| LODGIAN INC 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 “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “projects,” and similar expressions are intended to identify forward-looking statements |
| These forward-looking statements reflect our current views with respect to future events and the impact of these events on our business, financial condition, results of operations and prospects |
| Our business is exposed to many risks, difficulties and uncertainties, including the following: • 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 Iraq, 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 and land parcel 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 the majority of our assets being encumbered on our borrowings and future growth; 20 _________________________________________________________________ [70]Table of Contents • Our ability to meet the continuing listing requirements of the Securities and Exchange Commission and the American Stock Exchange; • 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 high energy costs, natural gas and gasoline prices; and • The risks identified below under “Risks Related to Our Business” and “Risks Relating 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 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 |
| Compliance with any new and existing standards could cause us to incur significant expenses and investment in capital expenditures |
| If we do not comply with standards or terms of any of our franchise agreements, those franchise agreements may be terminated after we have been given notice and an opportunity to cure the non-compliance or default |
| As of March 1, 2006, we have been notified that we were not in compliance with some of the terms of eight of our franchise agreements and have received default and termination notices from franchisors with respect to an additional seven hotels |
| We cannot assure you that we will be able to complete our action plans (which we estimate will cost approximately dlra5dtta4 million) to cure the alleged defaults of noncompliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or noncompliance |
| In addition, as part of our bankruptcy reorganization proceedings, we entered into stipulations with each of our major franchisors setting forth a timeline for completion of capital expenditures for some of our hotels |
| However, as of March 1, 2006, we have not completed the required capital expenditures for eight continuing operations hotels in accordance with the stipulations and we estimate that the cost of completing these required capital expenditures is dlra3dtta3 million |
| As of March 1, 2006, approximately dlra2dtta0 million is deposited in escrow with the Company’s lenders to be applied to the capital expenditure obligations, pursuant to the terms of the respective loan agreements signed with these lenders |
| Nonetheless, a franchisor could therefore seek to declare its franchise agreement in default and could seek to terminate the franchise agreement |
| 21 _________________________________________________________________ [71]Table of Contents If a franchise agreement is terminated, we will either select an alternative franchisor or operate the hotel independently of any franchisor |
| However, terminating or changing the franchise affiliation of a hotel could require us to incur significant expenses, including franchise termination payments and capital expenditures associated with the change of a brand |
| Moreover, the loss of a franchise agreement could have a material adverse effect upon the operations or the underlying value of the hotel covered by the franchise because of the loss of associated guest loyalty, name recognition, marketing support and centralized reservation systems provided by the franchisor |
| Loss of a franchise agreement may result in a default under, and acceleration of, the related mortgage debt |
| In particular, we would be in default under the Refinancing Debt if we experience either: • multiple franchise agreement defaults and the continuance thereof beyond all notice and grace periods for hotels whose allocated loan amounts total 10prca or more of the outstanding principal amount of such Refinancing Debt; • with regard to the Merrill Lynch Mortgage floating rate refinancing debt (“Floating Rate Debt”), either the termination of franchise agreements for more than two properties or the termination of franchise agreements for hotels whose allocated loan amounts represent more than 5prca of the outstanding principal amount of the floating rate debt, and such hotels continue to operate for more than five consecutive days without being subject to replacement franchise agreements; • with regard to the Merrill Lynch Mortgage fixed rate refinancing debt (“Fixed Rate Debt”), either the termination of franchise agreements for more than one property or the termination of franchise agreements for hotels whose allocated loan amounts represent more than 5prca of the outstanding principal amount of the fixed rate loan, and such hotels continue to operate for more than five consecutive days without being subject to replacement franchise agreements; or • a franchise termination for any hotel currently subject to a franchise agreement that remains without a franchise agreement for more than six months |
| A single franchise agreement termination could materially and adversely affect our revenues, cash flow and liquidity |
| In addition, our loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more such agreements |
| The 15 hotels that are either in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of dlra265dtta3 million of mortgage debt at March 1, 2006 |
| In connection with our equity offering in June 2004, we entered into new franchise agreements for all 15 of our Marriott-branded hotels at that time and agreed to pay a fee aggregating approximately dlra0dtta5 million, of which dlra0dtta1 million has been paid, and dlra0dtta4 million is payable in 2007, subject to offsets |
| Our current franchise agreements, generally of 5 to 20 years duration, terminate at various times and have differing remaining terms |
| As a condition to renewal of the franchise agreements, franchisors frequently contemplate a renewal application process, which may require substantial capital improvements to be made to the hotel and increases in franchise fees |
| A significant increase in unexpected capital expenditures and franchise fees would adversely affect us |
| Hotels require a high level of capital expenditures, maintenance and repairs, and if we are not able to meet these 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 |
| If we do not make needed capital improvements, we could lose our share of the market to our competitors and our hotel occupancy and room rates could fall |
| Furthermore, the process of renovating a hotel can be disruptive to operations, and a failure to properly plan and execute renovations and schedule them during seasonally slower sales months can result in renovation displacement, an industry term for a temporary loss of revenue caused by the renovation |
| We also risk termination of 22 _________________________________________________________________ [72]Table of Contents franchise agreements at the affected properties due to non-compliance with the terms of the franchise agreements |
| Most of our hotels are pledged as collateral for mortgage loans, and we have a significant amount of debt that could limit our operational flexibility or otherwise adversely affect our financial condition |
| As of December 31, 2005, we had dlra414dtta3 million of total long-term debt outstanding including both continuing and discontinued operations, dlra394dtta4 million of which is associated with our continuing operations, net of the current portion of long-term debt |
| We are subject to the risks normally associated with significant amounts of debt, such as: • We may not be able to repay or refinance our maturing indebtedness on favorable terms or at all |
| If we are unable to refinance or extend the maturity of our maturing indebtedness, we may not otherwise be able to repay such indebtedness |
| Debt defaults could lead us to sell one or more of our hotels on unfavorable terms or, in the case of secured debt, to convey the mortgaged hotel(s) to the lender, causing a loss of any anticipated income and cash flow from, and our invested capital in, such hotel(s); • 72 of our consolidated hotels are pledged as collateral for existing mortgage loans as of December 31, 2005, which represented 96dtta7prca of the book value of our hotel property and equipment, net, as of December 31, 2005, and, as a result, we have limited flexibility to sell our hotels to satisfy cash needs; • Increased vulnerability to downturns in our business, the lodging industry and the general economy; • Our ability to obtain other financing to fund future working capital, capital expenditures and other general corporate requirements may be limited; • Our cash flow from operations may be insufficient to make required debt service payments, and we may be required to dedicate a substantial portion of our cash flow from operations to debt service payments, reducing the availability of our cash flow to fund working capital, capital expenditures, and other needs and placing us at a competitive disadvantage with other companies that have greater resources and/or less debt; and • Our flexibility in planning for, or reacting to, changes in our business and industry may be restricted, placing us at a competitive disadvantage to our competitors that may have greater financial strength than we have |
| 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 financial covenants, including leverage and coverage ratios |
| Our compliance with these covenants depends substantially upon the financial results of our hotels |
| In particular, our debt agreements with Merrill Lynch Mortgage require minimum debt yield and minimum debt service coverage ratios |
| The floating rate debt (“Floating Rate Debt”) provides that when either (i) the debt yield for the hotels securing the respective loans for the trailing 12-month period is below 9prca during the first year, 10prca during the next 18 months, and 11prca, 12prca and 13prca during each of the next three extension periods, or (ii) to the extent extended, the debt service coverage ratio is less that 1dtta3x in the second extension period or 1dtta35x in the third extension period, excess cash flows produced by the mortgaged hotels securing the applicable loan (after payment of operating expenses, management fees, required reserves, service fees, principal and interest) must be deposited in a restricted cash account |
| For the fixed rate debt (“Fixed Rate Debt”), when the debt yield ratio for the hotels for the trailing 12-month period is below 9prca during the first year, 10prca during the next year and 11prca, 12prca and 13prca during each of the next three years, excess cash flows produced by the mortgaged hotels securing the applicable loan (after payment of operating expenses, management fees, required reserves, service fees, principal and interest) must be deposited in a restricted cash account |
| These funds can be used for the prepayment of the applicable loan in an amount required to satisfy the applicable test, capital expenditures reasonably approved by the lender with respect to the hotels securing the applicable loan, and scheduled principal and interest payments due on the Floating Rate Debt of up to dlra0dtta9 million or any Fixed Rate Loan of up to dlra525cmam000, as applicable |
| Funds will no longer be deposited into 23 _________________________________________________________________ [73]Table of Contents the restricted cash account when the debt yield ratio and, if applicable, the debt service coverage ratio are sustained above the minimum requirements for three consecutive months and there are no defaults |
| Additionally, as of December 31, 2005, we were not in compliance with the debt service coverage ratio requirement of the loan from Column Financial secured by one of our hotels in Phoenix, Arizona |
| The primary reason the debt service coverage ratio is below the required threshold is that the property underwent an extensive renovation in 2004 in order to convert the property from a Holiday Inn Select to a Crowne Plaza hotel |
| The renovation caused substantial revenue displacement which, in turn, negatively affected the financial performance of this hotel |
| Under the terms of the Column Financial loan agreement, until the required DSCR is met, the lender is permitted to require the borrower to deposit all revenues from the mortgaged property into an account controlled by the lender |
| Accordingly, in December 2004, we were notified by the lender that we were in default of the debt service coverage ratio and would have to establish a restricted cash account whereby all cash generated by the property be deposited into an account from which all payments of interest, principal, operating expenses and impounds (insurance, property taxes and ground rent) would be disbursed |
| The lender may apply excess proceeds after payment of expenses to additional principal payments |
| At December 31, 2005, dlra0dtta7 million was being retained in the restricted cash account |
| This property was refinanced on March 1, 2006 and, accordingly, the non-compliance issue with this loan has been resolved |
| Subsequent Events) |
| As of December 31, 2005, through our wholly-owned subsidiaries, we owed approximately dlra10dtta1 million under industrial revenue bonds secured by Holiday Inns in Lawrence, Kansas and Manhattan, Kansas |
| For the year ended December 31, 2004, the cash flows of the two hotels were insufficient to meet the minimum debt service coverage ratio requirements |
| Accordingly, on March 2, 2005, we notified the Trustee of the industrial revenue bonds which finance the Holiday Inns in Lawrence, Kansas and Manhattan, Kansas that we would not continue to make debt service payments |
| The failure to make debt service payments is a default under the bond indenture and also a default under the ground leases for these properties |
| On August 31, 2005, we reached a settlement agreement with the bond Trustee, under which we agreed to either sell the hotels to a third party or convey our rights and interests in the hotels to the Trustee and pay to the Trustee for the benefit of the bondholders the sum of dlra0dtta5 million in exchange for a full release |
| We paid dlra0dtta5 million in September 2005 and surrendered the hotels in February 2006 |
| The restrictive covenants in our debt documents may reduce our flexibility in conducting our operations and may limit our ability to engage in activities that may be in our long-term best interest |
| Our failure to comply with our debt documents, including these restrictive covenants, may result in additional interest being due and would constitute an event of default, and in some cases with notice or the lapse of time, if not cured or waived, could result in the acceleration of the defaulted debt and the sale or foreclosure of the affected hotels |
| As noted above, under certain circumstances the termination of a hotel franchise agreement could also result in the same effects |
| A foreclosure would result in a loss of any anticipated income and cash flow from, and our invested capital in, the affected hotel |
| No assurance can be given that we will be able to repay, through financings or otherwise, any accelerated indebtedness or that we will not lose all or a portion of our invested capital in any hotels that we sell in such circumstances |
| Rising 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 and some of the indebtedness is subject to variable interest rates, of which we had dlra86dtta5 million of variable rate debt at December 31, 2005 |
| In the future, we may incur additional indebtedness bearing interest at a variable rate, or we may be required to refinance our existing fixed-rate indebtedness at higher interest rates |
| Accordingly, increases in interest rates will increase our interest expense and adversely affect our cash flow, reducing the amounts available to make payments on our indebtedness, fund our operations and our capital expenditure program, make acquisitions or pursue other business opportunities |
| We have reduced the risk of rising interest rates by entering into interest rate cap agreements for all our variable interest rate debt |
| 24 _________________________________________________________________ [74]Table of Contents To service our indebtedness, we require a significant amount of cash |
| 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 and to refinance our indebtedness and to fund our operations, planned capital expenditures and other needs will depend on our ability to generate cash in the future |
| Various factors could adversely affect our ability to meet operating cash requirements, many of which are subject to the operating risks inherent in the lodging industry and, therefore, are beyond our control |
| These risks include the following: • 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 US; • Cyclical overbuilding in the lodging industry; • Varying levels of demand for rooms and related services; • Competition 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; • Effects of economic and market conditions; • Decreases in air travel; • Fluctuations in operating costs; • Changes in governmental laws and regulations that influence or determine wages or required remedial expenditures; • Natural disasters, including, but not limited to hurricanes; • Changes in interest rates and changes in the availability, cost and terms of credit; and • The perception of the lodging industry and lodging companies in the debt and equity markets |
| The value of our hotels and our ability to repay or refinance our debt are dependent upon the successful operation and cash flows of the hotels |
| The value of our hotels is heavily dependent on their cash flows |
| If cash flow declines, the hotel values may also decline and the ability to repay or refinance our debt could also be adversely affected |
| Factors affecting the performance of our hotels include, but are not limited to, construction of competing hotels in the markets served by our hotels, loss of franchise affiliations, the need for renovations, the effectiveness of renovations or repositioning in attracting customers, changes in travel patterns and adverse economic conditions |
| We may not be able to fund our future capital needs, including necessary working capital, funds for capital expenditures or acquisition financing from operating cash flow |
| Consequently, we may have to rely on third-party sources to fund our capital needs |
| We may not be able to obtain the financing on favorable terms or at all, which could materially and adversely affect our operating results, cash flow and liquidity |
| Any additional debt would increase our leverage, which would reduce our operational flexibility and increase our risk exposure |
| Our access to third-party sources of capital depends, in part, on: • general market conditions; • the market’s perception of our growth potential; • our current debt levels and property encumbrances; • our current and expected future earnings; 25 _________________________________________________________________ [75]Table of Contents • our cash flow and cash needs; and • the market price per share of our common stock |
| If we are not able to implement our growth strategy, we may not be able to improve our financial performance |
| Our growth strategy is focused on improving the operations of our continuing operations hotels with improved product quality as a result of our renovation program, improved services levels, and additional investment in our hotels, including repositionings and renovations, that will earn a sufficient return on the capital invested |
| Additionally, we periodically evaluate our portfolio of hotels to identify underperforming hotels that should be sold |
| We cannot assure you that the execution of our growth strategy will produce improved financial performance at the affected hotels |
| We compete for growth opportunities with national and regional hospitality companies, many of which have greater name recognition, marketing support and financial resources than we do |
| An inability to implement our growth strategy successfully would limit our ability to grow our revenue, net income and cash flow |
| Our current joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and performance, and any disputes that may arise between us and our joint venture partners |
| We currently have an ownership interest in four of our hotels through joint ventures |
| We generally will not be in a position to exercise sole decision-making authority regarding the hotels owned through such joint ventures |
| Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions |
| Joint venture partners may have business interests, strategies or goals that are inconsistent with our business interests, strategies or goals and may be, and in cases where we have a minority interest will be, in a position to take actions contrary to our policies, strategies or objectives |
| Joint venture investments also entail a risk of impasse on decisions, such as acquisitions or sales, because neither we nor our joint venture partner would have full control over the joint venture |
| Any disputes that may arise between us and our joint venture partners may result in litigation or arbitration that could increase our expenses and could prevent our officers and/or directors from focusing their time and effort exclusively on our business strategies |
| Consequently, actions by or disputes with our joint venture partners might result in subjecting hotels owned by the joint venture to additional risks |
| In addition, we may in certain circumstances be liable for the actions of our third-party joint venture partners |
| We have a history of significant losses and we may not be able to successfully improve our performance to achieve profitability |
| We incurred cumulative net losses of dlra348dtta7 million from January 1, 1999 through December 31, 2005 and had an accumulated deficit of dlra69dtta6 million as of December 31, 2005 |
| Our ability to improve our performance to achieve profitability is dependent upon a recovery in the general economy, combined with an improvement in the lodging industry specifically, and the successful implementation of our business strategy |
| Our failure to improve our performance could have a material adverse effect on our business, results of operations, financial condition, cash flow, liquidity and prospects |
| The economic downturn which commenced in early 2001 and the terrorist attacks of September 11, 2001 and the subsequent threat of terrorism resulted in a sharp decline in demand for hotels and affected our results in 2002 and 2003 |
| The lodging industry experienced some recovery beginning in the second half of 2003 which has continued through 2005 |
| These favorable trends need to continue into 2006 for us to generate positive cash flows essential to our growth and to the implementation of our business strategy |
| Although Smith Travel Research recently forecasted RevPAR growth for the US lodging industry in 2006 due to rising occupancy and rates and an improving economy, this forecast does not necessarily apply specifically to our portfolio of hotels |
| Additionally, rising interest rates and energy costs, the troubled airline industry and continued threats to national security or air travel safety could adversely affect the industry, resulting in our inability to meet profit expectations |
| 26 _________________________________________________________________ [76]Table of Contents 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 |
| The terrorist attacks of September 11, 2001 and the continued threat of terrorism, including changing threat levels announced by the US Department of Homeland Security, have had a negative impact on the lodging industry and on our hotel operations |
| These events have caused a significant decrease in occupancy and ADR in our hotels due to disruptions in business and leisure travel patterns and concerns about travel safety |
| In particular, major metropolitan areas and airport hotels have been adversely affected by concerns about air travel safety and a significant overall decrease in the amount of air travel |
| We believe that uncertainty associated with subsequent terrorist threats and incidents, military conflicts and the possibility of hostilities with other countries may continue to hamper business and leisure travel patterns and our hotel operations for the foreseeable future, and if these matters worsen, the effects could become materially more adverse |
| We may be unable to sell real estate, including our assets held for sale, in a timely manner or at expected prices |
| As of March 1, 2006, we have eight hotels and one land parcel listed as assets available for sale; however, real estate assets generally cannot be sold quickly |
| No assurance can be given that we will be able to sell any of these hotels or the land parcel on favorable terms or at all |
| Furthermore, even if we are able to sell these hotels, we may not be able to realize any cash proceeds from the sales after paying off the related debt, or the sale may not be timely to provide cash needed to fund our working capital, capital expenditures and debt service requirements |
| If we lose the franchise of any of these properties for sale, the value of the hotel could decline, perhaps substantially |
| The inability to sell these properties could severely hamper our strategy to own upscale and profitable hotels under popular brands, which could have adverse effects on our profitability |
| 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 drop in revenues |
| Consequently, during periods when revenues drop, we would be compelled to continue to incur certain expenses which are fixed in nature |
| Moreover, we could be adversely affected by: • 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 government 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 |
| We lack experience in making corporate acquisitions |
| As a result, our ability to identify prospects, conduct acquisitions and properly manage the integration of acquisitions is unproven |
| If we fail to properly evaluate and execute acquisitions or investments, it may have a material adverse effect on our results 27 _________________________________________________________________ [77]Table of Contents 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 and cash-rich 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 |
| Many of our loan agreements require that we maintain our insurance coverages with carriers with at least a “AA-” rating from Standard & Poors |
| Various types of catastrophic losses, including those related to environmental, health and safety matters may not be insurable or may not be economically insurable |
| In the event of a substantial loss, our insurance coverage may not cover the full current market value or replacement cost of our lost investment or building code upgrades associated with such an occurance |
| Inflation, changes in building codes and ordinances, environmental considerations and other factors might cause insurance proceeds to be insufficient to fully replace or renovate a hotel after it has been damaged or destroyed |
| We cannot assure you that: • the insurance coverages that we have obtained will fully protect us against insurable losses (ie, losses may exceed coverage limits); • we will not incur losses from risks that are not insurable or that are not economically insurable; or • current coverages with AA- rated or better carriers will continue to be available at reasonable rates |
| Should a material uninsured loss or a loss in excess of insured limits occur with respect to any particular property, we could lose our capital invested in the property, as well as the anticipated income and cash flow from the property |
| Any such loss would have an adverse effect on our results of operations, financial condition and liquidity |
| In addition, if we are unable to maintain insurance that meets our debt and franchise agreement requirements, and if we are unable to amend or waive those requirements, it could result in an acceleration of that debt and impair our ability to maintain franchise affiliations |
| 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 |
| 28 _________________________________________________________________ [78]Table of Contents Adverse conditions in major metropolitan markets in which we do substantial business could negatively affect our results of operations |
| Adverse economic conditions in markets, such as Pittsburgh, Baltimore/ Washington, DC, and Phoenix, in which we have multiple hotels, could significantly and negatively affect our revenue and results of operations |
| Our 14 hotels in these areas provided approximately 26dtta1prca of our 2005 continuing operations revenue and approximately 21dtta5prca of our 2005 continuing operations total available rooms |
| As a result of this geographic concentration of our hotels, we are particularly exposed to the risks of downturns in these markets, which could have a major adverse affect on our profitability |
| Demand for accommodations varies seasonally |
| The high season tends to be the summer months for hotels located in colder climates and the winter months for hotels located in warmer climates |
| Aggregate demand for accommodations at the hotels in our portfolio is lowest during the winter months |
| We generate substantial cash flow in the summer months compared to the slower winter months |
| If adverse factors affect our ability to generate cash in the summer months, the impact on our profitability is much greater than if similar factors occur during the winter months |
| We are exposed to potential risks of brand concentration |
| As of March 1, 2006, we operate approximately 83prca of our hotels under the InterContinental Hotels Group and Marriott flags, and therefore, are subject to potential risks associated with the concentration of our hotels under limited brand names |
| If either of these brands suffers a major decline in popularity with the traveling public, it could adversely affect our revenue and profitability |
| We have experienced significant changes in our senior management team |
| There have been a number of changes in our senior management team during the last two years and since our emergence from bankruptcy |
| Our new chief executive officer was hired in July 2005, our chief operating officer resigned in September 2005 and our chief financial officer resigned in December 2005 |
| On March 1, 2006, we hired James MacLennan as our new chief financial officer |
| If our management team is unable to develop successful business strategies, achieve our business objectives or maintain effective relationships with employees, suppliers, creditors and customers, our ability to grow our business and successfully meet operational challenges could be impaired |
| Our success is dependent on recruiting and retaining high caliber key personnel |
| Our ability to maintain or enhance our competitive position will depend to a significant extent on the efforts and ability of our executive and senior management, particularly our chief executive officer |
| Our future success and our ability to manage future growth will depend in large part upon the efforts of our management team and on our ability to attract and retain other highly qualified personnel |
| Competition for personnel is intense, and we may not be successful in attracting and retaining our personnel |
| Our inability to retain our current management team and attract and retain other highly qualified personnel could hinder our business |
| 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 |
| If these Internet bookings increase, these intermediaries may be in a position to demand higher commissions, reduced room rates or induce other significant contract concessions from us |
| Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification |
| Although we expect to continue to derive most of our business through the traditional channels, if the revenue generated through Internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be adversely affected |
| 29 _________________________________________________________________ [79]Table of Contents We may be unable to utilize all of our net operating loss carryforwards |
| As of December 31, 2005, we had approximately dlra306 million of net operating loss carryforwards available for federal income tax purposes, which includes an estimated dlra8dtta7 million of 2005 tax losses |
| Approximately dlra8 million of losses expired unused at December 31, 2005 |
| To the extent that we do not have sufficient future taxable income to be offset by these net operating loss carryforwards, any unused losses will expire between 2006 and 2024 |
| Our ability to use these net operating loss carryforwards to offset future income is also subject to annual limitations |
| An audit or review by the Internal Revenue Service could result in a reduction in the net operating loss carryforwards available to us |
| 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 or property damage or similar claims by private parties |
| In addition, the presence of contamination, or the failure to report, investigate or properly remediate contaminated property, may adversely affect the operation of the property or the owner’s ability to sell or rent the property or to borrow funds using the property as collateral |
| Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of those substances at the disposal or treatment facility, whether or not that facility is or ever was owned or operated by that person |
| The operation and removal of underground storage tanks is also regulated by federal, state and local laws |
| In connection with the ownership and operation of our hotels, we could be held liable for the costs of remedial action for regulated substances and storage tanks and related claims |
| Environmental laws require that ACBMs be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements |
| Third parties may be permitted by law to seek recovery from owners or operators for personal injury associated with exposure to contaminants, including, but not limited to, ACBMs |
| Operation and maintenance programs have been developed for those hotels which are known to contain ACBMs |
| Many, but not all, of our hotels have undergone Phase I environmental site assessments, which generally provide a nonintrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental consultant |
| The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotel owner or others may be responsible |
| None of the Phase I environment site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on us |
| Nevertheless, it is possible that these assessments did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware |
| 30 _________________________________________________________________ [80]Table of Contents Some of our hotels may contain microbial matter such as mold, mildew and viruses, whose presence could adversely affect our results of operations |
| Phase I assessments performed on certain of our hotels in connection with our refinancing completed at the time of our Chapter 11 bankruptcy emergence identified mold in four of our hotels |
| We have completed all necessary remediation for these properties |
| In addition, if any hotel in our portfolio is not properly connected to a water or sewer system, or if the integrity of such systems are breached, microbial matter or other contamination can develop |
| If this were to occur, we could incur significant remedial costs and we may also be subject to private damage claims and awards |
| Any liability resulting from noncompliance or other claims relating to environmental matters could have a material adverse effect on us and our insurability for such matters in the future and on our results of operations, financial condition, liquidity and prospects |
| A downturn in the economy due to high energy costs and gasoline prices could negatively impact our financial performance, our customer guest satisfaction scores and customer service levels |
| We use significant amounts of electricity, gasoline, natural gas and other forms of energy to operate our hotels |
| A shortage in supply or a period of sustained high energy costs could negatively affect our results of operations |
| Additionally, a shortage of supply could impact our ability to operate our hotels and could adversely impact our guests’ experience at our hotels, and ultimately, our guest satisfaction scores and potentially our franchisor affiliations |
| Risks Related to Our Common Stock Our common stock could be de-listed from the American Stock Exchange if its listing standards are not maintained |
| The rules of the American Stock Exchange allow the exchange to de-list securities if it determines that a company’s securities fail to meet its guidelines in respect of corporate net worth, public float, number of shareholders, aggregate market value of shares or price per share |
| We cannot assure purchasers of our common stock that we will continue to meet the American Stock Exchange listing requirements |
| If our common stock is delisted from the American Stock Exchange, it would likely trade on the OTC Bulletin Board, which is a quotation service for securities which are not listed or traded on a national securities exchange |
| The OTC Bulletin Board is viewed by most investors as less desirable and a less liquid marketplace |
| Thus, delisting from the American Stock Exchange could make trading our shares more difficult or expensive for investors, leading to declines in share price |
| It would also make it more difficult for us to raise additional capital |
| In addition, we would incur additional costs to sell equity under state blue sky laws if our common stock is not traded on a national securities exchange |
| Our stock price may be volatile |
| The market price of our common stock could decline and 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; 31 _________________________________________________________________ [81]Table of Contents • 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 the 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 the 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 |