,” on January 1, 2006, based on the modified prospective application transition method.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 11, 2009
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See notes to consolidated financial statements.
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31,
1.
Summary of Significant Accounting Policies
Description of Business
Lodgian, Inc. is one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms according to Hotel Business. The Company is considered an independent owner and operator because it does not operate our hotels under its own name. The Company operates substantially all of its hotels under nationally recognized brands, such as “Crowne Plaza,”, “Four Points by Sheraton”, “Hilton,” “Holiday Inn,” “Marriott,” and “Wyndham”. As of March 1, 2009, the Company operated 41 hotels with an aggregate of 7,578 rooms, located in 23 states and Canada. Of the 41 hotels, 35 hotels, with an aggregate of 6,655 rooms, are held for use and the results of operations are classified in continuing operations, while 6 hotels, with an aggregate of 923 rooms, are held for sale and the results of operations of those hotels are classified in discontinued operations. The portfolio of hotels, all of which are consolidated in the Company’s financial statements, consists of:
•
40 hotels that are wholly owned and operated through subsidiaries; and
•
one hotel that is operated in a joint venture in the form of a limited partnership, in which a Lodgian subsidiary serves as the general partner, has a 51% voting interest and exercises control.
The hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale, upscale and upper upscale market segments of the lodging industry. Most of the Company’s hotels are under franchises obtained from nationally recognized hospitality franchisors. The Company operates 21 hotels under franchises obtained from InterContinental Hotels Group as franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn Express brands. The Company operates 12 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. An additional 7 hotels are operated under other nationally recognized brands and one hotel is non-branded. Management believes that franchising under strong national brands affords the Company many benefits such as guest loyalty and market share premiums.
Principles of Consolidation
The financial statements consolidate the accounts of Lodgian, its wholly-owned subsidiaries and a joint venture in which Lodgian has a controlling financial interest and exercises control. Lodgian believes it has control of a joint venture when it manages and has control of the joint venture’s assets and operations. The joint venture in which the Company exercises control and is consolidated in the financial statements is Servico Centre Associates, Ltd. (which owns the Crowne Plaza West Palm Beach, Florida). This joint venture is in the form of a limited partnership, in which a Lodgian subsidiary serves as the general partner and has a 51% voting interest and exercises control.
All intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as discussed in Note 9, approximately $128 million of the Company’s outstanding mortgage debt is scheduled to mature in July 2009 and the current severe economic recession has negatively impacted the Company’s operating results, which affects operating cash flows as well as the ability to refinance the maturing indebtedness. In the absence of an extension, refinancing or repayment of the July 2009 debt, these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s management has engaged mortgage bankers to facilitate the refinancing process and to assist in negotiations with prospective lenders. Management is also negotiating to extend the maturing mortgage debt. However, management can provide no assurance that the Company will be able
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
to refinance or extend the debt. The financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities or any other adjustments that may be necessary if the Company is unable to continue as a going concern.
Inventories
Linen inventories are carried at cost. When the Company has to change its linen inventory as a result of brand standard changes required by the franchisors, the Company writes-off the existing linen inventory carrying costs and establishes a new linen inventory carrying cost on the balance sheet. The Company determined that linen inventory, on average, has a useful life in excess of one year. As a result, the Company classifies the estimated long term portion of the linen inventory balance in other assets on the balance sheet.
The Company determined that most china, glass and silverware inventory has a useful life longer than one year. China, glass and silverware inventory is classified as long-term assets and is included in property and equipment, net.
Minority Interests
Minority interests represent the minority stockholders’ proportionate share of equity of joint ventures that are consolidated by the Company and are shown as “minority interests” in the Consolidated Balance Sheet. The Company allocates to minority interests their share of any profits or losses in accordance with the provisions of the applicable agreements. If the loss applicable to the minority interest exceeds the minority’s equity, the Company reports the entire loss in the consolidated statement of operations.
Property and Equipment
Property and equipment is stated at depreciated cost, less adjustments for impairment, where applicable. Capital improvements are capitalized when they extend the useful life of the related asset. All repair and maintenance items are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful life of the asset. The Company capitalizes interest costs incurred during the renovation and construction of capital assets.
Management periodically evaluates the Company’s property and equipment to determine whether events or changes in circumstances indicate that a possible impairment in the carrying values of the assets has occurred. In general, the carrying value of a held for use 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 value. In determining the undiscounted cash flows, management considers 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 recorded as impairment expense in the Consolidated Statement of Operations. Management’s estimate of the fair value of an asset is generally based on a number of factors, including letters of intent or other indications of value from prospective buyers, or, in the absence of such, the opinions of third-party brokers or appraisers and discounted cash flows. While management may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, the Company’s estimate is ultimately based on management’s determination and the Company remains responsible for the impact of the estimate on the financial statements. If the estimated fair value exceeds the carrying value, no adjustment is recorded.
Additionally, if an asset is replaced prior to the end of its useful life, the remaining net book value is recorded as impairment expense. See Note 6 for further discussion of the Company’s charges for asset impairment.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Assets Held for Sale and Discontinued Operations
Management considers an asset held for sale when the following criteria per Statement of Financial Accounting Standards, (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” are met:
a) Management commits to a plan to sell the asset;
b) The asset is available for immediate sale in its present condition;
c) An active marketing plan to sell the asset has been initiated at a reasonable price;
d) The sale of the asset is probable within one year; and,
e) It is unlikely that significant changes to the plan to sell the asset will be made.
Upon designation of a property as an asset held for sale and in accordance with the provisions of SFAS No. 144, the Company records the carrying value of the property at the lower of its carrying value or its estimated fair market value, less estimated selling costs, and the Company ceases depreciation of the asset.
All losses and gains on assets sold and held for sale (including any related impairment charges) are included in “income (loss) from discontinued operations before income taxes” in the Consolidated Statement of Operations. All assets held for sale and the liabilities related to these assets are separately disclosed in the Consolidated Balance Sheet. The amount the Company will ultimately realize could differ from the amount recorded in the financial statements. See Note 3 for details of assets and liabilities, operating results, and impairment charges of the discontinued operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash consisted of amounts reserved for letter of credit collateral, a deposit required by the Company’s bankers, and cash reserves pursuant to loan agreements.
Fair Values of Financial Instruments
The fair value of financial instruments is estimated using market trading information. Where published market values are not available, management estimates fair values based upon quotations received from broker/dealers or interest rate information for similar instruments. Changes in fair value of the Company’s interest rate cap agreements are recognized in the Consolidated Statement of Operations. Refer to Note 9 for further information regarding the Company’s interest rate cap agreements.
The fair values of current assets and current liabilities are assumed equal to their reported carrying amounts. The fair values of the Company’s fixed rate long-term debt are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Concentration of Credit Risk
Concentration of credit risk associated with cash and cash equivalents is considered low due to the credit quality of the issuers of the financial instruments held by the Company and due to their short duration to maturity. Accounts receivable are primarily from major credit card companies, airlines and other travel-related companies. The Company performs ongoing evaluations of its significant credit customers and generally does not require
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
collateral. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential credit losses. At December 31, 2008 and 2007, allowances were $0.3 million.
Concentration of Market Risk
Adverse economic conditions in markets in which the Company has multiple hotels, such as Pittsburgh, Baltimore/Washington, D.C. and Phoenix, could significantly and negatively affect the Company’s revenues and results of operations. The eight continuing operations hotels in these markets combined provided 29%, 30%, and 29% of the Company’s continuing operations revenues in 2008, 2007, and 2006, respectively. Similarly, the same group of hotels provided 28% of the Company’s continuing operations available rooms in 2008, 2007, and 2006. As a result of the geographic concentration of these hotels, the Company is particularly exposed to the risks of downturns in these markets, which could have a major adverse effect on the Company’s profitability.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes,” which requires the use of the liability method of accounting for deferred income taxes and FIN 48 “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements. See Note 11 for the components of the Company’s deferred taxes. As a result of the Company’s history of losses, the Company has provided a full valuation allowance against its deferred tax asset.
Earnings per Common and Common Equivalent Share
Basic earnings per share is calculated based on the weighted average number of common shares outstanding during the period. Dilutive earnings per common share includes the Company’s outstanding stock options, nonvested stock, restricted stock, restricted stock units, and warrants to acquire common stock, if dilutive. See Note 12 for a computation of basic and diluted earnings per share.
Stock-Based Compensation
The Company adopted the provisions of SFAS No. 123(R) effective January 1, 2006 using the modified-prospective transition method. Under the modified-prospective method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date, and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain nonvested on the effective date.
In accordance with FASB Staff Position FAS 123(R)-3, the Company made a one-time election to calculate the APIC pool on the date of adoption using the simplified method, the impact of which was not material to the Company’s financial position and results of operation.
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares on the date of grant. No stock options were granted in 2006, 2007 and 2008.
The disclosures required by SFAS No. 123(R) are located in Note 2.
Revenue Recognition
Revenues are recognized when the services are rendered. Revenues are comprised of room, food and beverage and other revenues. Room revenues are derived from guest room rentals, whereas food and beverage revenues primarily include sales from hotel restaurants, room service and hotel catering and meeting rentals. Other revenues include charges for guests’ long-distance telephone service, laundry and parking services, in-room movie services, vending machine commissions, leasing of hotel space and other miscellaneous revenues.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Foreign Currency Translation
The financial statements of the Canadian operation have been translated into U.S. dollars in accordance with SFAS No. 52, “Foreign Currency Translation.” All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet dates. Income statement amounts have been translated using the average rate for the period. The gains and losses resulting from the changes in exchange rates from year to year are reported in “accumulated other comprehensive income” in the Consolidated Statements of Shareholders’ Equity (Deficit). The effects on the statements of operations of transaction gains and losses were insignificant for all years presented.
Operating Segments
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires the disclosure of selected information about operating segments. Based on the guidance provided in the standard, the Company has determined that its business of ownership and management of hotels is conducted in one reporting segment. During 2008, the Company derived approximately 98% of its consolidated revenues from hotels located within the United States and the balance from the Company’s one hotel located in Windsor, Canada.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Self-insurance
The Company is self-insured up to certain limits with respect to employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers’ compensation and automobile liability. Refer to Note 13 for further information.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 was effective in financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position FAS 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted the provisions of SFAS No. 157 for financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements at least annually. Since the Company’s existing fair value measurements are consistent with the provisions of SFAS No. 157, and are not significant, the partial adoption did not have a material impact on the Company’s financial statements. The Company has not applied the provisions of SFAS No. 157 to non-financial assets, such as property and equipment, which are measured at fair value for impairment assessment. The adoption of the deferred portion of SFAS No. 157 on January 1, 2009 is not expected to have a material impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115” (“SFAS No. 159”). This Statement provides an opportunity to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company did not elect the fair value option for its financial assets and financial liabilities.
In December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141(R) significantly changes the accounting for business combinations. Under this statement, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Additionally, SFAS No. 141(R) includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company has $64.1 million of deferred tax assets fully offset by a valuation allowance. The balance of $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the adoption of SFAS 141(R), such release will affect the income tax provision in the period of release.
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No. 160”), which is an amendment to ARB No. 51 “Consolidated Financial Statements”. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is in the process of evaluating the impact that the adoption of SFAS No. 160 will have on the results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment to SFAS No. 133.” The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. The Statement is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is in the process of evaluating the additional disclosures required by SFAS No. 161.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”) to address whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as specified in FASB Statement No. 128, “Earnings per Share”. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP EITF 03-6-1 to have a material impact on its results of operations and financial condition.
In June 2008, the FASB issued FASB Staff Position No. FAS 133-1 and FIN 45-4 “Disclosures about Credit Derivatives and Certain Guarantees - An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP No. FAS 133-1”) to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also clarifies the FASB’s intent about the effective date of SFAS No. 161. This FSP clarifies the FASB’s intent that the disclosures required by Statement 161 should be provided for any reporting period (annual or quarterly interim)
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
beginning after November 15, 2008. FSP No. FAS 133-1 is effective for financial statements issued for fiscal years ending after November 15, 2008. The adoption of FSP No. FAS 133-1 did not have a material impact on its disclosures, results of operations and financial condition.
2.
Stock-Based Compensation
On November 25, 2002, the Company adopted a Stock Incentive Plan which replaced the stock option plan previously in place. In accordance with the Stock Incentive Plan, and prior to the completion of the secondary offering of common stock on June 25, 2004, the Company was permitted to grant awards to acquire up to 353,333 shares of common stock to its directors, officers, or other key employees or consultants as determined by a committee appointed by the Board of Directors. Awards may consist of stock options, stock appreciation rights, stock awards, performance share awards, section 162(m) awards or other awards determined by the committee. The Company cannot grant stock options pursuant to the Stock Incentive Plan at an exercise price which is less than 100% of the fair market value per share on the date of the grant. Vesting, exercisability, payment and other restrictions pertaining to any awards made pursuant to the Stock Incentive Plan are determined by the committee. At the annual meeting held on March 19, 2004, stockholders approved an amendment and restatement of the Stock Incentive Plan to, among other things, increase the number of shares of common stock available for issuance hereunder by 29,667 immediately and, in the event the Company consummated a secondary offering of its common stock, by an additional amount to be determined pursuant to a formula. With the completion of the secondary offering of common stock on June 25, 2004, the total number of shares available for issuance under the Stock Incentive Plan increased to 3,301,058 shares.
A summary of the activity of the Stock Incentive Plan for the year ended December 31, 2008 is as follows:
Stock Options
The outstanding stock options generally vest in three equal annual installments and expire ten years from the grant date. As of December 31, 2008, all outstanding stock options were fully vested. The exercise price of the awards is the average of the high and low market prices on the date of the grant. The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes-Merton option pricing model. There were no stock option grants in 2008, 2007 and 2006.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of stock option activity during 2008, 2007, and 2006 is summarized below:
The amount of cash received from the exercise of stock options during 2008, 2007, and 2006 was approximately $23,000, $0.6 million, and $1.7 million, respectively. The aggregate intrinsic value of stock options exercised during 2008, 2007, and 2006 was approximately $2,000, $0.2 million, and $0.6 million, respectively.
A summary of stock options outstanding and exercisable (vested) at December 31, 2008 is as follows:
Restricted Stock
On January 31, 2006, the Company granted 12,413 shares of restricted stock to certain employees, of which 4,719 shares were withheld to satisfy tax obligations and were included in the treasury stock balance of the Company’s balance sheet. The shares vested immediately, but contained certain restrictions regarding sale for a period of one year. The shares were valued at $12.88, the average of the high and low market prices of the Company’s common stock on the date of the grant. The aggregate value of the grant was recorded as compensation expense in January 2006.
No restricted stock was granted in 2007 and 2008.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of restricted stock activity during 2007 and 2006 is summarized below:
The total fair value of restricted stock that vested during 2006 was $0.2 million.
Nonvested Stock
On January 22, 2008, the Company granted 76,500 shares of nonvested stock awards to certain employees. The shares vest in two equal annual installments commencing on January 22, 2009. The shares were valued at $8.90, the closing price of the Company’s common stock on the date of the grant.
On January 29, 2008, Edward J. Rohling, the Company’s President and Chief Executive Officer, resigned. Upon his resignation, Mr. Rohling’s nonvested stock awards immediately vested. As a result, the Company recorded $0.1 million in accelerated stock compensation expense.
On February 12, 2008, the Company granted 24,000 shares of nonvested stock awards to non-employee members of the Board of Directors. The shares vest in three equal annual installments commencing on January 30, 2009. The shares were valued at $8.68, the closing price of the Company’s common stock on the date of the grant.
On April 11, 2008, the committee approved the Lodgian, Inc. Amended and Restated Executive Incentive Plan (the “Revised Plan”). The Revised Plan provides for potential nonvested stock awards to certain of the Company’s key employees, as determined by the committee. On February 4, 2009, the Company awarded 286,503 shares of nonvested stock awards for the 2008 calendar year pursuant to the terms of the Revised Plan. The shares vest over two years. The shares were valued at $2.64, the closing price of the Company’s common stock on the date of the award. The Company recorded compensation expense totaling $0.2 million in 2008.
On February 12, 2009, the Company granted 20,000 shares of nonvested stock awards to non-employee members of the Board of Directors. The shares vest in three equal annual installments commencing on January 30, 2010. The shares were valued at $2.38, the closing price of the Company’s common stock on the date of the grant.
In April 2008, one member of the Board of Directors did not stand for re-election. The Board elected to accelerate the vesting of the member’s nonvested stock awards. In May 2008, a key employee was terminated from the Company. As part of the separation agreement, the Company accelerated the vesting of nonvested stock awards. The aggregate value of both grants, $0.1 million, was fully expensed in 2008.
In September 2008, three employees were terminated from the Company. Pursuant to the terms of their original award agreements, these employees were entitled to acceleration of the vesting of 4,001 shares of previously issued nonvested stock. The aggregate value of the grants, $34,000, was fully expensed in 2008.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of nonvested stock activity during 2008, 2007, and 2006 is summarized below:
The total fair value of nonvested stock awards that vested during 2008, 2007, and 2006, was $0.6 million, $1.2 million, and $0.5 million, respectively.
A summary of unrecognized compensation expense and the remaining weighted-average amortization period as of December 31, 2008 is as follows:
Compensation expense for the years ended December 31, 2008, 2007 and 2006 is as follows:
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3.
Discontinued Operations
Dispositions
During 2006, the Company sold six hotels and one land parcel for an aggregate sales price of $27.1 million, $5.0 million of which was used to paydown debt. A list of the properties sold in 2006 is summarized below:
•
On March 9, 2006, the Company sold the Fairfield Inn, a 105 room hotel located in Jackson, TN.
•
On April 3, 2006, the Company sold a land parcel located in Mt. Laurel, NJ.
•
On April 25, 2006, the Company sold the Holiday Inn, a 146 room hotel located in Pittsburgh, PA.
•
On October 24, 2006, the Company sold the Holiday Inn, a 167 room hotel located in Valdosta, GA.
•
On October 24, 2006, the Company sold the Azalea Inn, a 108 room hotel located in Valdosta, GA.
•
On November 28, 2006, the Company sold its rights to the ground lease of the former Holiday Inn located in Jekyll Island, GA.
•
On December 1, 2006, the Company sold the Quality Inn, a 205 room hotel located in Metairie, LA.
The Company realized gains of approximately $3.0 million in 2006 from the sale of these assets. Additionally in 2006, the Company surrendered two Holiday Inn hotels, located in Lawrence and Manhattan, KS, to the Trustee pursuant to the settlement agreement entered into in August 2005, and the venture which owns the Holiday Inn City Center Columbus, OH deeded the hotel to the lender, a minority-interest hotel that was accounted for under the equity method of accounting.
During 2007, the Company sold 23 hotels for an aggregate sales price of $82.2 million, $2.0 million of which was used to pay down debt. A list of the properties sold in 2007 is summarized below:
•
On January 15, 2007, the Company sold the University Plaza, a 186 room hotel located in Bloomington, IN.
•
On March 9, 2007, the Company sold the Holiday Inn, a 130 room hotel located in Hamburg, NY.
•
On June 13, 2007, the Company sold the following 16 hotels:
•
Holiday Inn, a 202 room hotel located in Sheffield, AL
•
Clarion, a 393 room hotel located in Louisville, KY
•
Crowne Plaza, a 275 room hotel located in Cedar Rapids, IA
•
Augusta West Inn, a 117 room hotel located in Augusta, GA
•
Holiday Inn, a 201 room hotel located in Greentree, PA
•
Holiday Inn, a 189 room hotel located in Lancaster East, PA
•
Holiday Inn, a 244 room hotel located in Lansing, MI
•
Holiday Inn, a 152 room hotel located in Pensacola, FL
•
Holiday Inn, a 228 room hotel located in Winter Haven, FL
•
Holiday Inn, a 100 room hotel located in York, PA
•
Holiday Inn Express, a 112 room hotel located in Dothan, AL
•
Holiday Inn Express, a 122 room hotel located in Pensacola, FL
•
Park Inn, a 126 room hotel located in Brunswick, GA
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•
Quality Inn, a 102 room hotel located in Dothan, AL
•
Ramada Plaza, a 297 room hotel located in Macon, GA
•
Ramada Inn, a 197 room hotel located in North Charleston, SC
•
On July 12, 2007, the Company sold the Holiday Inn, a 159 room hotel located in Clarksburg, WV.
•
On July 20, 2007, the Company sold the Holiday Inn, a 208 room hotel located in Fort Wayne, IN.
•
On August 14, 2007, the Company sold the Holiday Inn, a 106 room hotel located in Fairmont, WV.
•
On December 18, 2007, the Company sold the Holiday Inn, a 146 room hotel located in Jamestown, NY.
•
On December 27, 2007, the Company sold the Vermont Maple Inn, a 117 room hotel located in Burlington, VT.
The Company realized gains of approximately $4.0 million in 2007 from the sale of these assets.
During 2008, the Company sold 5 hotels for an aggregate sales price of $25.0 million, $7.9 million of which was used to pay down debt. A list of the properties sold in 2008 is summarized below:
•
On April 17, 2008, the Company sold the Holiday Inn, a 158 room hotel located in Frederick, MD.
•
On May 13, 2008, the Company sold the former Holiday Inn, a 156 room hotel located in St. Paul, MN.
•
On August 14, 2008, the Company sold the Holiday Inn, a 193 room hotel located in Marietta, GA
•
On October 9, 2008, the Company sold the Holiday Inn, a 127 room hotel located in Glen Burnie, MD
•
On December 16, 2008, the Company sold the Holiday Inn, a 217 room hotel located in Frisco, CO
The Company realized gains of approximately $6.1 million in 2008 from the sale of these assets.
Assets Held for Sale and Discontinued Operations
In accordance with SFAS No. 144, the Company has included the results of hotel assets sold during 2008, 2007 and 2006 as well as the hotel assets held for sale at December 31, 2008, December 31, 2007 and December 31, 2006, including any related impairment charges, in discontinued operations in the Consolidated Statements of Operations. The assets held for sale at December 31, 2008 and December 31, 2007 and the liabilities related to these assets are separately disclosed in the Consolidated Balance Sheets. All losses and gains on assets sold and held for sale (including any related impairment charges) are included in “Income (loss) income from discontinued operations before income taxes” in the Consolidated Statement of Operations. The amount the Company will ultimately realize on these asset sales could differ from the amount recorded in the financial statements.
The Company recorded impairment on assets held for sale in 2008, 2007 and 2006. Consistent with the accounting policy on asset impairment, and in accordance with SFAS No. 144, the reclassification of assets from held for use to held for sale requires a determination of fair value less costs of sale. The Company’s estimate of the fair value of an asset is generally based on a number of factors, including letters of intent or other indications of value from prospective buyers, or, in the absence of such, the opinions of third-party brokers or appraisers. While the Company may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, the Company’s estimate is ultimately based on the management’s determination and the Company remains responsible for the impact of the estimate on the financial statements. The Company records impairment charges and writes down respective hotel asset carrying values if the carrying values exceed the estimated selling prices less costs to
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
sell. As a result of these evaluations, during 2008, the Company recorded impairment charges totaling $10.8 million on 6 hotels as follows (amounts below are rounded individually):
•
$6.7 million on the Holiday Inn Select in Windsor, Ontario, Canada to reflect the current estimated selling price, net of selling costs;
•
$1.9 million on the Hilton Northfield, MI to reflect the current estimated selling price, net of selling costs;
•
$1.7 million on the Holiday Inn East Hartford, CT to reflect the current estimated selling price, net of selling costs;
•
$0.2 million on the closed French Quarter Suites Memphis, TN to reflect the current estimated selling price, net of selling costs;
•
$0.1 million on the former Holiday Inn St. Paul, MN to record the final disposition of the hotel; and
•
$0.1 million to record the final disposition of the Holiday Inn Frederick, MD as well as the disposal of replaced assets at various hotels;
In 2007, the Company recorded impairment charges totaling $9.9 million on 7 hotels as follows (amounts below are rounded individually):
•
$3.3 million on the Hilton Northfield, MI to reflect the estimated selling price;
•
$1.6 million on the Holiday Inn Select in Windsor, Ontario, Canada to reflect the estimated selling price;
•
$1.8 million on the Holiday Inn Frederick, MD to reflect the estimated selling price;
•
$1.3 million on the Holiday Inn Clarksburg, WV to reflect the estimated selling price less costs to sell, and to record the final disposition of the hotel;
•
$0.8 million on the Vermont Maple Inn Colchester, VT to reflect the estimated selling price less costs to sell, and to record the final disposition of the hotel;
•
$0.6 million on the Holiday Inn Jamestown, NY to reflect the estimated selling price less costs to sell, and to record the final disposition of the hotel;
•
$0.1 million on the University Plaza Bloomington, IN to record the final disposition of the hotel; and
•
$0.4 million to record the disposal of replaced assets at various hotels.
In 2006, the Company recorded impairment charges totaling $23.2 million on 16 hotels as follows (amounts below are rounded individually):
•
$3.9 million on the Holiday Inn Manhattan, KS to record the loss on disposal of fixed assets;
•
$2.2 million on the Holiday Inn Lawrence, KS to record the loss on disposal of fixed assets;
•
$1.4 million on the Holiday Inn Sheffield, AL which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.3 million on the Holiday Inn McKnight, PA to reflect the lowered estimated selling price less costs to sell, the write-off of capital improvements for franchisor compliance that did not add incremental value and the final disposition of the hotel;
•
$0.1 million on the Holiday Inn Valdosta, GA to reflect the estimated selling costs of the sale as this hotel was identified for sale during 2006, and to reflect the final disposition of the hotel;
•
$0.1 million on the Azalea Inn Valdosta, GA to reflect the estimated selling costs of the sale as this hotel was identified for sale during 2006, and to reflect the final disposition of the hotel;
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•
$0.7 million on the University Plaza Bloomington, IN, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$1.3 million on the Ramada Plaza Macon, GA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less cost to sell;
•
$2.1 million on the Holiday Inn University Mall, FL, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$1.8 million on the Holiday Inn Express Pensacola, FL, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.8 million on the Holiday Inn Greentree, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.2 million on the Holiday Inn York, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.9 million on the Holiday Inn Lancaster, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$6.4 million on the Holiday Inn Lansing, MI, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.6 million on the Holiday Inn Clarksburg, WV, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
•
$0.1 million on the Holiday Inn Jekyll Island, GA to record the disposal costs of furniture, fixtures and equipment incurred during the closing of the hotel; and
•
$0.3 million to record the disposal of replaced assets at various hotels.
In January 2008, the Company reclassified an additional 9 hotels as held for sale in accordance with SFAS No. 144. In May 2008, the Company reclassified the former Holiday Inn Marietta, GA to held for sale. In June 2008, the Company reclassified the Crowne Plaza Worcester, MA, from held for sale to held for use. Due to current market conditions, the Company believes that investing capital into the hotel using funds currently held in escrow by the lender will generate a better return than selling the hotel at a reduced price. The Company recorded an impairment charge of $4.8 million, which is included in income from continuing operations in the Company’s Consolidated Statement of Operations.
Assets held for sale consist primarily of property and equipment, net of accumulated depreciation. Liabilities related to assets held for sale consist primarily of accounts payable, other accrued liabilities and long term debt. At December 31, 2008, the held for sale portfolio consisted of the following 6 hotels:
•
French Quarter Suites Memphis, TN
•
Hilton Northfield, MI
•
Holiday Inn Cromwell Bridge, MD
•
Holiday Inn East Hartford, CT
•
Holiday Inn Phoenix, AZ
•
Holiday Inn Select Windsor, Ontario, Canada
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary balance sheet information for assets held for sale is as follows:
Summary statement of operations information for discontinued operations for the years ended December 31, 2008, 2007 and 2006 is as follows:
In addition to the assets held for sale listed above, the results of operations related to all of the hotels that were sold prior to December 31, 2008 were included in the statements of operations for discontinued operations.
Discontinued operations were not segregated in the Consolidated Statements of Cash Flows. Therefore, amounts for certain captions will not agree with respective data in the Consolidated Balance Sheets and related Consolidated Statements of Operations.
4.
Accounts Receivable
At December 31, 2008 and December 31, 2007, accounts receivable, net of allowances consisted of the following:
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5.
Prepaid Expenses and Other Current Assets
At December 31, 2008 and December 31, 2007, prepaid expenses and other current assets consisted of the following:
6.
Property and Equipment, net
At December 31, 2008 and December 31, 2007, property and equipment, net consisted of the following:
During 2008, the Company recorded $9.5 million of impairment losses related to assets held for use. Of this amount, $4.7 represented the write-off of assets that were replaced and had remaining book value. The remaining $4.8 million represented the write-down of the Crowne Plaza Worcester, MA to its estimated fair value upon reclassification to held for use in accordance with SFAS No. 144.
During 2007, the Company recorded $1.6 million of impairment losses related to assets held for use, which represented the write-off of assets that were replaced and had remaining book value.
During 2006, the Company recorded $0.6 million of impairment losses to write-off assets that were replaced in 2006 and had remaining book value.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7.
Other Assets
At December 31, 2008 and December 31, 2007, other assets consisted of the following:
Deferred franchise fees are amortized using the straight-line method over the terms of the related franchise, and deferred financing costs are amortized using the effective interest method over the related term of the debt.
Based on the balances at December 31, 2008, the five year amortization schedule for deferred financing and deferred loan costs is as follows:
8.
Other Accrued Liabilities
At December 31, 2008 and December 31, 2007, other accrued liabilities consisted of the following:
9.
Long-Term Liabilities
As of December 31, 2008, 35 of the Company’s 41 hotels are pledged as collateral for long-term obligations. Certain mortgage notes are subject to prepayment, yield maintenance, or defeasance obligations if the Company repays them prior to their maturity. Approximately 49% of the mortgage debt bears interest at fixed rates and approximately 51% of the debt is subject to floating rates of interest. The mortgage notes also subject the Company to certain financial covenants, including leverage and coverage ratios. As of December 31, 2008, the Company was in compliance with all of its financial debt covenants.
However, the Company’s continued compliance with its financial debt covenants depends substantially upon the financial results of the Company’s hotels. Given the severe economic recession, the Company could breach
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
certain financial covenants during 2009. The breach of a financial covenant, if not cured or waived by the lender, could lead, under the Merrill Lynch Fixed Rate loans and the Goldman Sachs loan, to the declaration of a “cash trap” by the lender whereby excess cash flows produced by the mortgaged hotels securing the applicable loan (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) could be placed in a restricted cash account. For the Merrill Lynch loans only, funds held in the restricted cash account may be used for capital expenditures reasonably approved by the loan servicer.
Set forth below, by debt pool, is a summary of the Company’s long-term debt (including the current portion) along with the applicable interest rates and the related carrying values of the property and equipment which collateralize the long-term debt:
(1)
The rate represents the annual effective weighted average cost of debt at December 31, 2008.
(2)
Long-term debt obligations at December 31, 2008 and December 31, 2007 include the current portion of $125.0 million and $5.1 million, respectively.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of the fixed rate mortgage debt (book value of $163.1 million) at December 31, 2008 is estimated at $166.4 million. The fair value of the variable rate mortgage debt (book value of $169.5 million) at December 31, 2008 is estimated at $136.3 million.
Mortgage Debt
On June 25, 2004, the Company entered into four fixed rate loans with Merrill Lynch Mortgage Lending, Inc (“Merrill Lynch”). The four loans, which totaled $260 million at inception, bear a fixed interest rate of 6.58%. Except for certain defeasance provisions, the Company may not prepay the loans except during the 60 days prior to maturity. One of the loans was defeased in 2007. The remaining three loans are currently secured by 17 hotels. The loans are not cross-collateralized. Each loan is non-recourse; however, the Company has agreed to indemnify Merrill Lynch in certain situations, such as fraud, waste, misappropriation of funds, certain environmental matters, asset transfers in violation of the loan agreements, or violation of certain single-purpose entity covenants. In addition, each loan will become full recourse in certain limited cases such as bankruptcy of a borrower or Lodgian. The Merrill Lynch loans, which totaled approximately $128 million at December 31, 2008, are scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. To address the pending maturities in July 2009, the Company is also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. To date, the Company been unable to secure refinancing and, in light of the current credit markets generally and the real estate credit markets specifically, management expects it to remain difficult to refinance the mortgage debt prior to the July 2009 maturity date. Management cannot currently predict whether these efforts will be successful. The outstanding loan balance is classified as current in the Consolidated Balance Sheet as of December 31, 2008. See Note 1 for additional discussion regarding this debt
On November 10, 2005, the Company entered into a $19.0 million loan agreement with IXIS Real Estate Capital Inc. (“IXIS”), which is secured by the Holiday Inn Hilton Head, SC. The loan agreement has a two-year initial term with three one-year extension options which are exercisable provided the loan is not in default. The loan bears a floating interest rate of 290 basis points above LIBOR. In December 2008, the Company exercised the second extension option, which extended the maturity to December 2009. The Company contemporaneously entered into a 24-month interest rate cap agreement, which effectively caps the interest rate at 7.90%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement. The loan is classified as long-term in the Consolidated Balance Sheet as of December 31, 2008 since management has the intent and ability to exercise the third extension option.
On February 1, 2006, the Company entered into a $17.4 million loan agreement with Wachovia Bank, National Association (“Wachovia”), which is secured by the Crowne Plaza Worcester, MA. The loan agreement has a five year term and bears a fixed rate of interest of 6.04%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement.
On February 1, 2006, the Company entered into a $6.1 million loan agreement with Wachovia, which is secured by the Holiday Inn Palm Desert, CA. The loan agreement has a five year term and bears a fixed rate of interest of 6.04%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement.
On March 1, 2006, the Company entered into a $21.5 million loan agreement with IXIS, which is secured by the Radisson Phoenix and Crowne Plaza Phoenix Airport hotels located in Phoenix, AZ along with the Crowne Plaza Pittsburgh Airport hotel located in Coraopolis, PA. The loan agreement has a two-year initial term with three one-year extension options which are exercisable provided the loan is not in default. The loan bears a floating rate of interest which is 295 basis points above LIBOR. In March 2008, the Company exercised the first of three one-year extension options, which extended the maturity to March 2009. In March 2009, the Company exercised the second extension option, which extended the maturity to March 2010. The Company contemporaneously entered into a 24-month interest rate cap agreement, which effectively caps the interest rate at 7.45%. The loan agreement is non-
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement. The loan is classified as long-term in the Consolidated Balance Sheet as of December 31, 2008 since management has the intent and ability to exercise the second extension option.
In April 2007, the Company entered into a $130 million loan agreement (the “Goldman Loan”) with Goldman Sachs Commercial Mortgage Capital, L.P. The Goldman Loan is secured by ten hotels and has an initial term of two years, with the option to extend the loan for three additional one-year periods. The loan bears interest at LIBOR plus 150 basis points. The Company purchased an interest rate protection agreement which caps the maximum interest rate at 8.5%. The loan is classified as long-term in the Consolidated Balance Sheet as of December 31, 2008 since management has the intent and ability to exercise the first extension option.
In June 2008, the Company paid $5.5 million on one of the Merrill Lynch fixed rate loans to release as collateral the former Holiday Inn Marietta, GA, which was subsequently sold.
In September 2008, the Company defeased $9.4 million of the $45.6 million balance of one of the Merrill Lynch fixed rate loans, which was secured by seven hotels. The Company purchased $9.7 million of US Government treasury securities (“Treasury Securities”) to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the hotel that originally served as collateral for the defeased portion of the loan. The hotel was classified as held for sale. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because the Company continues to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Company’s Consolidated Balance Sheet. As a result of the defeasance, the Company recorded a $0.5 million Loss on Debt Extinguishment in the statement of operations. The entire amount was recorded in discontinued operations.
In October 2008, the Company defeased $7.5 million of the $60.7 million balance of one of the Company’s mortgage loans, which was secured by eight hotels. The Company purchased $7.8 million of Treasury Securities to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the hotel that originally served as collateral for the defeased portion of the loan. The hotel was classified as held for sale and has since been sold. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because the Company continues to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Company’s Consolidated Balance Sheet. As a result of the defeasance, the Company recorded a $0.4 million Loss on Debt Extinguishment in the statement of operations. The entire amount was recorded in discontinued operations.
Interest Rate Cap Agreements
As noted above, the Company entered into three agreements to manage its exposure to fluctuations in the interest rate on its variable rate debt. These derivative financial instruments are viewed as risk management tools and are entered into for hedging purposes only. The Company does not use derivative financial instruments for trading or speculative purposes. However, the Company has not elected to follow the hedging requirements of SFAS No. 133.
The aggregate fair value of the interest rate caps as of December 31, 2008 was approximately nil. The fair values of the interest rate caps are recognized in the accompanying balance sheet in other assets. Adjustments to the carrying values of the interest rate caps are reflected in interest expense.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Future Loan Repayment Projections
Future scheduled principal payments on these long-term liabilities as of December 31, 2008 are as follows:
(1)
As discussed in Note 9, the Goldman Sachs loan matures in 2009, with the option to extend the loan for three additional one-year periods. Management has the intent and ability to exercise the first extension option, which will extend the maturity to 2010. Two further one-year extension options remain. The table assumes the first extension option will be exercised.
(2)
As discussed in Note 9, one IXIS loan matured in December 2007. The Company exercised the first and second one-year extension options, which extended the maturity to December 2009. The table assumes the remaining extension option will be exercised, which will extend the maturity to December 2010. The second IXIS loan matured in March 2008. As of December 31, 2008, the Company had exercised the first of three one-year extension options, which extended the maturity to March 2009. The table assumes the second extension option (which was subsequently exercised in March 2009) will be exercised, which will extend the maturity to March 2010. One further one-year extension option remains.
(3)
Comprised of unsecured notes payable of $42,000 for pre-petition bankruptcy related tax obligations and $1.3 million of other obligations.
10.
Stockholders’ Equity
Treasury Stock
On January 31, 2006, the Company granted 12,413 shares of restricted stock to certain employees, of which 4,719 shares were withheld to satisfy tax obligations and were added to Treasury Stock during 2006. The aggregate cost of these shares was approximately $61,000.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2007, 85,587 shares of nonvested stock awards vested, of which 6,989 were withheld to satisfy tax obligations and were added to Treasury Stock. The aggregate cost of these shares was approximately $86,000.
During 2008, 64,882 shares of nonvested stock awards vested, of which 11,257 shares were withheld to satisfy tax obligations and were included in the treasury stock balance of the Company’s balance sheet. The aggregate cost of these shares was approximately $104,000. Also, during 2008, the Company repurchased 3,667 shares of nonvested stock awards that vested at an aggregate cost of $32,000.
In May 2006, the Board of Directors of the Company approved a $15 million share repurchase program which expired in May 2007. Under this program, the Company repurchased 225,267 shares at an aggregate cost of $2.8 million during 2006. During 2007, the Company repurchased 146,625 shares at an aggregate cost of $1.9 million.
In August 2007, the Board of Directors of the Company approved a $30 million share repurchase program which was due to expire on August 22, 2009. Under this program, the Company repurchased 1.3 million shares at an aggregate cost of $15.2 million in 2007. During 2008, the Company repurchased 1.5 million shares at an aggregate cost of $14.9 million fulfilling the remaining authority under the program.
On April 11, 2008, the Board of Directors of the Company approved the repurchase of an additional $10 million of common stock over a period ending no later than April 15, 2009. As of December 31, 2008, the Company had repurchased approximately 554,000 shares at an aggregate cost of $4.4 million.
The Company may use its treasury stock for the issuance of future stock-based compensation awards or for acquisitions.
Class A and Class B Warrants
Pursuant to the Joint Plan of Reorganization confirmed by the Bankruptcy Court in November 2002 the Company issued Class A and B warrants.
The Class A warrants initially provided for the purchase of an aggregate of 503,546 shares of the common stock at an exercise price of $54.87 per share (after adjusting for the April 2004 reverse stock split) and expired on November 25, 2007.
The Class B warrants initially provided for the purchase of an aggregate of 343,122 shares of the common stock at an exercise price of $76.32 per share (after adjusting for the April 2004 reverse stock split) and expire on November 25, 2009.
11.
Income Taxes
Provision for income taxes for the Company is as follows:
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of the cumulative effect of temporary differences in the deferred income tax asset (liability) balances at December 31, 2008 and December 31, 2007 are as follows:
The difference between income taxes using the effective income tax rate and the federal income tax statutory rate of 34% is as follows:
At December 31, 2008 and 2007, the Company had established a valuation allowance of $64.1 million and $59.2 million, respectively, to fully offset its net deferred tax asset. As a result of the Company’s history of losses, the Company believed that it was more likely than not that its net deferred tax asset would not be realized, and therefore, provided a valuation allowance to fully reserve against these amounts. Of the $64.1 million, the 2008 deferred tax asset was increased by $4.9 million with $6.0 million increase relating to impairment charges incurred for books, $(0.6) million related to prior year true-ups, and $(0.5) million of additional deferred tax assets generated during the period. The balance of $64.1 million is primarily attributable to pre-emergence deferred tax assets if utilized and included in future tax expense.
At December 31, 2008, the Company had available net operating loss carry forwards (“NOLs”) of approximately $223.0 million for federal income tax purposes, which will expire in 2018 through 2028. In addition, the Company has excess tax benefits related to current year stock option exercises subsequent to the adoption of FAS 123(R) of $1.0 million that are not recorded as a deferred tax asset as the amounts have not yet resulted in a
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
reduction in current taxes payable. The benefit of these deductions will be recorded to additional paid-in capital at the time the tax deduction results in a reduction of current taxes payable. The Company has undergone several “ownership changes,” as defined in Section 382 of the Internal Revenue Code. Consequently, the Company’s ability to use the net operating loss carryforwards to offset future income is subject to certain limitations. As a result of the most recent Section 382 ownership change, the Company’s ability to use these net operating loss carryforwards is subject to an annual limitation of $8.3 million. Net operating loss carryforwards generated during the 2004 calendar year after June 24, 2004 as well as those generated during the 2005 through 2008 calendar year, are generally not subject to Section 382 limitations to the extent the losses generated are not recognized built in losses. At the June 24, 2004 ownership change date the company had a Net Unrealized Built in Loss (“NUBIL”) of $150 million. As of December 31, 2008, $95.7 million of the NUBIL has been recognized. The amount of losses subject to Section 382 limitations is $171.5 million; losses not subject to 382 limitations are $51.5 million.
In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 applies to all tax positions accounted for in accordance with SFAS No. 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, derecognition, and measurement is based on management’s best judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company was required to adopt the provisions of FIN 48 with respect to all the Company’s tax positions as of January 1, 2007. While FIN 48 was effective on January 1, 2007, the new standards apply to all open tax years. The only major tax jurisdiction in which the Company files income taxes is Federal. The tax years which are open for examination are calendar years ended 1998, 1999, 2000, 2001, 2003 and 2004, due to losses generated that may be utilized in current or future filings. Additionally, the statutes of limitation for calendar years ended 2005, 2006 and 2007 remain open. The Company has no significant unrecognized tax benefits; therefore, the adoption of FIN 48 had no impact on the Company’s financial statements. Additionally, no increases in unrecognized tax benefits are expected in the next twelve months. Interest and penalties on unrecognized tax benefits will be classified as income tax expense if recorded in a future period.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which is a revision of SFAS No. 141 “Business Combinations”. SFAS No. 141(R) significantly changes the accounting for business combinations. Under this statement, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Additionally, SFAS No. 141(R) includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. We have $64.1 million of deferred tax assets fully offset by a valuation allowance. The balance of the $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the effective date for SFAS No. 141(R), such release will affect the income tax provision in the period of release.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per common share:
In accordance with Emerging Issues Task Force Topic No. D-62, income (loss) from continuing operations should be the basis for determining whether or not dilutive potential common shares should be included in the computation of diluted earnings per share. Since the Company reported a loss from continuing operations for the years ended December 31, 2008, 2007 and 2006, the common stock equivalents were excluded from the computation of diluted earnings per share.
As a result, the Company did not include the shares associated with the assumed exercise of stock options (options to acquire 174,911 shares of common stock), the assumed conversion of 133,474 shares of nonvested stock, the assumed issuance of 286,503 shares of Revised Plan nonvested stock awards, and the assumed conversion of Class B warrants (rights to acquire 343,122 shares of common stock) in the computation of diluted (loss) income per share for the year ended December 31, 2008 because their inclusion would have been antidilutive.
The computation of diluted income per share for the year ended December 31, 2007, as calculated above, did not include the shares associated with the assumed exercise of stock options (options to acquire 212,408 shares of common stock), the shares associated with nonvested stock (115,191 shares), or Class B warrants (rights to acquire 343,122 shares of common stock) in the computation of diluted (loss) income per share for the year ended December 31, 2007 because their inclusion would have been antidilutive.
The computation of diluted income per share for the year ended December 31, 2006, as calculated above, did not include the shares associated with the assumed exercise of stock options (options to acquire 356,313 shares of common stock), the shares associated with nonvested stock (82,607 shares), or Class A and B warrants (rights to acquire 503,546 and 343,122 shares of common stock, respectively) in the computation of diluted (loss) income per share for the year ended December 31, 2006 because their inclusion would have been antidilutive.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13.
Commitments and Contingencies
Franchise Agreements and Capital Expenditures
The Company has entered into franchise agreements with various hotel chains which require annual payments for license fees, reservation services and advertising fees. The license agreements generally have original terms of 10 to 20 years. The franchisors may require the Company to upgrade its facilities at any time to comply with its then current standards. Upon the expiration of the term of a franchise, the Company may apply for a franchise renewal. Costs incurred in connection with these agreements for the years ended December 31, 2008, 2007 and 2006 were as follows:
During the term of the franchise agreements, the franchisors may require us to upgrade facilities to comply with their current standards. The current franchise agreements terminate at various times and have differing remaining terms. For example, the terms of four (three of which are held for sale and one of which is held for use as of March 1, 2009), three (all of which are held for use), and two (all of which are held for use) of the franchise agreements for our hotels are scheduled to expire in 2009, 2010, and 2011, respectively. As franchise agreements expire, we may apply for a franchise renewal or request a franchise extension. In connection with renewals, the franchisor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facilities, or the franchisor may elect not to renew the franchise. The costs incurred in connection with these agreements (excluding capital expenditures) are primarily monthly payments due to the franchisors based on a percentage of room revenues.
When a hotel does not meet the terms of its franchise license agreement, a franchisor reserves the right to issue a notice of non-compliance to the franchisee. This notice of non-compliance provides the franchisee with a cure period which typically ranges from 3-24 months. At the end of the cure period, the franchisor will review the criteria for which the non-compliance notice was issued and either acknowledge a cure under the franchise agreement, returning the hotel to good standing, or issue a notice of default and termination, giving the franchisee another opportunity to cure the non-compliant issue. At the end of the default and termination period, the franchisor will review the criteria for which the non-compliance notice was issued and either acknowledge a cure of the default under the franchise agreement, issue an extension which will grant the franchisee additional time to cure, or terminate the franchise agreement.
As of March 1, 2009, the Company has been or expects to be notified that it is in default and/or non-compliance with respect to three franchise agreements and is anticipating cure letters with respect to two franchise agreements as summarized below:
•
One hotel is in default of the franchise agreements because of substandard guest satisfaction scores. If the Company does not achieve scores above the required thresholds by the designated cure dates, this hotel could be subject to termination of the franchise agreement. However, since the Company recently completed some renovations at the hotel, the Company anticipates that it will be given additional time to cure the default.
•
One hotel is in default of the franchise agreement for failure to complete a Property Improvement Plan. If the Company does not cure the default by April 2009, the hotel’s franchise agreement could be terminated by the franchisor. This hotel is also in default the franchise agreement because of substandard guest satisfaction scores. If the Company does not achieve scores above the required thresholds by March 2009, this hotel could be subject to termination by the franchisor. However, since the hotel is currently under renovation, the Company anticipates that it will be given additional time to cure the defaults.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•
One hotel is not incompliance with some of the terms of the franchise agreement because of substandard guest scores. If the Company does not achieve scores above the required quality thresholds by March 2009, this hotel could be placed in default by the franchisor. However, the Company has met with the franchisor, is following a specific action plan for improvement, and anticipates that it will cure the failure by the required cure date.
•
The Company is anticipating cure letters for two hotels to be delivered no later than February 2010.
The corporate operations team, as well as each property’s general manager and associates, have focused their efforts to cure each of these non-compliance or default issues through enhanced service and product improvements by the required cure date. The Company believes that it will cure the non-compliance and defaults for continuing operations hotels which the franchisors have given notice before the applicable termination dates, except for one hotel which is in default for failure to complete a Property Improvement Plan. The Company will continue to work with the franchisor to extend the default cure period, if necessary. The Company cannot provide assurance that it will be able to complete the action plans (which are estimated to cost approximately $2.5 million for the capital improvements portion of the action plans of which $0.4 million had been spent as of December 31, 2008) to cure the alleged instances 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, the Company will 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 the Company to incur significant costs, including franchise termination payments and capital expenditures, and in certain circumstances could lead to acceleration of parts of indebtedness. This could materially and adversely affect the Company and its financial condition and results of operations.
Also, the Company’s 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 three hotels that are in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of $199.3 million of mortgage debt as of March 1, 2009.
If a franchise agreement is terminated, the Company will 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 the Company to incur significant costs, 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.
A single franchise agreement termination could materially and adversely affect the Company’s revenues, cash flow and liquidity.
To comply with the requirements of its franchisors and to improve its competitive position in individual markets, the Company plans to spend between $22 and $27 million on its hotels in 2009, depending on the determined courses of action following our ongoing diligence and analysis. The Company spent $47.2 million on capital expenditures during 2008.
Letters of Credit
As of December 31, 2008, the Company had three irrevocable letters of credit totaling $5.0 million which were fully collateralized by cash. The cash is classified as restricted cash in the accompanying Consolidated Balance Sheets. The letters of credit serve as guarantee for self-insured losses and certain utility and liquor bonds and will expire in September 2009, November 2009 and January 2010, but may be renewed beyond those dates.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Self-insurance
The Company is self-insured up to certain limits with respect to employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers’ compensation and auto liability. The Company establishes liabilities for these self-insured obligations annually, based on actuarial valuations and its history of claims. If these claims escalate beyond the Company’s expectations, this could have a negative impact on its future financial condition and results of operations. As of December 31, 2008 and December 31, 2007, the Company had accrued $10.4 million and $12.2 million, respectively, for these liabilities.
There are other types of losses for which the Company 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 the Company’s insurance limits were to occur, the Company could lose both the revenues generated from the affected hotel and the capital that it has invested. The Company also could be liable for any outstanding mortgage indebtedness or other obligations related to the hotel. Any such loss could materially and adversely affect the financial condition and results of operations.
The Company believes it maintains sufficient insurance coverage for the operation of the business.
Casualty gains (losses), net and business interruption insurance
All of the Company’s hotels are covered by property casualty and business interruption insurance. The business interruption coverage begins on the date of closure and continues for six months following the opening date of the hotel, to cover the revenue ramp-up period. Management believes the Company has sufficient property and liability insurance coverage to reimburse the Company for the damage to the property, including coverage for business interruption, as well as to pay any claims that may be asserted against the Company by guests or others.
With regard to property damage, the Company recognizes the related expenses as it incurs the charges. The Company writes off the net book value of the destroyed assets. As the combined expenses and net book value write-offs for each property exceed the insurance deductible, the Company records a receivable from the insurance carriers (up to the amount expected to be collected from the carriers). The casualty gain or loss is recorded upon final settlement of each insurance claim. Any funds received from the insurance carriers prior to the final settlement are recorded as insurance advances in the consolidated balance sheet.
With regard to business interruption proceeds, the Company recognizes the income when the proceeds are received or when the proofs of loss are signed.
In 2004, several hotels were damaged by the hurricanes that made landfall in the Southeastern United States. In August 2005, Hurricane Katrina made landfall in the U.S. Gulf Cost region and two hotels in the New Orleans area were damaged. In October 2005, an underground water main ruptured underneath one hotel, causing flood damage in certain areas of the hotel and a limited amount of structural damage. And, in January 2006, one hotel suffered a fire. All of the hotels have since reopened, except the one that was damaged in January 2006 by a fire, which has been sold.
In August 2008, Hurricane Ike made landfall in the U.S. Gulf Coast region and the Crowne Plaza Houston, TX sustained some damage. Based on current estimates, the Company does not expect the total cost of the damage to exceed the deductible amount of $1.7 million. As a result, the Company does not plan to file an insurance claim at this time.
In 2008, the Company finalized the casualty and business interruption claims for the former Holiday Inn Marietta, GA, which suffered a fire on January 15, 2006. The Company received proceeds totaling $6.1 million, of which $0.7 million related to business interruption and $5.4 million related to casualty claims. As a result of the settlement, the Company recognized business interruption insurance proceeds of $0.7 million and a total casualty gain of approximately $5.6 million, after deducting related costs. These amounts are included in income from discontinued operations in the Consolidated Statement of Operations.
In 2007, the Company recorded casualty gains (losses), net of related expenses, of $1.9 million and business interruption proceeds of $0.6 million in continuing operations, all of which was collected prior to December 31,
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2007. Also in 2007, the Company recorded casualty gains (losses), net of related expenses, of $2.7 million in discontinued operations, all of which was collected prior to December 31, 2007.
In 2006, the Company recorded casualty gains (losses), net of related expenses, of $2.9 million in continuing operations, all of which was collected prior to December 31, 2006. Additionally, the Company recorded business interruption proceeds of $3.9 million in continuing operations, of which $1.2 million was received in 2007. Also in 2006, the Company recorded casualty gains (losses), net of related expenses, of $0.2 million and business interruption proceeds of $0.8 million in discontinued operations, all of which was collected prior to December 31, 2006.
At December 31, 2008, all casualty and business interruption proceeds were finalized.
Litigation
From time to time, as the Company conducts its business, legal actions and claims are brought against it. The outcome of these matters is uncertain.
Management believes that the Company has adequate insurance protection to cover all pending litigation matters and that the resolution of these claims will not have a material adverse effect on the Company’s results of operations or financial condition.
Operating Leases
As of December 31, 2008, four held for use and two held for sale hotels are located on land subject to long-term leases. The corporate office is subject to an operating lease through 2011. Generally, these leases are for terms in excess of the depreciable lives of the buildings. The Company also has the right of first refusal on certain leases if a third party offers to purchase the land. The Company pays fixed rents on some of these leases; on others, the Company has fixed rent plus additional rents based on a percentage of revenues or cash flow. Some of these leases are also subject to periodic rate increases. The leases generally require the Company to pay the cost of repairs, insurance and real estate taxes. Lease expense for the non-cancelable ground, parking and other leases for the year ended December 31, 2008, 2007 and 2006 were as follows:
At December 31, 2008, the future minimum commitments for non-cancelable ground and parking leases were as follows (amounts in thousands):
14.
Employee Retirement Plans
The Company makes contributions to four multi-employer pension plans for employees of various subsidiaries covered by collective bargaining agreements. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Certain withdrawal penalties may exist,
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the amounts of which are not determinable at this time. The cost of pension contributions for the year ended December 31, 2008, December 31, 2007 and December 31, 2006 were as follows:
The Company adopted a 401(k) plan for the benefit of its non-union employees and one group of union employees under which participating employees may elect to contribute up to 25% of their eligible compensation subject to annual dollar limits established by the Internal Revenue Service. The Company matches an employee’s elective contributions to the 401(k) plan, subject to certain conditions. These employer contributions vest immediately. Contributions to the 401(k) plan made by the Company for the year ended December 31, 2008, December 31, 2007 and December 31, 2006 were as follows:
15.
Restructuring
In August 2007, the Company announced cost-reduction initiatives to improve future operating performance. These initiatives resulted in position eliminations in the Company’s corporate and regional operations staff as well as reductions in the hotel staff at certain locations. As a result, the Company recorded restructuring costs totaling $1.2 million, representing severance and related costs. At December 31, 2007, all of the costs had been paid or otherwise settled. A reconciliation of the restructuring costs and the related liability is as follows (in thousands):
16.
Related Party Transaction
On May 13, 2008, a Lodgian subsidiary acquired an interest in a ground lease related to the Holiday Inn in Glen Burnie, Maryland from WIH Hotels LLC (“WIH”) in an arm’s length transaction. WIH is an affiliate of BRY/HY Funding LLC, which owns 6.1% of our common stock. WIH and BRY/HY Funding LLC are entities owned by funds managed by affiliates of The Blackstone Group. The purchase price of the interest in the ground lease was $600,000. The transaction was approved in advance by our Audit Committee pursuant to our Statement of Policy with Respect to Related Party Transactions.
17.
Subsequent Events
On March 4, 2009, the Company sold the Holiday Inn in East Hartford, CT for a gross sales price of $3.5 million. In accordance with the terms of the agreement, the Company extended seller financing totaling $1.9 million and paid $1.6 million to acquire the land from the lessor.
EXHIBIT INDEX
**
Filed herewith.