Attached files
file | filename |
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EX-99.2 - SUMMIT HOTEL PROPERTIES LLC | v179113_ex99-2.htm |
EX-99.1 - SUMMIT HOTEL PROPERTIES LLC | v179113_ex99-1.htm |
EX-31.2 - SUMMIT HOTEL PROPERTIES LLC | v179113_ex31-2.htm |
EX-31.1 - SUMMIT HOTEL PROPERTIES LLC | v179113_ex31-1.htm |
EX-32.2 - SUMMIT HOTEL PROPERTIES LLC | v179113_ex32-2.htm |
EX-32.1 - SUMMIT HOTEL PROPERTIES LLC | v179113_ex32-1.htm |
EX-21.1 - SUMMIT HOTEL PROPERTIES LLC | v179113_ex21-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
Annual
Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of
1934
For
the Fiscal Year Ended December 31, 2009
or
¨ Transition
Report Pursuant to Section 13 Or 15(d) of The Securities Exchange Act of
1934
For
the Transition Period From________________to________________
Commission
File Number: 000-51955
SUMMIT HOTEL PROPERTIES,
LLC
(Exact
name of registrant as specified in its charter)
South
Dakota
|
20-0617340
|
(State
or other jurisdiction
|
(I.R.S.
Employer Identification No.)
|
of
incorporation or organization)
|
2701
South Minnesota Avenue, Suite 6
Sioux
Falls, SD 57105
(Address
of principal executive offices, including zip code)
(605)
361-9566
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to section 12(g) of the Act:
Class A
Membership Interests, no par value (“Class A Interests”) of Summit Hotel
Properties, LLC
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
¨
Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form
10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company in
Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes x No
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. There is no
established trading market for the registrant’s membership
interests.
The
number of Class A Membership Units outstanding as of March 26, 2010, was
1,166.62 and the number of Class A-1 Membership Units outstanding as of March
26, 2010, was 437.83.
TABLE
OF CONTENTS
Page
|
||
PART I
|
||
Item
1.
|
Business
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3
|
Item
1A.
|
Risk
Factors
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17
|
Item
1B.
|
Unresolved
Staff Comments
|
28
|
Item
2.
|
Properties
|
28
|
Item
3.
|
Legal
Proceedings
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31
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Item
4.
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[Reserved]
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32
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PART II
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||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
32
|
Item
6.
|
Selected
Financial Data
|
34
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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35
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Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
53
|
Item
8.
|
Financial
Statements and Supplementary Data
|
54
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
54
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Item
9A.
|
Controls
and Procedures
|
54
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Item
9B.
|
Other
Information
|
55
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PART III
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||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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55
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Item
11.
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Executive
Compensation
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60
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Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
63
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Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
66
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Item
14.
|
Principal
Accountant Fees and Services
|
69
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PART IV
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||
Item
15.
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Exhibits
and Financial Statement Schedules
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70
|
2
PART
I
ITEM
1. BUSINESS
General
We are a
leading developer, owner and manager of hotels categorized as mid-scale without
food and beverage (previously referred to as “limited service hotels”) and
upscale hotels (previously referred to as “select service hotels”) located
throughout the United States. As of December 31, 2009, we owned 65 hotels
in 19 states. With 1 exception, each hotel is franchised with a
nationally-recognized hotel brand. Our hotels are located in small,
mid-sized and suburbs of large markets with a variety of hotel demand
generators, such as tourist attractions, business headquarters, and convention
centers. We anticipate building and acquiring additional hotels in the
future, as well as selling hotels which no longer meet our strategic
goals. Hotels categorized as mid-scale without food and beverage are those
which do not offer a restaurant or bar. Upscale hotels have a small
lounge, offer a cooked-to-order breakfast or breakfast buffet, and may offer a
light lunch or dinner menu.
Our
revenues and earnings are derived from hotel operations of our owned
hotels. Our hotels are geographically diversified throughout the United
States to prevent concentration of revenues and earnings in any one hotel
market, and to smooth seasonal fluctuations in revenues experienced in many
hotel markets.
An
affiliate, The Summit Group, Inc. (“The Summit Group”), currently provides a
number of services for our hotels, including: hotel operations management,
location of acquisition targets and construction sites, development of
construction sites, and construction supervision. It is possible that in
the future the Board may consider hiring an unaffiliated hotel management
company to manage any or all of our hotels. However, this is not currently
expected by the Board.
Our
principal executive offices are located at 2701 South Minnesota Avenue, Suite 6,
Sioux Falls, South Dakota, 57105, and our telephone number is (605)
361-9566.
General
Development of Business
Summit
Hotel Properties, LLC, a South Dakota limited liability company, was formed on
January 8, 2004. Our predecessors had been building, buying,
operating and selling hotels since 1991. We have four classes of
membership interests: Class A, Class A-1, Class B and Class C membership
interests.
3
Class
A and Class A-1 Membership Interests
Class A and Class A-1 Members have
limited right to participate in the management of the Company and their voting
rights are limited to: (i) the creation of a new class of membership interest if
such new class has rights, powers and duties that are superior to those of their
class of membership interests; (ii) amendments to the Articles of Organization
or Operating Agreement of the Company, except as otherwise set forth in the
Operating Agreement; and (iii) dissolution of the Company. Thus, the
Members’ ability to influence Company decisions is substantially limited.
Except for the issuance of Class B and Class C membership interests discussed
below, from the inception of the Company through October 2005, the Company
offered only Class A membership interests to equity investors. The Company
first offered Class A-1 membership interests to equity investors pursuant to a
private offering that began in October 2005. The Company made an
additional offering of Class A-1 membership interests to equity investors
beginning in October 2008 and ending in October 2009. Pursuant to this
offering, the Company sold 610 Class A-1 Units for the aggregate amount of $30.5
million. Although the Class A-1 Units were sold in $50,000 increments and
were denominated as “units” at the time of sale, for purposes of certain
membership rights, including voting rights and certain types of distributions
under the Company’s Third Amended and Restated Operating Agreement, the Class
A-1 Membership Interests will be deemed to consist of 305 $100,000 Units (rather
than 610 $50,000 Units) and will be expressed in percentages of ownership rather
than in units.
Class
B and Class C Membership Interests
Class B membership interests are
non-voting interests that were issued by our predecessors and were acquired by
several employees and other parties. When we purchased the assets of our
predecessors on March 31, 2004, these interests were converted to Class B
membership interests in the Company. Class C membership interests are held
100% by The Summit Group, Inc., our hotel manager and Company Manager. The
Summit Group, Inc. held controlling interests in several of our predecessors,
and when we purchased our predecessors’ assets on March 31, 2004, these
interests were converted to Class C membership interests in the Company.
As additional Class A and Class A-1 membership interests are issued to
investors, the Class C Member is granted additional Class C membership
interests, as described in additional detail in Item 6. Selected Financial
Data.
Wholly-Owned
Subsidiaries
Several
of our lenders require that the borrowing entity be a bankruptcy-remote, special
purpose entity. To fulfill this requirement, as of December 31, 2009,
Summit Hotel Properties had two wholly-owned limited liability companies that
own hotel properties. These include Summit Hospitality I, LLC, which is
formed under the laws of Delaware and owns twenty-five of the Company’s
hotels. Summit Hospitality I, LLC, is wholly-owned by the Company and is
managed by a board of managers comprised of Kerry W. Boekelheide, our CEO and
Manager, Daniel P. Hansen, our CFO and Manager, and two independent
managers. The independent managers are entitled to vote only upon the
Company’s decision to file bankruptcy or initiate other insolvency
proceedings. The two independent managers have no voting authority or
managerial control except in these limited circumstances. In addition,
Summit Hospitality V, LLC, is a wholly-owned subsidiary, which owns thirteen of
the Company’s hotels. It is formed under the laws of the State of South
Dakota and is managed by the Company. All assets, liabilities, expenses
and revenues of these wholly-owned subsidiaries are reflected on our financial
statements.
4
Summit
Group of Scottsdale, Arizona
We own a
49% Class A membership interest in Summit Group of Scottsdale, Arizona, LLC,
which owns two hotels located in Scottsdale, Arizona (“Summit of
Scottsdale”). All assets, liabilities, expenses and revenues of Summit of
Scottsdale have been included in our financial statements. For additional
information, please see Item 8. Financial Statements and Supplementary
Data – Note 1 to Consolidated Financial Statements.
Material
Acquisitions and Dispositions
From
January 1, 2009, through December 31, 2009, the Company completed the
construction of 6 hotels with a total of 799 guestrooms. These hotels were
constructed for a total cost of approximately $110.8 million and are located in
Arizona, Florida (2), Idaho, and Oregon (2). The Company did not acquire
any hotels during this period. During this period we sold 2 hotels with a
total of 117 guestrooms, located in Missouri and Washington, for a total price
of $6.8 million. We also combined the Twin Falls, Idaho Comfort Inn and
Holiday Inn Express into a Comfort Inn & Suites hotel. In addition, in
1 hotel renovation, we eliminated 3 guestrooms. The sale, construction,
and renovation of hotels resulted in a net increase of 3 hotels and an increase
of 679 guestrooms in our portfolio.
The
Company owns 9 parcels of development land on which the Company originally
planned to develop 12 hotels. We intend to develop 5 of these parcels and
construct 7 new hotels at such time as we deem that market conditions are
appropriate and we have construction financing and equity in place. We
intend to sell 4 of these hotel parcels as market conditions improve. In
addition, the Company intends to sell 2 land parcels that were not originally
purchased for hotel development, but were adjacent to land purchased for hotel
development. We will acquire additional parcels of land as appropriate
opportunities arise, although we do not anticipate acquiring additional land
during 2010.
Financial
Information About Segments
100% of
our revenues are derived from rental of guestrooms at our hotels and related
services. Related services include: telephone usage fees to guests, hotel
meeting room rentals, restaurant and lounge receipts, hotel laundry and valet
services, concessions, and other sources directly associated with the renting of
guestrooms. The rental of guest rooms generated $119.0 million, $132.8
million and $112.0 million of gross revenues during the twelve months ended
December 31, 2009, 2008 and 2007, respectively. These revenues from the
rental of guest rooms were 98.2%, 98.3% and 98.4% of our consolidated gross
revenues during such years. Related services generated $2.2 million, $2.3
million and $1.8 million of gross revenues during the twelve months ended
December 31, 2009, 2008 and 2007, respectively. These revenues from
related services was 1.8%, 1.7% and 1.6% of our consolidated gross revenues
during such years. The above revenue information is based on revenue from
continuing operations. For additional financial information, see Item
8. Financial Statements and Supplementary Data.
5
Narrative
Description of Business
As of
December 31, 2009, we owned and operated 42 hotels categorized as mid-scale
without food and beverage and 23 upscale hotels, all located throughout the
continental United States. We strive to own, build and purchase hotels in
markets that have several sources of hotel users, including corporate and
business, leisure, and government travelers. Corporate, business, and
government travelers typically occupy hotels Sunday through Thursday
nights. Leisure travelers generally occupy hotels Friday and Saturday
nights. Therefore, we desire to have a mix of travelers at our hotels. A
list of our hotel properties owned as of December 31, 2009 is included as
Exhibit 99.1.
Franchises
With one
exception, each of our hotels is operated pursuant to a franchise agreement with
a nationally-recognized hotel franchisor. The franchisors include:
|
-
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Marriott
International (Courtyard by Marriott, Residence Inn, Fairfield Inn,
Fairfield Inn & Suites, TownePlace Suites, Springhill
Suites)
|
|
-
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Hilton
Hotels (Hampton Inn, Hampton Inn & Suites, Hilton Garden
Inn)
|
|
-
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Starwood
Hotels (aloft)
|
|
-
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InterContinental
Hotels Group (Holiday Inn Express, Holiday Inn Express & Suites,
Staybridge Suites)
|
|
-
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Choice
Hotels (Comfort Inn, Comfort Suites, Comfort Inn & Suites, Cambria
Suites)
|
|
-
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Carlson
Companies (Country Inn &
Suites)
|
|
-
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Hyatt
Global Hotels (Hyatt Place)
|
Each
franchisor sets strict standards concerning the exterior and interior appearance
of the hotel, amenities offered to guests, and service quality. Each
franchisor monitors guest complaints, and periodically inspects its franchised
hotels. Upon receipt of notice from a franchisor that a hotel is not in
compliance with the franchise standards, the hotel implements a plan to remedy
the deficiency. As of March 1, 2010, 2 of our hotels have been cited by
Marriott International for less than satisfactory scores on certain portions of
guest satisfaction reviews. We have developed remediation plans and
anticipate that the hotels will be upgraded to satisfactory ratings by the end
of 2010. The Company has 7 hotels franchised by Marriott International
with required renovations due during 2010. Marriott has extended the
renovation schedule for 4 of these properties, such that the renovations will
not be due until 2011. The other 3 hotels are developing action plans to
accomplish the required renovations during 2010. All other Company hotels
are in compliance with franchisor remodeling requirements.
Typically,
franchise agreements are effective for 10 to 20 years, depending on the
agreement. We had no franchise agreements expire in 2009. Two of our
hotel franchise agreements are set to expire during 2010: the Emporia, Kansas,
Holiday Inn Express and the Boise, Idaho, Holiday Inn Express.
Intercontinental Hotel Group has agreed to extend the Emporia Holiday Inn
Express franchise until a new Holiday Inn Express is built in the market.
At such time, we anticipate converting our hotel to another similar national
hotel brand. In Boise, Idaho, we have the right to build a new Holiday Inn
Express, thus the franchise agreement for our existing hotel will be extended
until we build the new hotel. In early 2009, our Twin Falls, Idaho Holiday
Inn Express combined with our existing Comfort Inn in Twin Falls, and converted
to a Comfort Inn & Suites.
6
Hotel
Management
Pursuant to a Hotel Management
Agreement (the “Management Agreement”), each of our hotels is managed by The
Summit Group, the Class C Member and Company Manager. Included among its
duties as the hotel manager, The Summit Group hires and supervises hotel
managers; organizes and supervises advertising and promotional programs;
oversees the selection and purchase of all necessary hotel supplies, as well as
replacement furniture, fixtures, and equipment; implements office and
bookkeeping systems and procedures; monitors and adjusts room rates; directs the
maintenance activities; and supervises the engagement or selection of all
vendors, suppliers, and independent contractors. The Summit Group is also
responsible for performing all bookkeeping and administrative duties in
connection with the hotels.
The
Summit Group, as our hotel manager, is entitled to reimbursement of its expenses
for the management of our hotels, including salaries and benefits of The Summit
Group employees, provided such reimbursement, together with reimbursements in
its capacity as Company Manager, but not including development expenses, do not
exceed 4.5% of the gross revenues of the hotels in any given year.
Expenses that are not related to hotel management and would normally be paid
directly by a hotel, such as bookkeeping, accounting, and legal expenses, are
not included in the 4.5% cap. During 2009, The Summit Group’s
reimbursement for hotel management services plus its responsibilities as Company
Manager totaled 2.4% of hotel revenues from continuing and discontinued
operations. See “Corporate Operations” below for a description of The
Summit Group’s responsibilities as Company Manager.
The Management Agreement provides that
we will indemnify The Summit Group against liabilities and losses arising out of
the management of our hotels, subject to the limitation that it will not be
indemnified for any losses which are caused by its fraud or misconduct.
The Summit Group cannot be removed, or the Management Agreement terminated,
except for cause as specified in the Management Agreement.
For its services as hotel manager, The
Summit Group does not receive independent consideration in addition to the
reimbursement of expenses discussed above. Due to its position as Company
Manager, The Summit Group owns all Class C Interests as well as a portion of the
Class B Interests in the Company and receives distributions related to such
ownership. In 2009, distributions related to The Summit Group’s Class B
and Class C Interests totaled $0.
7
Competitive
Strengths
Management
Structure.
We believe the key ingredient of a
successful operation is an effective management structure. The Summit
Group’s management structure is designed to maximize the profit potential of
acquired or developed hotels. There are two Directors of Operations who
oversee all operational activities at the hotels and supervise the regional
managers. The regional managers assist the general managers in their
regions to maximize sales and profits while operating the hotels with a high
degree of quality and guest satisfaction. The Summit Group’s regional
managers are responsible for twelve or fewer hotels, which allows them to
dedicate the time necessary to direct and guide the hotel general
managers. The Summit Group’s regional managers’ essential functions
consist of the following:
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overseeing
hotel sales efforts and strategies, including revenue
management
|
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-
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overseeing
hotel general managers to ensure properties perform in a cost-effective
manner while providing quality guest
service
|
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-
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ensuring
the physical condition of properties meets The Summit Group’s high
standards and initiating necessary
improvements
|
|
-
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developing
and managing budgets of assigned properties, controlling expenses
effectively
|
Direct
Sales.
The Summit Group considers itself one
of the leading direct sales organizations in the lodging industry. Its
regional managers, general managers, and sales managers are charged with a
mission of generating new business through proactive sales efforts. Many
hotels do not employ a direct sales effort and instead expect franchise
reservations systems and signage to produce high occupancy rates. The Summit
Group feels that it outperforms the mid-scale without food and beverage lodging
industry largely due to its direct sales approach. We also employ two
revenue managers who work full time assisting hotel general managers to
structure room rate plans to achieve optimum revenues.
The
tables below illustrate the performance of our hotels as compared to the
averages for the mid-scale without food and beverage lodging
industry.
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||||||||||
December 31,
|
Increase/
|
December 31,
|
Increase/
|
December 31,
|
||||||||||||||||
2009
|
(Decrease)
|
2008
|
(Decrease)
|
2007
|
||||||||||||||||
All
Company Hotels
|
||||||||||||||||||||
RevPAR1
|
$ | 54.12 | $ | (12.66 | ) | $ | 66.78 | $ | 2.40 | $ | 64.38 | |||||||||
Average
Daily Rate
|
$ | 87.40 | $ | (13.55 | ) | $ | 100.95 | $ | 4.75 | $ | 96.20 | |||||||||
Occupancy
Rate
|
61.92 | % | (4.23 | )% | 66.15 | % | (0.77 | )% | 66.92 | % | ||||||||||
Industry2
|
||||||||||||||||||||
RevPAR1
|
$ | 47.80 | $ | (8.32 | ) | $ | 56.12 | $ | (0.90 | ) | $ | 57.02 | ||||||||
Average
Daily Rate
|
$ | 85.22 | $ | (4.97 | ) | $ | 90.19 | $ | 2.99 | $ | 87.20 | |||||||||
Occupancy
Rate
|
56.1 | % | (6.10 | )% | 62.2 | % | (3.20 | )% | 65.40 | % |
(1)
|
RevPAR
means “Revenue Per Available Room” and is a common indicator used by the
hotel industry to track and compare financial performance of hotels.
It is calculated by multiplying a hotel’s occupancy rate by its average
daily rate.
|
(2)
|
Source:
Smith Travel Research Lodging Review, for years 2007, 2008, and
2009. The industry data shown is for the Mid-scale Without Food and
Beverage category of hotels. These generally include mid-level,
franchised hotels, which serve continental breakfasts but do not have
lounges or restaurants. These are of the same class as the
majority of the Company’s
hotels.
|
8
Hotel Acquisition and
Construction Financing.
Our hotels are typically financed with
a mix of equity and commercial bank financing. Historically, equity has
been used to fund 30-40% of each hotel project. However, in March 2007,
the Company entered into a loan agreement with Fortress Credit Corp.
(“Fortress”) whereby the proceeds from the Fortress loan would be used to
finance the equity portion of our new hotel acquisitions and construction
projects. In addition to using the Fortress loan to finance numerous hotel
acquisitions and construction projects, all interest payments on the Fortress
loan were also paid with advances from the loan. As of March 5, 2010, the
outstanding balance on the Fortress loan was $84.8 million. Use of the
Fortress loan to finance a portion of the equity of new hotel projects caused
the Company’s leverage to increase from 2007 through 2009.
Beginning in 2009, no additional
Fortress loan funds were used to finance new hotel acquisitions or construction
(although funds were advanced to make interest payments). Due to the
nationwide difficulties in obtaining commercial financing during 2009, our new
hotel construction was funded with 40-60% equity, and the remaining portion with
commercial bank financing.
Under
current economic conditions, we do not anticipate acquiring or beginning
construction of any new hotels during 2010. However, if we determine that
the market conditions for a particular project are favorable, and debt and
equity financing are available for the project, we may acquire or build a
limited number of hotels during 2010.
Policy
on Sale of Hotels
We review our hotels approximately
twice per year to determine if any significant changes to area markets have
occurred or are anticipated to occur that would warrant the sale of a particular
hotel. The factors we use in evaluating whether to sell a hotel
include: new hotel supply to an area, age of the hotel, major road
expansion, changes to major area employers, or changes to hotel demand
generators. In addition, we anticipate selling older hotels in markets
where we own a single hotel, or where we own only one hotel franchised with a
particular franchisor. A majority vote of the Board is required to approve
a sale, provided the sale price is sufficient to cover the costs of the sale,
satisfaction of all debt associated with the hotel, and return all capital
contributions allocated to the hotel. If the sale proceeds are not likely
to produce this result, a supermajority vote of the Board of Managers is
required. A supermajority vote is defined in our Operating Agreement
as an affirmative vote of eighty percent (80%) of the Managers present at a
meeting of the Managers or, if a written consent is obtained, an affirmative
vote of eighty percent (80%) of all Managers.
Management has not identified any
hotels that the Company will prepare for sale at this time.
9
Policy
on Purchase and Construction of Additional Hotels
Due to
the nationwide recession that began in 2008 and continued through 2009, we did
not acquire new hotels or begin construction on any hotels during 2009. At
such time as we become comfortable that the economy has reached or neared the
bottom of its business cycle, and we can obtain appropriate debt financing and
equity, we will refocus our efforts on developing and acquiring hotels at prices
which will maximize investor value over the long run. Buying or building
hotels during the low point in the business cycle will permit us to take
advantage of low purchase prices and construction costs, and stabilize the
acquired properties prior to the next up-swing in the national hotel market so
that the hotels are able to realize their full financial potential.
During 2009, we also did not purchase
any additional land to be used for future construction activities. As the
economic recovery gains momentum, we may strategically acquire land for the
development of new hotels, but will only begin construction if construction
financing and equity are in place. We target markets exhibiting the
following characteristics for the acquisition of land and construction of new
hotels:
|
-
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insufficient
high-quality hotel supply in the market or for mid-scale without food and
beverage hotels or upscale hotels
|
|
-
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barriers
to entry of additional new hotels
|
|
-
|
availability
of a high-quality franchise appropriate for the
market
|
|
-
|
no
suitable and appropriately priced existing hotel in the market that is
available for purchase
|
Due to the significant instability in
the United States economy and real estate markets, our hotel acquisition plans
are on hold until such time as appropriate opportunities arise. When
we resume acquiring hotels, our ideal acquisition targets typically include the
following:
|
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hotels
that are performing below their revenue
potential
|
|
-
|
hotels
that are performing at or near their revenue potential, but are not as
profitable as they could be because they are poorly
managed
|
|
-
|
hotels
in need of renovation to maintain franchise
standards
|
|
-
|
hotels
that need to be renovated and converted to a more popular or upscale
franchise
|
10
Corporate
Operations
We are governed by a seven-member Board
of Managers (“Board”). There is currently one vacant position on the
Board. In addition to the Board, we have a Company Manager, The Summit
Group, responsible for substantially all of our executive, supervisory and
administrative services, not otherwise specifically granted to the Board.
These executive, supervisory and administrative services include, but are not
limited to: administration, negotiation and pursuit of financing vehicles;
determining the time and amount of distributions; and providing our record
keeping. Furthermore, the Company Manager is responsible for the internal
accounting of the Company, and coordination with accountants, including
distribution of income tax information and forms to each of the Members.
The Company Manager is reimbursed for its reasonable out-of-pocket expenses
incurred as a result of its administration of the Company, provided all
reimbursements of management expenses to The Summit Group, together with
reimbursements in its capacity as Hotel Manager, but not including development
expenses, do not exceed 4.5% of the gross revenue of the hotels in any given
year. The Company Manager cannot be removed from its position, or its
authority lessened, except upon amendment of our Operating Agreement or for
cause. “Cause” is defined in the Operating Agreement as a material
violation or breach of the authority, duty or obligations of the Company
Manager, a breach of the duties of loyalty and good faith, or knowingly and
intentionally failing to discharge such duties, willfully and wantonly
disregarding the interest of the Company, intentionally and deliberately
disregarding standards of behavior or conduct for such position which the
Company and others have a right to expect of such party, or any other acts or
omissions of carelessness or negligence of such degree or recurrence as to
manifest culpability or wrongful intent. Mere failure to perform as the
result of a good faith error in judgment or discretion does not constitute
“cause.”
The Company Manager has the authority
to approve any act of the Company unless such authority is restricted to the
Board or Members. Consent of a majority of the Managers present at a
meeting of the Board is necessary to approve any act, unless a greater
percentage is required by the Operating Agreement. The following actions
require the affirmative vote of the Board with the required vote set forth in
parentheses:
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-
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acquisitions
of real property or construction of hotels meeting our investment
parameters (majority vote)
|
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-
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acquisitions
of real property or construction of hotels not meeting our investment
parameters (supermajority vote)
|
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-
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acquiring
additional hotel entities if within our investment parameters (majority
vote)
|
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-
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acquiring
additional hotel entities if outside our investment parameters
(supermajority vote)
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-
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the
sale of hotels constituting greater than 50% of all the hotels as measured
by the number of rooms of the hotels (supermajority
vote)
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-
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financing
or refinancing exceeding our financing parameters (supermajority
vote)
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-
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additional
private offerings not meeting our offering parameters (supermajority
vote)
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use
of refinancing and sale proceeds (majority
vote)
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-
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sale
of a hotel (majority vote)
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-
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sale
of a hotel in which the sales price is not sufficient to cover the costs
of the sale, satisfaction of all debt associated with the hotel, and all
capital contributions associated with the hotel (supermajority
vote)
|
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-
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amendments
to the Operating Agreement or Articles of Organization of the Company
(majority vote)
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-
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financing
not in the course of ordinary business or otherwise within our financing
parameters (supermajority vote)
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11
A
supermajority vote of the Board is defined in the Operating Agreement as the
affirmative vote of eighty percent (80%) of the Managers present at a duly
constituted meeting of the Managers or, if a written consent is obtained, an
affirmative vote of eighty percent (80%) of all Managers.
Pre-Set
Parameters
Our
Operating Agreement sets forth certain parameters to be used as guidelines in
decision-making. These parameters may only be amended by unanimous consent
of the Board. The Company Manager may take any action falling within the
pre-set parameters, unless otherwise restricted in the Operating
Agreement.
“Financing
parameters” means debt or refinancing which does not (i) result in debt
exceeding 75% of the value of the hotel(s) securing such debt, or (ii) exceed a
1.15 debt coverage ratio of the hotel(s) securing such debt. All debt
which falls outside of the financing parameters has been approved by a
supermajority vote of the Board.
“Investment parameters” means a
hotel that meets the following requirements:
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limited
service (also referred to as mid-scale without food and beverage) or
select service (also referred to as upscale)
hotel
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franchised
with a current franchisor with which The Summit Group already has a
business relationship
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60-160
rooms
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located
in markets with a population base of at least 50,000
persons
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located
in the contiguous 48 States of the United
States
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In
addition to the above, if an entity is to be acquired, it:
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must
be currently paying a 10% priority return to its investors, and is
projected to continue to make such
payment
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must
consist entirely of accredited
investors
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There is
an exception to this requirement in that no further consent of the Board is
required if the remaining 51% interest in Summit of Scottsdale is to be acquired
by the Company. All acquisitions which fall outside of these parameters
have been approved by a supermajority vote of the Board.
We are also subject to limitations on
our ability to sell additional interests in the Company, which we refer to as
“offering parameters.”
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“Offering
parameters” means a private offering that meets the
following:
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no
greater than $50,000,000 to be
raised
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no
new class of membership interests to be
offered
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to
be offered only to accredited
investors
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12
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cannot
provide The Summit Group with greater rights than currently
existing
|
All private offerings which fell
outside of these parameters have been approved by a supermajority vote of the
Board.
Board
of Managers Committees
We have an Audit Committee and a
Compensation Committee of the Board of Managers. These committees have the
authority, granted by the Company’s Operating Agreement, to set certain policies
and take certain actions for the Company. For additional information, see
Item 10. Directors, Executive Officers and Corporate
Governance.
Liquidation
Strategy
In the event we have not entered into a
contract for our purchase, redemption or merger with a third party by December
31, 2014, dependent on market and other conditions, the Board will explore
liquidating strategies, including, but not limited to, adopting a plan of
liquidation pursuant to which we, or our hotels, would be liquidated or
sold. Any such plan of sale or liquidation will be effected as determined
by the Board to be in the best interests of the Members. The plan of
liquidation will provide that we are under no obligation to liquidate within a
specific time period as the precise timing will depend on real estate and
financial markets, industry trends, economic conditions of the areas in which
the hotels are located and the projected federal income tax effects on Members
which may exist in the future. We cannot guarantee that we will be able to
liquidate our hotels or the Company, in part or in whole, or if at all, and we
will continue in existence until all hotels or our interests are sold. If
we continue in existence, we may continue to acquire additional hotels. If
the Company is liquidated, proceeds will be distributed in accordance with the
provisions of the Operating Agreement.
Seasonality
Certain
segments of the hotel industry are very seasonal. Leisure travelers tend
to travel more during the summer. Business travelers occupy hotels
relatively consistently throughout the year, but decreases in business travel
occur during summer and the winter holidays.
The hotel
industry is also seasonal based upon geography. Hotels in the south tend
to have high occupancy rates during the winter months. Hotels in the north
have higher occupancy rates during the summer months. On balance, the
hotel industry experiences its highest occupancies during summer, and its lowest
occupancy rates from December through February. To provide for more stable
revenues throughout the year, we strive to maintain geographic diversity of our
hotels.
13
Working
Capital
Approximately 90% of the Company’s
revenues are related to credit card transactions, which are typically paid
within 2-3 days of a guest’s stay. Certain corporate clients are granted
credit, based upon the Company’s periodic evaluation of the customer’s
creditworthiness. These revenue collection practices are standard in the
hotel industry, and the Company does not believe that it is exposed to
significant credit risk.
Diversity
of Customers
We serve
a wide variety of customers, and no one customer generates more than 10% of our
revenues. Our customers can be grouped into several categories, including
business/commercial travelers, leisure travelers, and government
travelers.
Government
Contracts
The
United States government sets, for each hotel market, a maximum hotel room rate
that it allows its employees to pay. If the government rate is not
competitive in a particular market and our hotels can receive a higher rate from
other customers, we will not offer the government employee rate at that
hotel. We periodically contract with the United States government or other
governmental entities to rent a set number of guestrooms at a set price.
However, such contracts are not a material portion of our revenues.
Future
Reservations
Most of
our customers do not reserve rooms far in advance of the date they arrive at the
hotel. Furthermore, with limited exception, our guests are able to cancel
reservations prior to arrival at the hotel. Therefore, it is difficult to
predict the occupancy rates of our hotels through the end of 2010. Based
upon the current state of the United States economy and current trends in
industry occupancy rates, we anticipate that same-hotel 2010 revenues will
remain stable compared to 2009. See Item 1.A. Risk
Factors.
Hotel
Industry
The hotel
industry is subject to business cycles, affected primarily by general economic
conditions and by construction of new hotels. During periods when the
hotel industry is experiencing higher revenues and the economy is stable, hotel
developers often react by building new hotels. As the new hotels open in a
market, the increase in available rooms may cause existing hotels to experience
decreasing RevPAR and profitability. (“RevPAR” means revenue per available room,
and is the product of the occupancy rate and the average daily rate charged by a
hotel, referred to as ADR.) As this over-building occurs and profitability
declines, new hotel construction slows. The demand for new hotel rooms
grows gradually until the new hotel supply is absorbed into the market, and
occupancy rates and ADRs increase. As profitability increases, the new
construction begins again, and the industry cycle starts over.
From 2007
through 2009, the nationwide supply of new hotels increased faster than the
demand for hotel rooms. Thus, across the nation the hotel industry became
out of balance due to the increasing supply in hotels. The over-building,
combined with the decline in the economy, has resulted in a situation in which
there are few new hotels in development across the country and developers are
focused on finishing existing hotel construction projects. Industry
observers anticipate that the supply of new hotels will decrease during 2010 and
2011 as existing hotel projects are completed and new projects are not in
development
14
As a
result of the significant decline in general economic conditions during 2008 and
2009, many individuals and families have cancelled or postponed leisure travel
plans. Furthermore, corporations and businesses throughout the United
States have eliminated or significantly restricted travel budgets. For
example, our hotel located in Bellevue, Washington, has experienced decreased
occupancy rates as a result of travel restrictions at Microsoft. The
over-building of hotels, combined with the decline in leisure and corporate
travel, caused the hotel industry to experience large decreases in occupancy
rates and ADR during the last half of 2008 and throughout 2009. Industry
analysts anticipate that occupancy rates and ADRs will stabilize during 2010,
but the industry will not see a rebound in sales until at least the first
quarter of 2011.
We have ceased land acquisitions for
future construction of new hotels. We will start acquiring development
land, and building or acquiring hotels when we believe that appropriate
development opportunities become available in markets where the economy has
started to recover. We believe that the current tight credit markets and
lowered profitability of the hotel industry will create numerous opportunities
to acquire existing hotels at reduced prices.
At such time as the general economy
stabilizes, we expect the hotel industry to experience increasing occupancy
rates and ADRs for a period of up to five years. As a result, we plan to
look for opportunities to acquire strategically appropriate hotel assets so that
we can take advantage of the expected up-swing in the industry.
Competition
We operate in a highly competitive
industry. Each geographic hotel market has unique competitive
conditions. The size of each hotel market varies greatly and is determined
by factors such as geographic features creating a natural market border,
proximity to a particular event site, and the number of hotels in the
area. In each market where our hotels are located, there are a number of
hotels of varying size, service quality, amenity level, and price range.
Our biggest competitors are those hotels that are franchised by
nationally-recognized hotel companies, offering a similar level of amenities at
similar prices. In the hotel markets we compete in, there are anywhere
from 3 to 15 direct competitors. Indirect competitors include those hotels
that offer similar amenities but without a nationally-recognized franchise
affiliation, hotels with greater amenity levels, and hotels with lower
prices.
In the current economy, we are
encountering significant competition from high-end and luxury hotels.
These competitors have made drastic reductions in their room rates, depressing
room rates in many markets. As a result, we have lowered our room rates in
order to remain competitive. In addition, many hotels categorized as
mid-scale without food and beverage and upscale hotels in the markets in which
our hotels are located have slashed room rates in an attempt to counter
declining occupancy rates.
15
When choosing a hotel, customers may
consider several factors, including: quality customer service, amenities
offered, price level, location, and franchise affiliation. There are
several markets in which we own multiple hotels. Often, these hotels are
located very near, or adjacent to each other. Thus, our hotels often
compete against each other. We believe this provides us with competitive
advantages because it allows us to limit our most significant potential
competitors by binding the most desirable franchises, offering similar yet
distinct amenities and services, and by referring customers between
hotels.
We are operationally competitive in the
markets we serve for a number of reasons. We maintain strict quality
standards concerning the physical appearance of our hotels. We provide
on-going training to our staff to provide the highest levels of customer service
in the mid-scale without food and beverage and upscale hotel segments. We
focus on providing guests with the amenities they want and need, such as
expanded continental breakfast menus, flat panel televisions, in-room high speed
Internet access, premium cable and movie channels, and a variety of high-quality
exercise equipment. Even in markets where our competitors maintain high
property condition, customer service and amenity levels, we are able to survive
difficult market conditions better than most hotel owners because of our
corporate financial strength and diverse revenue base.
Environmental
Matters
We are
subject to certain requirements and potential liabilities under various federal,
state and local environmental laws, ordinances and regulations (“Environmental
Laws”). For example, a current or previous owner or operator of real property
may become liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. The presence of hazardous or
toxic substances may adversely affect our ability to sell or rent such real
property or to borrow using such real property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic wastes may be liable
for the costs of removal or remediation of such wastes at the treatment, storage
or disposal facility, regardless of whether such facility is owned or operated
by such person. We use certain substances and generate certain wastes that may
be deemed hazardous or toxic under applicable Environmental Laws. From
time to time we have incurred, and in the future may incur, costs related to
cleaning up contamination resulting from prior owners’ uses of our properties.
To date, remediation costs relating to prior owners’ uses of our properties have
been immaterial to our operations. Other Environmental Laws require
abatement or removal of certain asbestos-containing materials (“ACMs”) (limited
quantities of which are present in various building materials such as spray-on
insulation, floor coverings, ceiling coverings, tiles, decorative treatments and
piping) in the event of damage or demolition, or certain renovations or
remodeling. We currently own no hotels that were constructed at the time
when asbestos-containing materials were commonly used in construction, but may
purchase additional such properties in the future. Environmental Laws also
govern emissions of and exposure to asbestos fibers in the air and also regulate
polychlorinated biphenyls (“PCBs”), which may be present in electrical
equipment. We believe that few, if any of our hotels have underground storage
tanks (“USTs”) or equipment containing chlorofluorocarbons (“CFCs”). In
connection with our ownership, operation and management of our properties, we
could be held liable for costs of remedial or other action with respect to PCBs,
USTs or CFCs. Prior to purchasing land for new hotel construction or
existing hotels, we hire third-party engineers to assess the property and advise
us concerning potential environmental hazards or concerns.
16
Environmental
Laws are not the only source of environmental liability. Under the common law,
owners and operators of real property may face liability for personal injury or
property damage because of various environmental conditions such as alleged
exposure to hazardous or toxic substances (including, but not limited to, mold,
ACMs, PCBs and CFCs), poor indoor air quality, radon or poor drinking water
quality.
Although
we have incurred and expect to incur remediation and various
environmental-related costs during the ordinary course of operations, we
anticipate that such costs will not have a material adverse effect on our
operations or financial condition.
Employees
As of
December 31, 2009, we employed approximately 1,570 employees at our
hotels. None of our employees are covered by a collective bargaining
agreement.
Financial
Information About Geographic Areas
Due to
the nature of our business, we do not track the domicile of our customers.
However, we believe that a large majority of our customers are domiciled in the
United States. All of our assets are located in the United States.
We do not intend to own or operate hotels located in a foreign
country.
ITEM
1.A. RISK FACTORS
The
following risk factors and other information included in this annual report
should be carefully considered. In addition to the risks described below, we are
subject to a number of other risks and uncertainties which we may not be aware
of or which we currently deem to be immaterial to our business operations.
If any of the following or other risks occurs, our business, financial
condition, operating results and cash flows could be adversely
affected.
In
addition, certain statements in this annual report refer to anticipated or
expected future events, developments or actions. The risks set forth
below, as well as others set forth in this document, if they were to occur,
could cause actual results or outcomes to differ materially from those
anticipated or expected.
17
If
we cannot extend our credit facility with Fortress Credit Corp., we may not be
able to refinance or repay it when it becomes due. If we default on the loan
with Fortress Credit Corp. we may forfeit ownership of 49% of our wholly-owned
subsidiaries.
Our loan
with Fortress Credit Corp. is secured by a pledge of 49% of the membership
interests of our wholly-owned subsidiaries. As of March 1, 2010, these
entities own 38 of our 65 hotels. All new hotels acquired or developed by
us will be required to be owned by a wholly-owned subsidiary subject to this
pledge. The Fortress credit facility was scheduled to mature March 5,
2010, but Fortress has granted a forbearance until April 5, 2010, to permit the
parties to finalize documentation of an extension. The Company and
Fortress have agreed on the major terms of an extension. However, if we
are unable to agree upon definitive extension documents, we will be required to
re-pay the entire balance of the credit facility or risk having Fortress
foreclose on its security interest in our wholly-owned subsidiaries and take
other remedies available under the loan agreement.
The
current slowdown in the lodging industry and economy generally will continue to
impact our financial results and growth.
The present economic slowdown and the
uncertainty over its breadth, depth and duration has had a negative impact on
the hotel industry. Many economists have reported that the United States
is in a severe recession. High unemployment has reduced individual
disposable income. Moreover, many businesses have self-imposed
restrictions on their employees’ ability to travel and hold conferences or
events at hotels. These factors have combined with increases in the supply of
hotel guestrooms to reduce demand for hotel rooms across the nation.
Accordingly, our financial results have been impacted by the economic slowdown
and our future financial results could be further harmed if the economic
slowdown continues for a significant period or becomes worse.
Events
beyond our control which cause regional or nationwide decreases in travel or
that otherwise cause the interruption of our operations or a decline in our
business will negatively affect our operations.
We are at
risk of any event which will cause decreases in regional or nationwide
travel. Such events can include a decline in general economic conditions,
terrorist acts or threats of terrorism, rising fuel prices, inflation, military
actions, public health emergencies such as the swine flu, avian flu or SARS, or
natural disasters. These types of events could cause a significant decline
in travel and tourism, which is likely to cause a decrease in our revenues,
financial condition, results of operations, and ability to reinstate
distributions to our members.
In
addition, it is possible that any of our hotels could be subject to significant
damage or destruction as a result of fire, wind, flood, or other casualty.
Such an event could cause a negative effect on the operations of our
hotels. Further, as a result of future development of hotels in the
markets in which our hotels are operating, the lodging supply may exceed demand,
resulting in decreases in prevailing occupancy rates and average daily room
rental rates. In such event, the results of operation of the hotels may be
adversely affected.
We have
acquired and intend to maintain comprehensive insurance on each of our hotels,
including liability, fire and extended coverage, of the type and amount we
believe are customarily obtained by hotel owners. We cannot give assurance that
such coverage will be available at reasonable rates or with reasonable
deductibles. Certain catastrophic losses, such as earthquakes, floods, or losses
from foreign or domestic terrorist activities may be only partially insurable or
not insurable due to the restrictions of insurers or economic
infeasibility.
18
Regardless
of a decline in revenue, many of our most significant expenditures (including
mortgage note payments, real estate taxes, and maintenance costs) will not
decrease. There can be no assurance that our projected occupancy levels or
average room rates will be attained and it is possible that the hotels will fail
in the event of lower occupancy levels or room rates. If operating costs
increase as a result of inflation or any other cause and we are unable to
increase room rates for any reason, the hotels may not be able to generate
sufficient revenues to cover operating expenses. In the event we are
unable to make scheduled payments on our debt obligations, the hotels could be
foreclosed upon by our lenders.
Hotel
revenues are volatile, which reduces our ability to make accurate predictions
and provide consistent distributions.
Hotels
are unlike other real estate investments which typically provide a long-term
source of income, such as office leases. Instead, hotel revenues can be
volatile because our guestrooms are rented by day. Therefore, changes in
the economy, consumer preferences, terrorist events or any of the other events
mentioned in this Item 1A can be immediately reflected in our revenues as a
result of guests canceling reservations or travel plans with little or no
notice. The occurrence of any of the foregoing factors could have an immediate
material adverse effect on our business, financial condition, results of
operations and our ability to reinstate distributions to our
members.
The hotel
industry is seasonal in nature. Generally, our earnings are higher in the second
and third quarters. If we incorrectly estimate the level of reserves we
need to maintain in order to fund operating expenses during the first and fourth
quarters, debt service payments or member distributions, member distributions
may be negatively affected or we may need to incur unexpected short-term
borrowings to cover the shortfall.
Our
success depends on senior executive officers whose continued service is not
guaranteed.
We depend
on the efforts and expertise of the senior executive officers of the Company and
The Summit Group to manage our day-to-day operations and strategic business
direction. The loss of any of their services could have a material adverse
effect on our business, financial condition, results of operations and our
resulting ability to reinstate distributions to our members. See Item 10.
Directors, Executive Officers and Corporate Governance.
Our
hotels are subject to significant competition in the markets where we are
located and such competition may cause our hotels to not meet our financial
expectations.
The hotel
industry is highly competitive, particularly in the mid-market, mid-scale
without food and beverage and upscale hotel sectors in which we operate.
There are several nationally-recognized franchises that offer franchise brands
in these segments. Historically, the hotel industry is subject to business
cycles, often caused by over-building new hotels. A material increase in
the supply of new hotel rooms to a market can quickly destabilize that market
causing existing hotels to experience decreasing RevPAR and profitability.
(“RevPAR” means revenue per available room, and is the product of the occupancy
rate and the average daily rate charged by a hotel, referred to as ADR.)
From 2007 through 2009, the supply of new hotels increased faster than the
demand for hotel rooms. Thus, across the nation the hotel industry became
out of balance due to the increasing supply in hotels. This, combined with
the significant decline in general economic conditions, caused hotel occupancy
rates and ADRs to decline in most markets. If significant new hotel
construction occurs in one or more of our major markets, or if the market is
particularly negatively affected by general economic conditions, we may
experience a worsening adverse effect on our business, financial condition,
results of operations and our ability to reinstate distributions to our
members.
19
If
the hotel market continues to decline, it may cause further declines in
revenues, financial condition, and negatively affect our ability to reinstate
distributions to our members.
Events
outside our control, such as over-building, general economic conditions, natural
disasters, terrorist activities and other risks discussed in this Item 1A have
adversely affected the hotel industry in the past, and the decline in the United
States economy is currently causing a significant decline in the revenues and
profitability of the industry. Similar events occurring in the future, or
further declines in the general economy, may affect the hotel industry and cause
a further decline in overall hotel industry fundamentals. Such events have
already caused and could continue to cause us to struggle to acquire capital or
financing necessary to acquire or build new properties. In addition, such
events may cause a decline in the financial performance of our existing
hotels. These results would negatively affect our hotel operations,
financial condition, results of operations and our ability to reinstate
distributions to our members.
There
is significant competition for the acquisition of land and existing hotels which
may cause us difficulties in increasing the size of our hotel
portfolio.
In the
long term, we intend to continue to build and acquire hotel properties to add to
the geographic diversity of our hotel portfolio. If we are unable to
locate, successfully negotiate for, or finalize the purchase of land or existing
hotels, we will not be able to attain this component of our business strategy.
There is significant competition for the acquisition of land from other
hoteliers, retail business owners, developers and service businesses such as
restaurants. In addition, we compete for hotel acquisitions with
individual hoteliers, regional or national hotel ownership or management
companies, REITs, institutional investors and others who are engaged in real
estate acquisition. These competitors may purchase the properties we wish
to acquire thus preventing our continued growth. If we choose to pay
higher prices for the properties in order to be more competitive, our returns to
our members may decline.
Our
newly constructed or acquired hotels have no or limited operating history and
may not achieve the operating performance we anticipate, and as a result, our
overall returns may decline.
Our hotels built during 2009 have
limited or no operating history. In addition, our hotels built or acquired
during 2007 and 2008 have experienced extended stabilization periods as a result
of the significant decline in general economic conditions. Consequently,
many of these hotels are a drain on the cash flow produced by our stabilized
hotels. Significant increases in anticipated hotel room supply or
decreases in hotel room demand in the markets where any one or more of our
recently acquired or constructed hotels are located could cause the operating
performance of the hotels to fall further below our projected
results.
20
The
acquisition, development, construction and renovation of hotels contains a
number of risks which may result in significant liability to the
Company.
Hotels
that are acquired may have hidden or concealed physical defects or operational
defects that expose us to liability or significant expenditures to remedy the
defects. In addition, any renovation, development or construction of
hotels carries all risks inherent in such activities such as costs greatly
exceeding original estimates, regulatory hurdles which cause increased
expenditures or significant delays to cure, financing may not be available on
favorable terms for renovation or development of a property, permanent financing
may not be available or a project may not be completed on schedule resulting in
increased debt service, and most development projects, regardless of whether
they are ultimately successful, typically require a substantial portion of
management’s time and attention. Renovation, construction, and development
activities are also subject to risks relating to the inability to obtain, or
delays in obtaining, all necessary zoning, land-use, building, occupancy and
other required governmental permits and authorizations.
The
hotel industry is capital intensive and we are subject to risks associated with
our on-going need to obtain capital and financing to fund property improvements
and maintenance.
In order
to remain competitive and to remain in compliance with our franchise agreements,
our hotels must be renovated regularly. Such renovations include on-going
repairs and maintenance, replacement of equipment, furniture and fixtures, and
property upgrades. Such renovations are subject to risks inherent in
construction activities such as cost overruns and delays, unavailability of
financing to fund such improvements, and regulatory and governmental
concerns. Furthermore, such activities may interrupt our hotel operations,
causing a decline in revenues and increases in operating expenses. As a
result, such renovations could have a material adverse effect on our business,
financial condition, results of operations and our ability to reinstate
distributions to our members.
The
conditions of our existing indebtedness include provisions limiting certain
aspects of our operations and ability to reinstate distributions to our
members.
The
documents evidencing our existing indebtedness under certain loans contain
financial and operating covenants, such as debt service coverage ratios,
leverage ratios, liquidity requirements and other limitations which may restrict
our ability to reinstate distributions or other payments to our members.
In addition, such covenants may restrict our ability to sell any individual
hotel or groups of hotels, sell all or substantially all of our assets and
engage in mergers, consolidations and certain acquisitions. In addition, certain
of our loans require that reserves be established and restricted only for
funding future renovations. Failure to meet or comply with the covenants
could cause one or more of our lenders to declare the indebtedness in default,
accelerate the payments and engage in foreclosure proceedings. As of March
26, 2010, we are in the process of finalizing documentation concerning an
extension of the Company’s loan with Fortress Credit Corp. We anticipate
new covenants in the negotiated documents to include: a restriction on payment
of distributions to members; Fortress approval for any sale or refinance of
Company assets, or acquisitions of new equity or debt; and a pledge of excess
cash flow generated by the Company’s hotels, however, the Company is permitted
to pay operational expenses, all loan payments, necessary capital expenditures,
and other similar expenses required to operate and maintain the Company’s
assets. For additional information concerning certain terms and conditions of
our indebtedness, see Item 7. Management’s Discussion and Analysis of
Financial Conditions and Results of Operations – Additional Information
Concerning Sources and Uses of Cash.
21
We
may not be able to refinance our loans as they become due which may cause the
hotels secured by such loans to be foreclosed upon.
Our
mortgage notes generally mature in advance of their full amortization, resulting
in balloon payments. Given the current economy, many lenders have
significantly reduced lending for commercial projects. These adverse
conditions in the United States credit markets have caused financing
opportunities to be limited or available only on terms that are
unfavorable. In the event we are unable to refinance the amount of the
balloon payment on a maturing loan, we will be forced to identify sufficient
cash to pay off the remaining principal. If we do not have sufficient
funds available in our cash reserves, we will be unable to pay off the loan
and may be subject to foreclosure of our hotels. Alternatively, we may be
required to sell certain hotels or other assets at prices and upon terms that
are unfavorable, which would negatively affect our financial performance and
ability to reinstate distributions to our members. In addition, in the
event we are successful in refinancing our indebtedness, prevailing interest
rates may be significantly higher than on our existing debt. As a result,
our debt service payments could be significantly increased, which would decrease
our cash available for distribution to the members. As of December 31,
2009, we have loans with anticipated balloon payments of $134.4 million maturing
in 2010, loans with anticipated balloon payments of $19.6 million maturing in
2011, and loans with anticipated balloon payments of $147.4 million maturing in
2012.
As of
December 31, 2009, 49.18% of our debt carried fixed interest rates, and 50.82%
carried variable interest rates. As of December 31, 2009, our fixed
interest rate debt totaled $209.6 million. Our variable interest rate debt
totaled $216.6 million as of December 31, 2009, which included amounts
outstanding under our lines of credit, and not the total available under the
lines of credit. Increases in prevailing interest rates could increase our
debt service payments significantly. This would adversely affect our
financial condition, results of operations and ability to reinstate
distributions to our members. Additional information concerning our fixed-
and variable-rate debt is included in Item 8. Financial Statements and
Supplementary Data – Note 11 to Consolidated Financial Statements.
If
we default on our secured debt in the future, the lenders may foreclose on our
hotels.
Our loans
are generally secured by first mortgages on our hotels. If we default on
any of our loans, the respective lender may declare a default and accelerate all
payments due under that loan. We may also be subject to foreclosure of our
hotels pledged under the respective mortgages. In addition to losing one
or more hotels in the event of foreclosure, our members may suffer negative tax
consequences as a result of the Company recognizing taxable income if the
outstanding note balance exceeds our tax basis in the property. A default
or foreclosure may adversely affect our financial condition, cash flow, ability
to satisfy our other debt obligations, and the ability to reinstate
distributions to members.
22
Our
real estate investments are illiquid and this can restrict our ability to react
to market changes because we may be unable to sell one or more hotels upon
favorable prices or terms.
As with
most real estate investments, hotel assets are generally illiquid. This
may restrict our ability to react quickly to changing market, economic or
financial conditions by selling one or more properties. Along with nearly
all real estate markets in the United States, the national hotel real estate
market has declined significantly during 2008 and 2009. Economists predict
that there will be no significant rebound in commercial real estate markets in
the United States during 2010. The occurrence of terrorist acts, a
continuing or deepening recession in the global economy or United States
economy, increasing interest rates, military actions, natural disasters and
other events beyond our control may cause the hotel real estate market to
decline further.
We may
decide to sell one or more of our hotel properties in the future. The decision
to sell may be because a hotel no longer fits within our strategic plan, because
our investment could be better utilized in another hotel, or because we need to
raise cash to fund operations or pay down one of our loans. We cannot
predict whether we will be able to sell any one or more of our hotels at a
price, in a time frame, and upon terms that are acceptable to us.
In order
to make a hotel more attractive for sale, we may need to make substantial
upgrades and renovations. We cannot be certain that we will have funds
available to finance such upgrades and renovations, thus restricting our ability
to sell the hotel at a price and on terms that are acceptable to us. In
addition, we have certain covenants in our loans which prevent us from prepaying
or only allow prepayment with a significant penalty. If we are unable to
pay off a loan and have the mortgage released, we will not be able to find a
buyer for the property. These conditions may adversely affect our
financial condition, results of operations and our ability to reinstate
distributions to members.
Changes
in our debt service requirements may subject us to increasing interest expense
which may reduce our ability to reinstate distributions to our
Members.
Our
debt-to-equity ratio was 5.3:1.0 as of December 31, 2009, and 4.6:1.0 as of
December 31, 2008. Beginning in March 2007, we began to increase the
leverage on our hotel portfolio. Increased leverage subjects our hotels to
increased debt service payment requirements which will impede our cash flow and
restrict our ability to reinstate distributions to members. Further,
increased leverage makes it more likely that we will be unable to survive the
current or a future downturn in the hotel industry because we would be unable to
support the increased payment requirements. In some situations, we
financed 100% of the initial acquisition or construction of a hotel for a period
of several months. Financing 100% of a hotel subjects us to risks that
such highly leveraged hotels will not generate sufficient revenues to pay
operating expenses and debt service requirements. This could result in the
foreclosure of the loans on such hotels. As of December 31, 2009, three of
our hotels were 100% financed.
23
If
interest rates increase, our debt service requirements will increase on our
variable interest rate loans. We do not use any form of interest rate
protection, such as swap agreements or interest rate cap contracts. We may
in the future enter into contracts to provide interest rate protection on our
mortgage notes. Furthermore, at the time that our fixed interest rate
loans mature, we will pay higher debt service payments on refinanced loans that
carry higher interest rates. In addition, beginning March 6, 2010,
interest payments on our $84.8 million Fortress Credit Corp. loan are no longer
paid by advances from such loan. Rather we will begin paying these
interest payments with cash from the Company’s operations. These higher
debt service requirements could adversely affect our financial condition and
results of operations. If we are unable to make scheduled debt service
payments, we may be required to sell one or more hotels at a price and on terms
that are disadvantageous to us or, our properties may be subject to
foreclosure.
Governmental
regulations and noncompliance therewith could adversely affect our operations
and financial condition.
Construction
regulation.
Renovation,
development and construction of hotels requires certain municipal and state
approvals. Therefore, we are subject to risks relating to the
inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy and other required governmental permits and
authorizations. Further, such regulations may cause construction cost
overruns due to unexpected construction requirements. If these events
occur, our hotels may be more expensive to build than originally estimated, thus
reducing the investment return on those projects.
Environmental
matters.
Our
hotels are subject to various federal, state and local environmental laws.
In the event one of our properties is discovered to be contaminated by a
regulated hazardous material, we may be required to clean-up the contamination,
even if the contamination occurred prior to our ownership. Further,
environmental contamination will likely cause a decrease in the value of the
property. Such contamination may even result from the migration of
hazardous materials from a neighboring property. We may also be subject to
lawsuit and liability resulting from harm caused to other property or persons as
a result of the contamination of our hotel. The costs resulting from
clean-up of hazardous material contamination, or liability for harm caused to
another could be significant and materially adversely affect our financial
condition.
We are
unable to provide assurance that our properties are not contaminated by
hazardous materials and that we will not be subject to the significant costs
that can accompany such contamination. Our mortgage lenders require that
we indemnify them for any environmental liability at our
hotels.
24
Americans
with Disabilities Act and other changes in governmental rules and
regulations.
Under the
Americans with Disabilities Act of 1990 (“ADA”), all public accommodations must
meet various federal requirements related to access and use by disabled persons.
Prior to obtaining occupancy permits, our renovated and newly-constructed hotels
are subject to municipal scrutiny of our compliance with the ADA. There is
a certain amount of discrepancy between experts and municipal construction
officials concerning what is required in order to be in compliance.
Therefore, we may be subject to increased costs of construction or delays in
construction due to the requirements of local building officials. If a
property is not in compliance with the ADA we may be required to remove barriers
to access. Further, we could be subject to fines imposed by the United
States government, or damages resulting from civil lawsuits. Substantial
expenditures in efforts to be in compliance with the ADA may adversely affect
our financial condition and ability to reinstate distributions to
members.
Our
hotels may contain or develop harmful molds, which could lead to liability for
adverse health effects and remediation costs.
Molds
exist in all climates and in the air we breathe. However, when mold levels
get too high, it can endanger the health of persons breathing the mold
particles, particularly with certain strains of mold. Southern and humid
climates are particularly subject to the growth and proliferation of molds due
to high humidity. The presence of mold in our hotels could negatively
affect the health of our employees and guests. Thus, the presence of mold
in our hotels, beyond acceptable levels, may require us to remediate the mold
problem. The existence or remediation of mold may require us to close all
or a portion of the subject hotel, thus reducing our revenues. In addition, we
may be subject to liability and civil lawsuits resulting from employees or
guests who were exposed to the mold and suffered resulting health effects.
Mold remediation can be expensive, and the unexpected costs could adversely
affect the result of our operations, financial condition and ability to
reinstate distributions to our members.
Our
mortgage agreements and ground leases may restrict our ability to sell our
hotels.
We have
covenants in some of our loans which prevent us from paying off certain loans,
or only allowing prepayment of such loans with a significant penalty. If
we are unable to pay off a loan and have the mortgage released, we will not be
able to find a buyer for the property. These conditions may adversely
affect our financial condition, results of operations and our ability to
reinstate distributions to members.
In
addition, several of our loan agreements contain restrictions or prohibitions on
our ability to assign the loans to third parties. If such assignments are
prohibited, our ability to sell the hotel subject to that loan is greatly
restricted. If such assignments are permitted, they generally require
consent of the lender, and payment of a significant transfer fee and all costs
associated with the assignment.
Prepayment
penalties and restrictions on assignment may reduce the price received for our
hotels. This may adversely affect our financial condition and ability to
reinstate distributions to members.
25
Our
ground leases contain certain provisions that may limit our ability to sell our
hotels.
We own
four hotel properties subject to a ground lease. These leases require the
consent of the lessor in order to transfer the hotel and assign the ground
lease. If the lessor refuses to allow transfer, we may be unable to sell a
hotel that we otherwise want or need to sell. This may negatively affect
our results of operations, financial condition and ability to reinstate
distributions to members.
Members
may be required to report taxable income in periods where no cash distributions
are made, thus requiring members to pay taxes from personal funds.
Because all our taxable income will
flow through to our members without regard to the amount of any cash
distributions, our members’ tax liability on their distributive share of our
taxable income could exceed any cash distributions received. If members do
not receive distributions sufficient to pay the tax liability with respect to
their distributive share of income or gain, they will be forced to pay tax
liabilities out of personal funds. Members will be required to report
their distributive share of our income, gains, losses, deductions and credits
without regard to whether corresponding cash distributions are received.
Because members will report their annual share of our taxable income or loss
without regard to the amount of any cash distributions received, they may incur
a tax liability with respect to their distributive share of income or gains, if
any, for a taxable year in excess of any cash distribution.
Members
have limited voting rights and ability to control the Board of Managers or our
operations.
We have a Board of Managers; however,
six of our seven Managers are appointed by the Class C Member, The Summit
Group. Furthermore, The Summit Group is the Company Manager and has
significant control over the operations and actions of the Company. The
Summit Group may be removed as Company Manager only for cause. In
addition, The Summit Group is hired by us as the hotel manager pursuant to a
Hotel Management Agreement. The Hotel Management Agreement provides that
we may terminate The Summit Group as hotel manager only for cause. The
Operating Agreement may not be amended to change these provisions without the
consent of the Class C Member. Class A, Class A-1 and Class B Members have
no right to participate in the management of the Company and their voting rights
are limited to: (i) the creation of a new class of membership interest if such
new class has rights, powers and duties that are superior to those of their
class of membership interests; (ii) amendments to the Articles of Organization
or Operating Agreement of the Company, except as otherwise set forth in the
Operating Agreement; and (iii) dissolution of the Company. Thus, the
Members’ ability to influence Company decisions is substantially
limited.
26
There
are inherent conflicts of interest in our organizational and management
structure.
The Company is subject to various
conflicts of interest arising out of its relationship with certain members,
investors, Managers, and their affiliates. The Summit Group, the Company
Manager and hotel manager, also manages one hotel not owned by the
Company. Furthermore, The Summit Group may develop and manage additional
hotels which may not be owned by the Company. Potentially, these hotels
could compete with the Company’s hotels for guests, and may compete for
managers, employees and other resources, including the time and efforts of The
Summit Group.
As The Summit Group appoints seats on
the Board of Managers and is also a member in the Company, the interests of The
Summit Group may be adverse to other members. As a result of these
conflicts of interest, certain actions or decisions by The Summit Group may have
an adverse effect on the interests of the members. Because The Summit
Group’s Class C membership interests are not subject to dilution in the event of
a private offering or other issuance of additional membership interests, it is
possible that issuing additional membership interests may be advantageous to The
Summit Group, but is not in the best interests of the Company or other
members.
Because reimbursable expenses are
payable pursuant to the hotel management agreement without regard to whether the
Company’s hotels are generating net cash from operations or otherwise benefiting
the Company, an additional conflict of interest could arise in that it might be
to the advantage of a Manager or The Summit Group to retain certain hotels even
though its continued retention might not be in the members’ best
interests.
The Company’s two executive officers
are both executive officers of The Summit Group, the Company Manager and hotel
manager. The executive officers may make decisions and take actions on
behalf of the Company which are beneficial to The Summit Group, but not in the
best interest of the Company.
Kerry W. Boekelheide, the sole owner of
The Summit Group and a Company Manager, is also an owner of Summit Capital
Partners, LLC fka Summit Real Estate Investments, LLC (“SCP”), the affiliated
broker-dealer which the Company uses for its securities offerings and he
therefore has an interest in raising additional capital and offering securities
of the Company. It is possible that offering securities of the Company may
be in the best interests of SCP or its agents, but may not be in the best
interests of the Company.
The
issuance of additional membership interests will dilute the members’
ownership.
As hotel
acquisition and construction opportunities arise from time to time, we may issue
additional membership interests to raise the capital necessary to finance the
hotel acquisitions and construction, subject to our offering parameters.
Future issuances of membership interests will dilute the Class A, Class A-1 and
Class B members’ ownership interest in the Company.
27
Members
will have virtually no ability to sell or transfer their membership interests
and thus are required to bear the risks of this investment for a significant
period of time.
We do not intend to apply for listing
of our membership interests on any stock exchange or on the NASDAQ stock market
or any Alternative Trading System, although management reserves the right to
pursue such possibilities. In addition, our
Operating Agreement contains extensive restrictions on the transfer of
membership interests. The transferability of membership interests is also
restricted by federal and state law. The membership interests may not be
offered, sold, transferred, pledged, or hypothecated to any person
without the consent of the Company Manager. Due to tax and other
requirements, the Company Manager does not intend to grant consent except for
those transfers made pursuant to a safe harbor from the publicly traded
partnership rules. It may be difficult or impossible for members to
liquidate their investment when desired. Therefore, members may be
required to bear the economic risks of the investment for an indefinite period
of time.
ITEM
1.B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We are
headquartered in Sioux Falls, South Dakota and, as of December 31, 2009, owned
and managed 65 hotel properties throughout the United States. We lease our
headquarters office location. We own in fee all of our hotel properties,
except for four hotels that are subject to a land lease. We believe that,
for our respective class of hotels, all of our hotel properties are in good
physical condition, are the appropriate size and offer appropriate amenities,
and are located in markets that, when the economy stabilizes, will be good to
excellent. As of December 31, 2009, we owned 65 hotel properties with a
total of 6,533 guestrooms. 42 of our hotels are categorized as mid-scale
without food and beverage hotels, 23 of our hotels are categorized as upscale
hotels. A list of our hotel properties owned as of December 31, 2009 and
operating information for those hotels is included as Exhibit 99.1.
The
Company’s hotels are located throughout the continental United States with
concentrations in Arkansas (4 hotels), Arizona (4 hotels), Colorado (7 hotels),
Idaho (7 hotels), Kansas (4 hotels), Louisiana (4 hotels), Tennessee (5 hotels),
and Texas (7 hotels).
From
January 1, 2009 through December 31, 2009, we completed the construction of 6
hotels, and sold 2 hotels. The acquisitions and dispositions of the
Company’s hotels and real estate are set forth below:
Opening/Sale
|
||||||||
Location
|
# Rooms
|
Franchise
|
Status
|
Date
|
||||
Jacksonville,
FL
|
136
|
Aloft
|
Construction
Complete
|
08/09
|
||||
Flagstaff,
AZ
|
164
|
Courtyard
by Marriott
|
Construction
Complete
|
09/09
|
||||
Portland,
OR
|
124
|
Residence
Inn
|
Construction
Complete
|
09/09
|
||||
Portland,
OR
|
136
|
Hyatt
Place
|
Construction
Complete
|
11/09
|
||||
Ft.
Myers, FL
|
148
|
Hyatt
Place
|
Construction
Complete
|
10/09
|
||||
Twin
Falls, ID
|
91
|
Holiday
Inn Express & Suites
|
Construction
Complete
|
03/09
|
||||
St.
Joseph, MO
|
65
|
Comfort
Suites
|
Sold
|
5/09
|
||||
Ellensburg,
WA
|
|
52
|
|
Comfort
Inn
|
|
Sold
|
|
8/09
|
28
Construction
of the Jacksonville, FL Aloft was financed with equity and with debt issued by
First National Bank of Omaha. Construction of the Flagstaff, AZ Courtyard
by Marriott hotel was financed with equity and by Compass Bank.
Construction of the Portland, OR Residence Inn was financed with equity and by
the Bank of the Cascades loan. Construction of the Portland, OR Hyatt
Place was financed with equity and by Bank of the Ozarks. Construction of the
Ft. Myers, FL Hyatt Place was funded entirely with equity. Construction of
the Twin Falls, ID Holiday Inn Express Hotel & Suites was funded with equity
and a loan from BNC National Bank. The above-mentioned loans are further
described in Item 8. Financial Statements and Supplementary Data – Note 11
to Consolidated Financial Statements.
The
aggregate purchase price and construction cost of the six properties described
in the above table is approximately $110.8 million. The sale price of the
St. Joseph, MO Comfort Suites was $4.05 million. The sale price of the
Ellensburg, WA Comfort Inn was $2.75 million.
Franchises
The
following table reflects, as of December 31, 2009, our hotel properties, by
franchise brand:
Properties
|
Rooms
|
|||
Hampton
Inn
|
11
|
1,211
|
||
Fairfield
Inn by Marriott
|
10
|
867
|
||
Springhill
Suites by Marriott
|
7
|
671
|
||
Holiday
Inn Express
|
6
|
547
|
||
Courtyard
by Marriott
|
6
|
715
|
||
Comfort
Suites
|
4
|
310
|
||
Cambria
Suites
|
4
|
485
|
||
Residence
Inn
|
4
|
411
|
||
Hyatt
Place
|
4
|
556
|
||
Comfort
Inn
|
3
|
201
|
||
Country
Inn & Suites by Carlson
|
1
|
64
|
||
TownePlace
Suites by Marriott
|
1
|
90
|
||
Hilton
Garden Inn
|
1
|
120
|
||
Staybridge
Suites
|
1
|
92
|
||
aloft
Hotel
|
1
|
136
|
||
Unfranchised(1)
|
1
|
57
|
||
Total
|
65
|
6,533
|
(1)
|
Our
unfranchised hotel is an Aspen Hotel & Suites located in Fort Smith,
AR.
|
Fairfield
Inn by Marriott, Comfort Inn, Hampton Inn, Hampton Inn & Suites, Comfort
Suites, Holiday Inn Express, Holiday Inn Express Hotel & Suites, and Country
Inn & Suites by Carlson, are each considered franchise brands in the
mid-scale without food and beverage segment. Each of these hotels offers
amenities generally present for hotels of this class, including a swimming pool
and whirlpool, free continental breakfast, and in-room high speed Internet
access. A significant number of the rooms at each Hampton Inn & Suites,
Comfort Suites, Holiday Inn Express Hotel & Suites, and Country Inn &
Suites are mini-suites, and include a small microwave and
refrigerator.
29
Courtyard
by Marriott, Cambria Suites, aloft Hotels, Hyatt Place, Hilton Garden Inn, and
Springhill Suites are considered upscale hotel franchises. Springhill
Suites was previously considered a limited-service hotel franchise, but the
franchisor required the addition of several amenities and the hotels are now
considered an upscale hotel brand. The hotel and room décor is generally
of higher quality than other hotels in this segment. In addition, these
hotels offer a hot, made-to-order breakfast or breakfast buffet, and lounge
which is open for limited hours each evening. These hotels may also offer
a light lunch or dinner menu.
Residence
Inn, Staybridge Suites, and TownePlace Suites are considered mid-scale without
food and beverage, extended-stay hotels. Each guestroom at the hotels in
this segment offers a separate bedroom area, large living area, and full
kitchen. These properties cater to guests who stay over 7
nights.
Affiliation
with a nationally-recognized franchise offers name recognition, national
marketing and advertising campaigns, centralized reservations systems, and
certain other centralized functions and quality control.
Ground
Leases
Four of
our hotel properties are located on leased land. The hotels located on
leased land, lease termination dates, and extension options are as
follows:
|
-
|
Fort
Smith, Arkansas Comfort Inn. Total lease payments are anticipated to
be $44,088 in 2010. Lease termination date is August 31, 2022.
One option to extend for 30 years.
|
|
-
|
Fort
Smith, Arkansas Hampton Inn. Total lease payments are anticipated to
be $145,987 in 2010. Lease termination date is May 31, 2030. Eleven
options to extend the term of the lease, with each option being a 5-year
term.
|
|
-
|
Portland,
Oregon Residence Inn. All lease payments have been prepaid through
the initial term of the lease, including the scheduled lease payment of
$23,700 due in 2010. Lease termination date is June 30, 2084. The
lease has one option to extend for a term of 15
years.
|
|
-
|
Portland,
Oregon Hyatt Place. All lease payments have been prepaid through the
initial term of the lease, including the scheduled lease payment of
$23,700 due in 2010. Lease termination date is June 30, 2084. The lease
has one option to extend for a term of 15
years.
|
Financing
and Mortgages
As of
December 31, 2009, we had approximately $404.7 million of outstanding long-term
mortgage debt. One of our hotels owned as of December 31, 2009 is mortgage
free, the remainder are encumbered by a mortgage or deed of trust. Mortgage debt
is obtained from a variety of commercial and institutional lenders. For
additional information concerning our debt and lenders, please see Item 7.
Management’s Discussion and Analysis of Financial Information and Results of
Operations — Additional Information Concerning Sources and Uses of Cash, and
Item 8. Financial Statements and Supplementary Data – Note 11 to
Consolidated Financial Statements.
30
Maintenance
Obsolescence
and wear and tear can negatively affect the value and the revenue-generating
ability of our hotels. We are committed to maintaining the highest
standards of physical condition of our hotels compared to other hotels
categorized as mid-scale without food and beverage and upscale hotels.
Furthermore, all but one of our hotels are subject to a franchise
agreement. Each franchisor requires strict adherence to a regular
maintenance, repair, remodeling and refurbishment schedule. We are in
compliance with such schedules at each of our hotels and anticipate remodeling
three hotels during 2010. We are working with the franchisors at these
hotels to determine the extent of the required remodeling. In 2009 we
expended approximately $8.7 million to renovate our existing hotels to keep them
in good and competitive condition.
ITEM
3. LEGAL PROCEEDINGS
The
Company has had a complaint filed against it with the US Department of
Labor/Occupational Safety and Health Administration (“OSHA”) by Peter J. Poulos,
a former employee. The administrative file was opened on April 6,
2009. The complaint was made against the Company, The Summit Group, Inc.,
Kerry W. Boekelheide, Director of Human Resources Lori Richards, Director of
East Coast Operations Trent Peterson, Regional Manager Stephanie Romic and
Regional Manager Janis Moeller. The complaint alleges that, as a result of
one circumstance of a payment being applied to incorrect accounts, the Company
engaged in a scheme to perpetuate fraud, and that the employee’s subsequent
termination was retaliatory and in violation of the Corporate and Criminal Fraud
Accountability Act of 2002 (CCFA). The only relief sought under the
complaint is an administrative finding that the Company violated the CCFA.
The Company vehemently denies these allegations and is vigorously defending the
claim. There have been no recent material developments concerning this
proceeding.
On May
12, 2009, the Company was served with a civil complaint of Peter J. Poulos, the
same former employee described above, filed in United States District Court,
Southern District of South Dakota. The complaint is made against the
Company, The Summit Group, Inc., Kerry W. Boekelheide, and Trent Peterson and is
based upon the same set of circumstances as in the OSHA complaint described
above. The relief sought includes damages, including front and back pay,
compensatory damages, punitive damages, and other relief, in excess of $10
million. The Company vehemently denies these allegations and is vigorously
defending the claim. On July 10, 2009 Kerry W. Boekelheide was dismissed from
the lawsuit. Discovery is proceeding in this case, and trial is scheduled
for August 2010.
We are
involved from time to time in litigation arising in the ordinary course of
business, however, we are not currently aware of any actions against us that we
believe would materially adversely affect our business, financial condition or
results of operations. We may be subject to future claims which could
cause us to incur significant expenses or damages. We have assumed
liability for past events at the hotels and for entities previously acquired by
the Company, including lawsuits that have not yet materialized. If we
acquire or consolidate additional entities in the future, we may assume
obligations and liabilities of such entities. We operate in an industry
susceptible to personal injury claims and significant personal injury claims
could be asserted against us in the future arising out of events not known to us
at this time.
31
ITEM
4. [RESERVED]
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
There is
no established public trading market for any class of the Company’s
securities.
As of March 26, 2010, there were
approximately 660 record holders of the Company’s Class A membership interests,
and 470 record holders of the Company’s Class A-1 membership interests.
There are no outstanding warrants or options to purchase any class of Company
security, pursuant to compensation plans or otherwise, and there is no class of
security convertible into common equity of the Company.
Each
month from April 2004 through December 2009, the Company has paid each Class’s
Priority Return. The Priority Return for members is a cumulative but not
compounded 10% return on each Class A Member’s Adjusted Capital Contribution and
a cumulative but not compounded 8% return on each Class A-1 Member’s Adjusted
Capital Contribution. Effective January 1, 2010, the members’ Priority
Return payments were reduced to 25% of the regular amount, and as of March 31,
2010, the payments were suspended. We are in the process of finalizing
documentation concerning an extension of the Company’s loan with Fortress Credit
Corp., and we anticipate the negotiated documents to include a restriction on
payment of distributions to members. The unpaid Priority Returns continue to
accrue and will be paid at such time as is permitted by the Company’s lenders
and sufficient cash is available. In addition, the Company previously made
additional distributions to the members, however, no additional distributions
were made during 2009 and none are anticipated to be made during 2010. For
additional information concerning the Fortress Credit Corp. refinance, please
see Item 7. Management’s Discussion and Analysis of Financial Conditions
and Results of Operations –Recent Developments.
32
During
the twelve month periods ended December 31, 2009 and 2008, the Company made
Priority Return and additional distributions to the Class A and Class A-1
Members, as set forth in the following table.
Class A
|
Class A-1
|
|||||||||||||||
Priority Return
|
Additional
|
Priority Return
|
Additional
|
|||||||||||||
2009
|
||||||||||||||||
First
Quarter
|
$ | 2,402,344 | $ | 0 | $ | 441,127 | $ | 0 | ||||||||
Second
Quarter
|
$ | 2,429,037 | $ | 0 | $ | 581,523 | $ | 0 | ||||||||
Third
Quarter
|
$ | 2,455,730 | $ | 0 | $ | 689,516 | $ | 0 | ||||||||
Fourth
Quarter
|
$ | 2,455,730 | $ | 0 | $ | 816,061 | $ | 0 | ||||||||
Total
|
$ | 9,742,841 | $ | 0 | $ | 2,528,227 | $ | 0 | ||||||||
2008
|
||||||||||||||||
First
Quarter
|
$ | 2,402,346 | $ | 0 | $ | 262,849 | $ | 0 | ||||||||
Second
Quarter
|
$ | 2,429,038 | $ | 1,451,618 | $ | 265,770 | $ | 98,162 | ||||||||
Third
Quarter
|
$ | 2,455,731 | $ | 2,756,096 | $ | 268,690 | $ | 186,374 | ||||||||
Fourth
Quarter
|
$ | 2,455,730 | $ | 3,215,448 | $ | 268,690 | $ | 217,437 | ||||||||
Total
|
$ | 9,742,845 | $ | 7,423,162 | $ | 1,065,999 | $ | 501,973 |
October
2008 Offering
We began
a private offering of our Class A-1 membership interests pursuant to a
Confidential Private Placement Memorandum dated October 21, 2008. The
Class A-1 membership interests were offered privately, pursuant to an exemption
under Rule 506 of the Securities Act of 1933. No interests are offered to
unaccredited investors, and no sales are made to unaccredited investors. A
total of 2,000 units of Class A-1 membership, for an aggregate offering price of
$100,000,000, were offered at $50,000 per unit. This offering closed
October 20, 2009. We received and accepted subscriptions from 380 holders
with gross proceeds of $30.5 million. Commissions on the sales and related
expenses totaled $2.8 million, for net proceeds of $27.7 million. There
was no particular class of offerees for the Class A-1 Units, and the Units were
sold to individuals, entities, and institutional buyers.
33
ITEM
6. SELECTED FINANCIAL DATA
Selected
Financial Data
The
following financial and operating information should be read in conjunction with
the information set forth under “Management’s Discussion and Analysis of
Financial Conditions and Results of Operations” and our consolidated financial
statements and related notes thereto appearing elsewhere in this annual report
and incorporated herein by reference.
Income Statement Data (in
millions)
For the Years Ended
|
||||||||||||||||||||
December 31,
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Operating
Revenues
|
$ | 121.2 | $ | 135.1 | $ | 113.9 | $ | 100.7 | $ | 72.3 | ||||||||||
Income
/(Loss) From
|
||||||||||||||||||||
Continuing
Operations
|
$ | (16.6 | ) | $ | 4.0 | $ | 3.9 | $ | 7.7 | $ | 7.2 | |||||||||
Net
Income/(Loss)
|
$ | (15.1 | ) | $ | 13.1 | $ | 14.0 | $ | 10.1 | $ | 4.0 |
Earning
Data
Income/(Loss)
From Continuing Operations Per Unit (1)
|
$ | (9,559.47 | ) | $ | 2,579.50 | $ | 2,520.04 | $ | 5,003.89 | $ | 5,591.22 | |||||||||
Net
Earnings Per Unit (1)
|
$ | (8,716.23 | ) | $ | 8,411.67 | $ | 9,012.19 | $ | 6,544.76 | $ | 3,134.90 | |||||||||
Aggregate
Cash Distributions Paid(1)
|
$ | 12,271,067 | $ | 26,702,848 | $ | 24,839,848 | $ | 25,148,544 | $ | 21,618,861 | ||||||||||
To
Class C
|
$ | 0 | $ | 6,683,725 | $ | 5,612,615 | $ | 5,780,665 | $ | 5,319,822 | ||||||||||
Per
Class C Unit(1)
|
$ | 0 | $ | 38,501 | $ | 32,331 | $ | 33,299 | $ | 30,644 | ||||||||||
To
Class B
|
$ | 0 | $ | 1,285,144 | $ | 1,124,079 | $ | 1,160,779 | $ | 1,234,396 | ||||||||||
Per
Class B Unit(1)
|
$ | 0 | $ | 15,796 | $ | 13,816 | $ | 14,267 | $ | 15,172 | ||||||||||
To
Class A
|
$ | 9,742,840 | $ | 17,166,006 | $ | 16,575,137 | $ | 16,784,874 | $ | 15,064,643 | ||||||||||
Per
Class A Unit(1)
|
$ | 8,351 | $ | 14,714 | $ | 14,208 | $ | 14,388 | $ | 14,633 | ||||||||||
To
Class A-1
|
$ | 2,528,227 | $ | 1,567,973 | $ | 1,528,017 | $ | 1,422,226 | $ | 0 | ||||||||||
Per
Class A-1 Unit(1)
|
$ | 8,012 | $ | 11,767 | $ | 11,467 | $ | 11,654 | $ | 0 | ||||||||||
Weighted
Average Number of Units Outstanding
|
||||||||||||||||||||
Class
C
|
173.60 | 173.60 | 173.60 | 173.60 | 173.60 | |||||||||||||||
Class
B
|
81.36 | 81.36 | 81.36 | 81.36 | 81.36 | |||||||||||||||
Class
A
|
1,166.62 | 1,166.62 | 1,166.62 | 1,166.62 | 1,029.49 | |||||||||||||||
Class
A-1
|
315.55 | 133.25 | 133.25 | 122.04 | 0 | |||||||||||||||
Total
|
1,737.13 | 1,554.83 | 1,554.83 | 1,543.62 | 1,284.45 |
(1)
|
For
purposes of determining the number of units outstanding, we assumed that a
member acquires a Unit of membership by making a capital contribution of
$100,000. As described in the Company’s Registration Statement filed
on Form 10, the Company is periodically re-valued by a third party, and
the valuation at the time of purchase determines the respective member’s
Sharing Ratio in the Company. Thus, each member’s Units may carry
different Sharing Ratios. A member’s distributions are determined,
in part, by their Sharing Ratio. Therefore, the above Cash
Distributions per Unit are
averages.
|
34
Balance Sheet Data (in
millions)
For the Periods Ended
|
||||||||||||||||||||
December 31,
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Total
Assets
|
$ | 519.4 | $ | 494.8 | $ | 448.0 | $ | 356.0 | $ | 317.3 | ||||||||||
Long
Term Obligations
|
$ | 270.4 | $ | 350.8 | $ | 261.5 | $ | 210.1 | $ | 180.7 |
Calculation of Sharing
Ratios
Sharing
Ratios are the rights to distributions and allocations granted to a
Member. Sharing Ratios are determined at the time of purchasing a
membership interest and are based upon the capital contributions received
pursuant to an offering divided by a recent third-party valuation of the
Company. Each respective investor in an offering receives its
proportionate share of the Sharing Ratios issued pursuant to such offering based
upon the investor’s capital contribution, multiplied by 50%. The Class C
Member is allocated a Sharing Ratio equivalent to each Sharing Ratio allocated
to an investor. Issuance of new Sharing Ratios results in an adjustment to
the existing Sharing Ratios of all classes of members. Aggregate Sharing
Ratios as of December 31, 2009 for each membership class were:
Class
A
|
41.7 | % | ||
Class
A-1
|
7.4 | % | ||
Class
B
|
7.4 | % | ||
Class
C
|
43.5 | % |
Anticipated
Changes to Selected Financial Data
Management anticipates that the
Company’s revenues and expenses will remain relatively stable during 2010,
compared to 2009. Management does anticipate, however, that there will be
no distributions made to members after March 31, 2010 through the end of 2010
due to restrictions on distributions anticipated in the Fortress Credit Corp.
loan covenants. Management also believes that the Total Assets and Long
Term Obligations will not continue to grow as in previous years, but will
stabilize as the Company does not anticipate making significant acquisitions or
beginning new hotel construction during 2010.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Management’s
discussion and analysis of financial conditions and results of operations
(“MD&A”) discusses our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these consolidated financial statements requires management to
make estimates and assumptions that affect reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and reported amounts of revenues and costs
and expenses during the reporting periods. On an ongoing basis, management
evaluates its estimates and judgments, including those related to revenue
recognition, bad debts, investments, plant, property and equipment and
intangible assets, income taxes, financing operations, self-insurance claims
payable, contingencies, and litigation.
35
Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of the
assets and liabilities that are not readily available from other sources.
Actual results may differ from these estimates under different assumptions and
conditions.
Forward-Looking
Statements
This
report includes “forward-looking” statements, as that term is defined in the
Private Securities Litigation Reform Act of 1995 or by the Securities and
Exchange Commission in its rules, regulations and releases. Forward-looking
statements are any statements other than statements of historical fact,
including statements regarding our expectations, beliefs, hopes, intentions or
strategies regarding the future. In some cases, forward-looking statements can
be identified by the use of words such as “may,” “will,” “expects,” “intends,”
“should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,”
“potential,” “continue,” or other words of similar meaning. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those discussed in, or implied by, the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, general economic conditions, our financial and business
prospects, our capital requirements, our financing prospects, changes in same
hotel revenues, and those risks described in Item 1.A. of this annual report. We
caution readers that any such statements are based on currently available
operational, financial and competitive information, and they should not place
undue reliance on these forward-looking statements, which reflect management’s
opinion only as of the date on which they were made. Except as required by law,
we disclaim any obligation to review or update these forward-looking statements
to reflect events or circumstances as they occur.
Critical Accounting
Policies
Adopted Accounting
Standards
The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB.” The FASB sets generally
accepted accounting principles (GAAP) that we follow to ensure we consistently
report our financial condition, results of operations, and cash flows. In
June 2009, the FASB issued FASB ASC 105, Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification,
sometimes referred to as the Codification or ASC, as the sole source of
authoritative GAAP. The FASB finalized the Codification effective
for periods ending on or after September 1, 2009. Prior FASB standards are
no longer being issued by the FASB. Pursuant to the provisions of FASB ASC
105, the Company has updated references to GAAP in its financial statements
issued for the period ended December 31, 2009.
36
Property and
Equipment
Property and equipment are stated at
cost less accumulated depreciation. We periodically review the carrying
value of property and equipment and other long-lived assets for indications that
the carrying value of such assets may not be recoverable. This review
consists of a comparison of the carrying value of the assets with the expected
future undiscounted cash flows. If the respective carrying values exceed
the expected future undiscounted cash flows, the impairment is measured using
fair value measures to the extent available or discounted cash
flows.
Capitalized Development and
Interest Costs
The Company capitalizes all hotel
development costs and other direct overhead costs related to the purchase and
construction of hotels. Additionally, the Company capitalizes the interest
costs associated with constructing new hotels. Capitalized development,
direct overhead and interest are depreciated over the estimated lives of the
respective assets. Organization and start-up costs are expensed as
incurred. For the years ended December 31, 2009, 2008, and 2007, the
Company capitalized interest of $2,977,101, $3,829,267, and $4,489,724,
respectively.
Impairment of Long-Lived
Assets
We consider each individual hotel to be
an identifiable component of our business. In accordance with FASB ASC
360, “Property Plant and Equipment,” we do not consider a hotel as “held for
sale” until the potential transaction has been approved by our Board, as may be
required, and it is probable that the sale will be completed within one year. We
do not consider a sale to be probable until a buyer’s due diligence review is
completed and all substantive conditions to the buyer’s performance have been
satisfied. Once a hotel is “held for sale,” the operations related to the
hotel will be included in discontinued operations.
We do not depreciate hotel assets while
they are classified as “held for sale.” Upon designation of a hotel as
being “held for sale,” and quarterly thereafter, we review the carrying value of
the hotel and, as appropriate, adjust its carrying value to the lesser of
depreciated cost or fair value less cost to sell, in accordance with ASC
360. Any such adjustment in the carrying value of a hotel classified as
“held for sale” will be reflected in discontinued operations. We will
include in discontinued operations the operating results of hotels classified as
“held for sale” or that have been sold.
We
periodically review the carrying value of certain long-lived assets in relation
to historical results, current business conditions and trends to identify
potential situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying value of such
assets may not be recoverable, we estimate the undiscounted sum of the expected
cash flows of such assets to determine if such sum is less than the carrying
value of such assets to ascertain if an impairment exists. If an
impairment exists, we determine the fair value by using quoted market prices, if
available for such assets, or if quoted market prices are not available, we
would discount the expected future cash flows of such assets.
37
Management has identified six land
parcels that the Company intends to sell and no longer develop. These
parcels were deemed to be impaired and written down to their fair market
value. Carrying value of the assets exceeded their fair value by
$6,332,736, which fair value was determined to be the quoted market prices of
the assets. Therefore, an impairment loss of that amount has been charged
to operations in the year ended December 31, 2009.
Consolidation
Policy
The consolidated financial
statements include the accounts of the Company and its variable interest entity,
Summit Group of Scottsdale, Arizona, LLC. All significant intercompany
accounts and transactions have been eliminated.
The Company adopted FASB ASC 810,
“Consolidations” beginning October 1, 2004. This ASC requires that we
present any variable interest entities in which we have a majority variable
interest on a consolidated basis in our financial statements. In January
2009, the Company has adopted FASB ASC 810, Consolidation. Under Topic
810, variable interest entities (“VIEs”) are required to be consolidated by
their primary beneficiaries if they do not effectively disperse risks among the
parties involved. The primary beneficiary of a VIE is the party that
absorbs a majority of the entity’s expected losses, receives a majority of its
expected residual returns, or both, as a result of holding variable
interests. In applying Topic 810, management has utilized available
information and reasonable assumptions and estimates in evaluating whether an
entity is a VIE and which party is the primary beneficiary. These
assumptions and estimates are subjective and the use of different assumptions
could result in different conclusions.
Revenue
Recognition
The
revenue from the operation of a hotel is recognized as part of the hotel
operations segment when earned. Typically, cash is collected from the
guest at the time of check-in or checkout or the guest pays by credit card which
is typically reimbursed within 2-3 days; however, we also extend credit to
selected corporate customers.
Results
of Operations
The
following discussion presents an analysis of results of our operations for the
years ended December 31, 2009, 2008, and 2007.
Our Net
Income declined for the year ended December 31, 2009 compared to the year ended
December 31, 2008, primarily because of a decline in revenues resulting from the
general economic downturn. The primary cause was a decline in revenues
caused by decreased occupancy rates and average daily rates (ADRs) at our
hotels. Due to the significant decline in the national economy, occupancy
rates and room rates have decreased at hotels throughout the United States,
including the Company’s hotels. Furthermore, many of the expenses incurred
in operating hotels are fixed, thus expenses did not decline commensurate with
the decline in revenues. As a result, Net Income declined for the year
ended December 31, 2009, compared to the year ended December 31,
2008.
38
All of
our revenues are derived from guestroom rentals at our hotels, and revenues from
services related to guestroom rentals. In addition to guestroom rental
revenue, our hotels derived revenues from fees to guests for telephone usage,
hotel meeting room rentals, restaurant and lounge receipts, hotel laundry and
valet services, revenues from concessions and other fees charged to hotel users
for similar services. All revenues were generated from hotels located in
the United States.
Management
utilizes a variety of indicators to compare the financial and operating
performance of the hotels between periods, as well as the performance of
individual hotels or groups of hotels. The key indicators we use include:
occupancy percentage rate which is the percentage computed as the number of
hotel guestrooms occupied divided by the number of guestrooms available for
occupancy; average daily rate (ADR) which is the average rental rate charged to
guests; revenue per available room (RevPAR) which is the product of the
occupancy rate and ADR. Each of these indicators is also commonly used
throughout the hotel industry. Because the number of hotels we own each
year is variable, we believe these indicators give a better indication of our
performance.
Year
Ended December 31, 2009 Compared with Year Ended December 31, 2008
Revenues
We generated $121.2 million of revenues
from continuing operations during the year ended December 31, 2009, compared to
$135.1 million during the year ended December 31, 2008, a decrease in total
year-to-year revenues of 10.3%. The decrease was primarily caused by
decreasing occupancy rates and ADRs at our hotels.
The key indicators for the Company’s
hotel performance for the years ended December 31, 2009 and 2008 are set forth
in the following table (includes hotels with continuing and discontinued
operations).
Year Ended
|
Year Ended
|
|||||||||||
December 31,
|
December 31,
|
|||||||||||
2009
|
2008
|
Increase/Decrease)
|
||||||||||
All
Company Hotels
|
||||||||||||
RevPAR
|
$ | 54.12 | $ | 66.78 | $ | (12.66 | ) | |||||
Average
Daily Rate
|
$ | 87.40 | $ | 100.95 | $ | (13.55 | ) | |||||
Occupancy
Rate
|
61.92 | % | 66.15 | % | (4.23 | )% | ||||||
Number
of Hotels Owned
|
65 | 62 | 3 | |||||||||
Number
of Guestrooms
|
6,533 | 5,854 | 679 |
Management
attributes the decline in revenues to decreased occupancy rates and average
daily rates (ADRs) at our hotels. Due to the significant decline in the
national economy, many business and leisure travelers have cancelled or
postponed travel plans. As a result, occupancy rates at hotels throughout
the United States have declined. Because of the lower occupancy rates,
many hotel operators have lowered their room rates in an attempt to be more
competitive. Consequently, we were also forced to lower room rates during
the fourth quarter of 2008 and throughout 2009 to remain competitive in our
markets.
39
The
effects of the decline in the national economy are exacerbated by the increased
supply in hotel rooms that occurred in our markets during 2007 and 2008.
Due to increased construction of new hotels throughout the United States, the
supply of new hotels rooms exceeded demand for hotel rooms during the past few
years. This resulted in decreasing occupancy rates at our hotels
throughout 2007 and 2008. Thus, the effects of the national economy are in
addition to already overbuilt hotel markets in much of the United
States.
Occupancy
and ADR declined at our hotels during the twelve months ended December 31, 2009
compared to the twelve months ended December 31, 2008 in large part because of
the effects of the national recession as described above. In addition, the
Company opened six new hotels during 2009. New hotels generally open with
lower occupancy rates and ADRs, as was the case with the Company’s six new
hotels. Thus, these new hotels caused a further reduction in our portfolio
occupancy rates and ADR. We continue to focus our efforts on revenue
management to ensure that each of our hotels maximizes its revenues each day by
attaining the optimum balance between ADR and occupancy rate. Further, we
continue to emphasize marketing at our newer hotels so that they continue to
stabilize, despite the challenges caused by the economy. We anticipate
that during 2010, occupancy rates and ADRs will begin to stabilize at our
hotels. For additional information, see Cash Provided by/Used in Operating
Activities below.
Hotel Operating
Expenses
Our
hotel operating expenses increased as a percentage of revenues, and totaled
$119.5 million for the twelve months ended December 31, 2009, which was 98.6% of
our total revenues, compared to $113.9 million for the twelve months ended
December 31, 2008, which was 84.3% of our total revenues. The largest component
of this increase was due to the impairment loss of $6.3 million or 5.2% of total
revenue. This non-cash expense reflects a write-down of the value of
certain parcels of land to their fair market value. In addition, our six
new hotels opened during 2009 did not generate revenues sufficient to cover
their operating expenses, which further caused an increase in our percentage of
operating expenses to revenues. The remaining increase in the percentage
of operating expenses to revenues was caused by the overall decline in revenues
at our existing hotels, but a limited corresponding decline in expenses.
Hotel operating expenses consist primarily of expenses incurred in the
day-to-day operation of our hotels such as hotel staff salaries and wages, hotel
utility expenses, hotel real estate taxes, and royalty and other fees charged by
our franchisors. Many of our expenses are fixed, such as essential hotel
staff, real estate taxes, insurance, depreciation, and certain types of
franchise fees, and these expenses do not decrease even if the revenues at our
hotels decrease.
Due to
the decline in revenues, management has re-focused its efforts on operating our
hotels efficiently and reducing expenses, but without sacrificing a high-quality
guest experience. Despite the efforts to decrease expenses during the twelve
months ended December 31, 2009 compared to the twelve months ended December 31,
2008, because of the significant decline in revenues, the Company generated Net
Loss of $15.1 million. Although Net Income declined during the twelve months
ended December 31, 2009 compared to the twelve months ended December 31, 2008,
because of the Company’s efforts to reduce expenses, the Company continues to
generate positive Net Cash from Operations (as defined below).
40
The
Company generated Net Cash from Operations of ($0.5) million during the twelve
months ended December 31, 2009. Net Cash from Operations as defined in the
Company’s Operating Agreement is gross cash proceeds from the Company’s
operations and disposition of assets, less the portion used to pay the
established reserves, debt payments, capital improvements, replacements and
contingencies, all as determined by the Company Manager. Management believes
this non-GAAP financial measure is significant because many members are highly
interested in the Company’s cash flow, which reflects its ability to reinstate
distributions to its members including the Priority Return payments.
Management continues to review operational cash flow and debt obligations on a
monthly basis. The amended Fortress loan provisions are anticipated to
require the Company to suspend all distribution to members. The Company
will reinstate making Priority Return payments at such time as management
determines it is prudent and the Company is no longer subject to loan covenants
restricting such payments. Please see the attached Exhibit 99.2 for a
reconciliation of Net Cash from Operations to Net Income (Loss).
Depreciation and
Amortization
Our depreciation and amortization
expense totaled $24.0 million for the year ended December 31, 2009, and $22.3
million for the year ended December 31, 2008. Our buildings and major
improvements are recorded at cost and depreciated using the straight-line method
over 27 to 40 years, the estimated useful lives of the assets. Hotel equipment,
furniture and fixtures are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets of 2
to 15 years. Periodically, we adjust the estimated useful life of an asset based
upon our current assessment of the remaining utility of such asset.
Management Expense
We reimburse The Summit Group, Inc. for
the expenses it incurs in the management of our hotels and as Company
Manager. During the year ended December 31, 2009, we reimbursed The Summit
Group $2.9 million related to total revenues, and $2.9 million related to
revenues from continuing operations in hotel management and Company Manager
expenses, which was 2.4% of total revenues and 2.4% of revenues from continuing
operations. During the year ended December 31, 2008, we reimbursed The
Summit Group $4.2 million of total revenues, and $4.0 million related to
revenues from continuing operations in hotel management and Company Manager
expenses, which was 2.9% of total revenues and 3.0% of revenues from continuing
operations. Additional information concerning reimbursements and payments
to The Summit Group is discussed in Item 13. Certain Relationships and Related
Transactions, and Director Independence.
41
Repairs and Maintenance
We incurred $6.2 million in repair and
maintenance expenses for the year ended December 31, 2009, and $8.0 million in
repair and maintenance expenses for the year ended December 31, 2008. The
decrease in repair and maintenance expenses during 2009 is due to the large
number of properties remodeled during 2008 compared to 2009, and because several
hotels underwent their regular improvements as requested by the franchisors
during 2008. During the twelve months ended December 31, 2009, we renovated
three hotels with each renovation costing in excess of $500,000. Of these
renovations, two were due to conversion from one franchise system to another,
and one was due to franchisor requirements. During the twelve months ended
December 31, 2008, we renovated one hotel which renovation cost less than
$500,000, and we renovated 3 hotels with each renovation costing in excess of
$500,000. Of these renovations, one was due to conversion from one
franchise system to another, two were related to the renovation of acquired
properties and one was due to franchisor requirements. Management
anticipates that repair and maintenance expense will remain stable during 2010
as there are only three hotel renovations scheduled as of March 26,
2010.
Normal
maintenance and repair costs are expensed as they are incurred. Hotel
development costs and other direct overhead costs related to the purchase and
construction of hotels are capitalized. Expenses related to remodeling
hotels are expensed to the extent permitted by generally accepted accounting
principles.
Impairment
As a
result of the Company’s review of the carrying value of our long-term assets,
management deemed that six land parcels were impaired. Thus, the value was
written down to their deemed fair market value. An impairment loss of $6.3
million was charged to operations in 2009.
Year
Ended December 31, 2008 Compared with Year Ended December 31, 2007
Revenues
We generated $135.1 million of revenues
from continuing operations during the year ended December 31, 2008, compared to
$113.9 million during the year ended December 31, 2007, an increase in total
year-to-year revenues of 18.6%. There are two primary reasons for the
increase in revenues from 2007 to 2008. First, we experienced a
significant increase in RevPAR, resulting from a strong increase in ADR despite
a decline in occupancy rates. Second, we acquired 3 hotels, completed
construction of 7 hotels, and disposed of 6 hotels during 2007, for an increase
of 4 hotels in our portfolio, and an increase of 464 guestrooms. This is
an increase of 8.6% in the number of guestrooms in our portfolio. The
revenues of the hotels acquired and constructed during 2007 continued to
stabilize during 2008 as we had the opportunity to improve management at the new
hotels prior to the collapse of the national economy.
42
The key indicators for the Company’s
hotel performance for the years ended December 31, 2008 and 2007 are set forth
in the following table (includes hotels with continuing and discontinued
operations).
Year Ended
|
Year Ended
|
|||||||||||
December 31,
|
December 31,
|
|||||||||||
2008
|
2007
|
Increase/Decrease)
|
||||||||||
All
Company Hotels
|
||||||||||||
RevPAR
|
$ | 66.78 | $ | 64.38 | $ | 2.40 | ||||||
Average
Daily Rate
|
$ | 100.95 | $ | 96.20 | $ | 4.75 | ||||||
Occupancy
Rate
|
66.15 | % | 66.92 | % | (0.77 | )% | ||||||
Number
of Hotels Owned
|
62 | 64 | (2 | ) | ||||||||
Number
of Guestrooms
|
5,854 | 5,863 | (9 | ) |
Management
attributes the success in increasing ADR and RevPAR at our hotels to several
factors. First, hotel management continued to emphasize direct-sales
efforts to improve occupancy rates at our hotels. Second, the hotels sold
during 2007 and 2008 tended to be hotels with sub-par ADR and occupancy rates,
compared to the remainder of our portfolio. The hotels acquired and
constructed tend to command higher room rates, even though the occupancy rates
continue to stabilize at these hotels. Third, we made focused efforts on
revenue management to ensure that each of our hotels maximizes its revenues each
day by attaining the optimum balance between ADR and occupancy rate. Our
RevPAR increased due to the significant increase in ADR, despite the decrease in
portfolio occupancy rates. The decline in occupancy rates was
primarily due to increasing supply in the number of hotel rooms in our markets,
because our new properties had not yet stabilized and due to decreases in travel
nationwide in the third and fourth quarters of 2008. For additional
information, see Cash Provided by/Used in Operating Activities
below.
Hotel Operating
Expenses
Our hotel
operating expenses totaled $113.9 million for the year ended December 31, 2008,
which was 84.3% of our revenues from continuing operations, and $95.6 million
for the year ended December 31, 2007, which was 83.9% of our total
revenues. Hotel operating expenses consist primarily of expenses incurred
in the day-to-day operation of our hotels such as hotel staff salaries and
wages, hotel utility expenses, hotel real estate taxes, and royalty and other
fees charged by our franchisors. The primary reason for the increase in
the percentage of operating expenses to revenues was because of depreciation
expense related to newly constructed hotels and due to renovations that occurred
at several of our hotels during 2008, 2007, and 2006.
Depreciation and
Amortization
Our depreciation and amortization
expense totaled $22.3 million for the year ended December 31, 2008, and $16.1
million for the year ended December 31, 2007. Our buildings and major
improvements are recorded at cost and depreciated using the straight-line method
over 27 to 40 years, the estimated useful lives of the assets. Hotel equipment,
furniture and fixtures are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets of 2
to 15 years. Periodically, we adjust the estimated useful life of an asset based
upon our current assessment of the remaining utility of such
asset.
43
Management Expense
We reimburse The Summit Group, Inc. for
the expenses it incurs in the management of our hotels and as Company
Manager. During the year ended December 31, 2008, we reimbursed The Summit
Group $4.2 million related to total revenues, and $4.0 million related to
revenues from continuing operations in hotel management and Company Manager
expenses, which was 2.9% of total revenues and 3.0% of revenues from continuing
operations. During the year ended December 31, 2007, we reimbursed The
Summit Group $4.1 million of total revenues, and $3.5 million related to
revenues from continuing operations in hotel management and Company Manager
expenses, which was 3.0% of total revenues and 3.1% of revenues from continuing
operations. Additional information concerning reimbursements and payments
to The Summit Group is discussed in Item 13. Certain Relationships and Related
Transactions, and Director Independence.
Repairs and Maintenance
We incurred $8.0 million in repair and
maintenance expenses for the year ended December 31, 2008, and $10.4 million in
repair and maintenance expenses for the year ended December 31, 2007. The
decrease in repair and maintenance expenses during 2008 is due to the large
number of properties remodeled during 2007 compared to 2008, and because several
hotels underwent their regular improvements as requested by the franchisors
during 2007. During the twelve months ended December 31, 2008, we renovated 1
hotel which renovation cost less than $500,000, and we renovated 3 hotels with
each renovation costing in excess of $500,000. Of these renovations, 1 was
due to conversion from one franchise system to another, 2 were related to the
renovation of acquired properties and 1 was due to franchisor
requirements. During the twelve months ended December 31, 2007, we
renovated 2 hotels with each renovation costing less than $500,000, and we
renovated 9 hotels with each renovation costing in excess of $500,000. Of
these renovations, 2 were due to conversion from one franchise system to
another, 1 was due to renovations of acquired properties and 8 were due to
franchisor requirements.
Normal
maintenance and repair costs are expensed as they are incurred. Hotel
development costs and other direct overhead costs related to the purchase and
construction of hotels are capitalized. Expenses related to remodeling
hotels are expensed to the extent permitted by generally accepted accounting
principles.
Liquidity
and Capital Resources
Cash Provided by/Used in
Operating Activities
Cash
generated from hotel operations is the primary source of funding for operational
expenses, debt service and distributions to members. We anticipate that
cash flow from operations will be sufficient to fund these operational expenses,
and debt service. Based upon the negotiated terms of a loan extension with
Fortress Credit Corp., we anticipate reserving all excess cash for the purpose
of paying down our debt. We maintain a cash reserve to fund anticipated
and unanticipated shortfalls in liquidity. The cash reserve balance is
reviewed and adjusted on a monthly basis to reflect anticipated decreases in
revenues resulting from seasonal fluctuations, declines in revenues resulting
from significant events affecting the projected industry revenues, and planned
major capital expenditures. Our line of credit that has been used to fund
acquisition, construction or working capital needs does not have additional
funds available at this time.
44
We
generated $9.2 million, $26.8 million and $25.9 million in cash from operating
activities during the years ended December 31, 2009, December 31, 2008, and
December 31, 2007, respectively. This cash generated from operations was
used primarily to provide distributions to the members of $12.3 million, $26.7
million and $24.8 million during the years ended December 31, 2009, 2008 and
2007, respectively.
We have
historically made monthly Priority Return distributions to Class A and Class A-1
members. In addition, prior to 2009 during April, July and October, we
have distributed excess cash resulting from hotel operations to Class A, Class
A-1, Class B and Class C members. During the years ended December 31,
2009, 2008, and 2007, the Company’s average monthly Priority Return distribution
was $1,022,589, $900,737, and $900,737, respectively. During the years
ended December 31, 2009, 2008, and 2007, the Company’s average monthly
distribution of excess cash was $0, $1,324,500, and $1,169,250,
respectively. Effective January 1, 2010, the members’ Priority
Return payments were reduced to 25% of the regular amount, and as of March 31,
2010, the payments were suspended. The unpaid Priority Returns continue to
accrue and will be paid at such time as is permitted by the Company’s lenders
and sufficient cash is available.
Many
economists have reported that the United States is in a severe recession. During
the third and fourth quarters of 2008 and throughout 2009, many individuals and
families cancelled or postponed leisure travel plans. Furthermore,
corporations and businesses throughout the United States eliminated or
significantly restricted travel budgets. As a result, occupancy rates fell
in hotels across the country. In addition, luxury hotels have drastically
reduced their room rates, thus competing with mid-scale hotels. Hotels in
large metropolitan areas appear to have suffered the most significant effects of
the financial crisis. Hotels in mid-sized and smaller markets have also
experienced declining revenues, but to a lesser degree than in major
metropolitan areas.
The
Company experienced declining occupancy rates in 2008 due to over-building of
hotels in many markets. The decline in occupancy rates intensified during
the third and fourth quarters as the nationwide recession worsened. During
2009, our hotel occupancy rates continued to decline as the recession
worsened. Furthermore, we have been forced to reduce room rates at many of
our hotels in order to remain competitive. Our hotels located in major
metropolitan areas (including Bellevue, Washington, Dallas, Texas, Phoenix,
Arizona) have experienced the most significant declines in occupancy rates and
ADR. Our hotels located in mid-sized and smaller markets have experienced
smaller declines in occupancy rates and ADR. Thus, our diversity across
various markets has helped to lessen the impact of the recession on our
portfolio.
45
In
addition, due to our rapid pace of construction and acquisition of new hotels
beginning in 2007 continuing through 2009, the total amount of our debt
increased quickly. Because these new hotels recently opened, however, they
are not yet generating sufficient cash to fund their operations and debt
payments. The stabilization period for our new hotels has been
significantly longer than was originally projected because of the severe
nationwide downturn in the hotel industry. As construction has been
completed on all of our new hotels, the construction loans have begun
amortizing. Consequently, the Company’s monthly requirements for principal
and interest payments have increased.
In order
to combat the effects of the recession and over-building in many markets, we
continue to focus on remaining highly competitive within our markets, and
engaging in the direct sales process. Furthermore, our hotels have
intensified efforts to provide a quality guest-experience, but with reduced
expenses. Hotel staffs have been reduced, primarily through
attrition. Expenses are very closely monitored and controlled, but with a
focus on not reducing guest satisfaction. As a result of these efforts,
management expects that our revenues and expenses will stabilize in 2010.
Therefore, for the foreseeable future, management anticipates that we will have
sufficient resources to fund hotel operating expenses, make all debt service
payments, and make capital improvements.
Cash Provided by/Used in
Investing Activities
Management periodically reviews our
hotel investments to determine whether any assets no longer meet our investment
standards, are located in markets in which we no longer desire to own hotels, or
no longer complement our core business. In such cases we take steps to
dispose of such hotels at commercially reasonable prices and terms. We can
provide no assurance that we will be able to complete such dispositions in
reasonable time frames or upon reasonable terms.
Proceeds received from the disposition
of hotels are generally reinvested and used to finance additional hotel property
purchases or construction of new hotels. During the year ended December
31, 2009, we received $0.2 million of cash from the disposition of hotels and
related assets which was reinvested into construction costs. During the
year ended December 31, 2008, we received $23.6 million of cash from the
disposition of hotels and related assets which was used primarily to pay down
debt and was reinvested into purchases of land and new furniture or
equipment. During the year ended December 31, 2007, we received $35.6
million of cash from the disposition of hotels and related assets which was used
primarily to pay down debt and was reinvested into purchases of land,
construction costs, and new furniture or equipment.
Certain
of our borrowing arrangements require that we maintain cash reserves for payment
of property taxes, insurance and maintenance expenses of our hotels. These
restricted funds are for use only at the hotels financed by the respective
lender requiring the reserve. As of December 31, 2009, $2.1 million of cash
reflected on our balance sheet was classified as restricted, and was not
available for other operating purposes. As of December 31, 2008, $4.2
million of cash reflected on our balance sheet was classified as restricted, and
was not available for other operating purposes. The decline in cash
reserves was primarily caused by the refinance of the loans on the Scottsdale,
Arizona hotels, resulting in restricted funds being released by the prior
lender. For additional information concerning cash reserves, please see
Item 8. Financial Statements and Supplementary Data – Note 9 to Consolidated
Financial Statements.
46
Due to
the economic recession and decline in the hotel industry that occurred during
2008 and 2009, as well as the increasing difficulty in obtaining financing for
hotel projects, the Company has sought reduce its exposure to costs, expenses
and financing requirements related to construction and development activities.
Thus, during 2009 the Company did not acquire additional parcels of land for
development. In addition, the Company stopped construction in progress on
one hotel located in Houston, Texas. The Company did not start any new
hotel construction during 2009, although we did complete six construction
projects that had started during 2008. For additional information, see
Construction and Development Requirements below.
Cash Provided by/Used in
Financing Activities
Proceeds
from the issuance of long-term debt and Notes Payable generated $5.1 million in
2009, $23.3 million in 2008, and $8.9 million in 2007. The Company also
received proceeds from equity contributions of $15.1 million, $5.6 million, and
$0 during 2009, 2008, and 2007, respectively. These funds were primarily
used to fund new hotel construction during 2009 and 2008, and the purchase
furniture and equipment during 2007.
In
October 2008, we began a private equity offering. As of December 31, 2009,
we received and accepted subscriptions from 380 holders with gross proceeds of
$30.5 million (net proceeds of $27.7 million). These proceeds were used to
finance hotel construction projects started in 2008 and pay down debt related to
land and hotel acquisitions.
Additional information concerning this
offering is discussed in Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
Additional
Information Concerning Sources and Uses of Cash
Major
capital improvements on existing hotels and the acquisition or construction of
new hotels is funded primarily through financing of hotels with commercial
lenders and equity contributions. At this time, the Company does not
anticipate acquiring, or starting construction of any new hotels until such time
as the United States economy strengthens and debt and equity financing are in
place. The Company did not acquire any hotels and did not start any new hotel
construction projects during 2009. As of March 26, 2010, the Company does
not have any hotels under contract for purchase and no new hotel construction is
yet scheduled for 2010.
We acquired a considerable number of
land and hotel properties during the 2007 and 2008, but no land or hotels were
acquired during 2009. The total cost of land and hotel properties acquired
that have been financed directly through issuance of debt was $16.4
million in 2008 and $42.3 million in 2007. During 2009, we finalized
projects on which construction had already started. As of March 26, 2010,
the Company does not have new hotels under construction. The total cost of
construction that was financed directly through issuance of debt was $51.1
million in 2009, $38.8 million in 2008, and $78.8 million in 2007. These
projects have been funded through several bank loans,
including:
47
|
·
|
A
loan with Fortress Credit Corp. for the purpose of financing our equity
requirements for the acquisition, development and construction of real
estate and hotel properties. This loan has matured and Fortress and the
Company are in the process of finalizing documents to refinance the
loan. As of March 4, 2010, the outstanding balance of the loan was
$84.8 million. The loan carries a variable interest rate of 30-day
LIBOR plus 875 basis points, of which LIBOR plus 575 basis points is paid
current, and the remainder accrues until maturity. The parties are
negotiating a twelve-month maturity date extension, with an additional
six-month extension possible based upon compliance with certain
covenants. The loan is secured by a pledge of 49% of the membership
interests of our wholly-owned subsidiaries. For additional
information concerning the Fortress loan, see Recent Developments
below.
|
|
·
|
We
have a $28.2 million line of credit with First National Bank of Omaha for
the purpose of temporarily funding acquisitions and construction of new
hotels (“Acquisition Line of Credit”). The Acquisition Line of
Credit carries an interest rate at 90-day LIBOR plus 4.0%, with a floor of
5.5%. The borrowings under the Acquisition Line of Credit are repaid as
permanent financing and equity sources for such acquisitions are
secured. Two hotels are currently financed by the Acquisition
Line. The outstanding balance on the Acquisition Line of Credit as
of December 31, 2009 was $21.5 million and $12.3 million on December 31,
2008. The $28.2 million available under the Acquisition Line is
roughly equivalent to the principal balance outstanding plus amounts
outstanding under letters of credit issued by First National Bank of
Omaha. As a result, we will
need to refinance or otherwise pay down the principal balance on the
Acquisition Line of Credit prior to being able to access the Line for
additional funds. We are required to maintain a minimum aggregate
debt service coverage ratio of 1.50 to 1.00, and may not incur more than
$450 million in debt without lender approval. The Acquisition Line
of Credit matures on June 24, 2010. We anticipate extending the
maturity date prior to June 24,
2010.
|
|
·
|
In
addition, we have a $35 million credit pool with First National Bank of
Omaha for the permanent financing of hotels. We will be unable to
finance additional hotels from the credit pool until we have refinanced or
otherwise paid down loans currently financed under the credit pool. Each
loan from the credit pool is classified as either a Pool One loan or a
Pool Two loan. Loans from Pool One pay interest only for a maximum
of two years, and carry an interest rate of 90 -day LIBOR plus 4.0%, with
a floor of 5.5%. Loans from Pool Two are for a term of five years,
and principal and interest payments are based upon a twenty-year
amortization schedule. The Pool Two loans carry an interest rate of
90-day LIBOR plus 4.0%, with a floor of 5.25%. The outstanding
balance on the Credit Pool as of December 31, 2009 was $36.5 million and
$44.3 million on December 31, 2008. We are required to maintain a
minimum aggregate debt service coverage ratio of 1.50 to 1.00, and may not
incur more than $450 million in debt without lender
approval.
|
|
·
|
On
June 29, 2009, the Company entered into a loan with Bank of the Ozarks to
fund the land acquisition and construction of the Hyatt Place hotel
located in Portland, OR. The loan is in the amount of $7.4 million,
but based on the hotel’s performance, the Company has the opportunity to
increase the loan amount to $10.8 million. The loan carries a
variable interest rate of the three-month LIBOR plus 400 basis points,
with a floor of 6.75%. The loan matures in June 2012, with two
one-year extensions available. The outstanding balance as of
December 31, 2009 was approximately $5.8
million.
|
48
|
·
|
On
February 29, 2008, the Company entered into a loan with General Electric
Capital Corporation in the amount of $11.4 million to fund the land
acquisition and hotel construction located in San Antonio, TX. The
loan carries a variable interest rate of LIBOR plus 255 basis points, and
matures in May 2014. The outstanding balance as of December 31, 2009
was $11.4 million.
|
|
·
|
On
October 3, 2008, the Company entered into a loan with Bank of the Cascades
in the amount of $13.27 million to fund the land acquisition and
construction of the Residence Inn hotel located in Portland, OR. The
loan carries a variable interest rate of the Bank of the Cascades prime
rate, with a floor of 6%, and matures in September 2011, with a one-year
extension available. The outstanding balance as of December 31, 2009
was $12.4 million.
|
|
·
|
On
September 17, 2008, the Company entered into a loan with Compass Bank in
the amount of $19.3 million to fund the construction of a Courtyard by
Marriott hotel located in Flagstaff, Arizona. The loan carried a
variable rate of the prime rate minus 25 basis points, and matures in May
2018. The outstanding principal balance as of December 31, 2009 was
$15.7 million.
|
|
·
|
In
2005, we obtained a note payable with MetaBank providing the Company with
short-term construction financing for our Boise, Idaho Cambria Suites in
the amount of $8.45 million. On March 10, 2009, this note was
refinanced into a permanent loan in the principal amount of $7.45 million
and with a maturity date of April 1, 2012. Interest on unpaid
principal is payable monthly at a rate equal to the Prime rate, with a
floor of 5%. The amount outstanding on this note was $7.45 million
on December 31, 2009.
|
|
·
|
On
October 1, 2008, the Company entered into a loan with BNC National Bank in
the amount of $6.5 million to fund the construction of a Holiday Inn
Express Hotel & Suites located in Twin Falls, Idaho. The loan
carried a variable rate of the Prime rate minus 25 basis points, and
matures on April 1, 2016. The outstanding principal balance as of
December 31, 2009 was $5.8 million.
|
|
·
|
On
December 9, 2009, the Company entered into two loans with National Western
Life Insurance Company in the amount of $5.35 million to refinance the
debt on the Springhill Suites, and in the amount of $8.65 million to
refinance the debt on the Courtyard by Marriott, both located in
Scottsdale, Arizona. The loans carry a fixed rate of interest at 8%,
and they mature on January 1, 2015, with one ten-year extension
available. The outstanding principal balances as of December 31,
2009 were $5.35 million and $8.65
million.
|
We have
also obtained financing with regional banks, or in connection with a hotel
acquisition have assumed the financing, for several of our hotels. As of
December 31, 2009, 49.18% of our long-term debt on the hotels carried a fixed
interest rate. Certain of these loans may contain provisions requiring
maintenance of specific leverage ratios or replacement
reserves.
49
We have
$134.4 million in outstanding debt maturing during 2010, which does not include
amounts outstanding on our lines of credit. Of this, $83.5 million was due
as of December 31, 2009 on the Fortress Credit Corp. (“Fortress”) loan which
matured March 5, 2010. The Company and Fortress have reached agreement
concerning the major terms for an extension of the maturity date. As a
result, Fortress granted a forbearance to the Company until April 5, 2010 so
that the Company and Fortress have sufficient time to finalize negotiations of
the extension documents. A portion of the available funds under the
Fortress loan were advanced to pay interest payments on the loan. Thus,
the Company did not pay interest on the Fortress from cash flow. It is
anticipated that the interest rate on the Fortress loan will increase to 30-day
LIBOR plus 875 basis points, with LIBOR plus 575 basis points being paid
current, and the remainder accruing until maturity. There is also a LIBOR
floor of 2.0%. Thus, the Company anticipates making an additional $6.5
million in annual interest payments beginning March 5, 2010.
In
addition to the Fortress loan, the Company has $50.9 million of loans with other
lenders maturing during 2010. Credit is increasingly difficult to obtain
for hotel projects. The Company anticipates that the maturing loans will
be refinanced by the lenders who currently hold the loans, although the terms of
the refinanced loans may be somewhat more onerous than exist in the current
loans. The Company has not yet identified replacement lenders for any of
these maturing loans and has not yet received commitments from the existing
lenders to refinance these loans, however, the Company continues to make all
required debt payments on all of its debt. Thus, we believe these loans
have a good possibility of being refinanced by the existing lenders. We
also anticipate that we will generate funds from operations or from asset sales
which may be used to pay down loans that cannot be refinanced. However,
financing is increasingly difficult to obtain and there is no assurance that we
will be able to refinance our indebtedness as it becomes due, and if we are able
to secure financing, that it will be on favorable terms.
We cannot provide assurance that our
business will continue to generate cash flow sufficient to service our debt
payments. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may be required to sell assets
at below-market values, reduce capital expenditures, or seek to obtain
additional financing. Our ability to make scheduled principal payments,
and to pay interest on or to refinance our indebtedness depends on our future
performance and financial results, which, to a certain extent, are subject to
general conditions affecting the hotel industry and to general economic,
financial, competitive, and other factors beyond our control.
Due to our significant reliance on
financing for the acquisition and construction of hotels, changes in interest
rates and underwriting parameters may affect our ability to acquire or build
hotels which meet our investment objectives. As a result of the current
conditions in the banking industry and general economy, many lenders are not
offering new commercial loans, or if they do offer such loans, the terms and
conditions are restrictive. We have experienced increasing difficulties
obtaining financing for our hotels, particularly construction financing, on
reasonable terms and conditions. Furthermore, upon the scheduled maturity
of existing indebtedness we may be unable to obtain financing at terms similar
to those on credit facilities currently financing our hotels. As of
December 31, 2009, approximately 50.82% of our long-term indebtedness carried
variable interest rates which increase or decrease with general interest rates
changes.
50
Construction and Development
Requirements
We have
several parcels of land that are held for future development and construction,
or sale. The properties under construction and held for development as of
December 31, 2009 are described in the table below:
Acquisition
|
Opening
|
|||||||||
Location
|
# Rooms(2)
|
Franchise(2)
|
Status
|
Date
|
Date (1)
|
|||||
Houston,
TX
|
118
|
Springhill
Suites
|
Future
Construction
|
2/15/07
|
TBD
|
|||||
El
Paso, TX
|
101
|
Hampton
Inn & Suites
|
Future
Construction
|
7/16/07
|
TBD
|
|||||
El
Paso, TX
|
121
|
Courtyard
by Marriott
|
Future
Construction
|
7/16/07
|
TBD
|
|||||
Boise,
ID
|
120
|
Holiday
Inn Express &Suites
|
Future
Construction
|
10/1/04
|
TBD
|
|||||
Twin
Falls, ID
|
116
|
Courtyard
by Marriott
|
Future
Construction
|
12/9/08
|
TBD
|
|||||
Spokane,
WA
|
105
|
Courtyard
by Marriott
|
Future
Construction
|
7/31/08
|
TBD
|
|||||
Spokane,
WA
|
|
108
|
|
Springhill
Suites
|
|
Future
Construction
|
|
7/31/08
|
|
TBD
|
(1)
|
Construction
will not begin on any hotel until debt and equity financing are in place
and management has determined that market conditions are
appropriate. Thus, no hotels are scheduled for construction as of
March 26, 2010.
|
(2)
|
Number
of units and franchise indicate our plans as of March 26, 2010, which are
subject to change.
|
The
hotels to be constructed are expected to be financed through future loans from
commercial lenders, proceeds received from the sale of a hotel, or equity
contributions.
Recent
Developments
The Company and Fortress Credit Corp.
(“Fortress”) have agreed to the material terms of an extension of the Company’s
loan with Fortress (“Fortress Loan”). In March 2007 the Company entered
into the Fortress Loan, in the amount of $99.7 million and with a maturity date
of March 5, 2010. To permit the parties to finalize definitive
documentation for the extension, on March 4, 2010 Fortress agreed to forbear
from declaring a default or otherwise enforcing its rights under the Fortress
Loan until April 5, 2010. The loan extension is anticipated to be for a
period of one (1) year, with an option for an additional six (6) month extension
contingent on meeting certain requirements. Furthermore, the interest rate
will be 30-day LIBOR plus 8.75%, subject to a LIBOR floor of 2.0%. LIBOR
plus 5.75% will be paid current, and the remainder will be accrued until
maturity.
As a condition of the Fortress Loan
extension, the Company agreed that all cash generated by the Company and not
required for payment of hotel operational expenses, principal and interest
payments on the Company’s loans, capital expenditures, and other expenses
related to owning and operating the Company, will be reserved and used to pay
down Company debts. Additional anticipated covenants of the refinanced
loan include, but are not limited to: covenants limiting the Company’s ability
to sell or refinance assets, incur debt or obtain equity without Fortress’s
prior approval; restrictions on distributions to members; granting first
mortgages to Fortress on all unencumbered land and one hotel property, as well
as a second mortgage on one encumbered hotel property; and a requirement that
the Company maintain a 1.10:1.00 debt service coverage ratio through March 5,
2011, and a 1.15:1.00 debt service coverage ratio after March 5, 2011 through
final maturity of the loan. As the definitive documents are not yet
finalized, additional restrictive terms and conditions may be
required.
51
Acquisitions and
Dispositions
Since
December 31, 2009, we have not entered into any contracts to acquire to sell
development land or hotels.
Contractual
Obligations
We had the following contractual
obligations outstanding as of December 31, 2009 (in millions):
Due In
|
||||||||||||||||||||
Less Than
|
Due In
|
Due In
|
Due After
|
|||||||||||||||||
Total
|
1 Year
|
1-3 Years
|
4-5 Years
|
5 Years
|
||||||||||||||||
Long-term
debt (1)
|
$ | 439.9 | $ | 146.2 | $ | 188.7 | $ | 66.4 | $ | 38.6 | ||||||||||
Operating
lease obligations
|
$ | 8.2 | $ | 0.2 | $ | 0.5 | $ | 0.5 | $ | 7.0 | ||||||||||
Other
(2)
|
$ | 21.5 | $ | 21.5 | $ | 0.0 | $ | 0.0 | $ | 0.0 | ||||||||||
Total
|
$ | 469.6 | $ | 167.9 | $ | 189.2 | $ | 66.9 | $ | 45.6 |
(1)
|
Obligations
include interest payment obligations which are reasonably
calculable. Such amounts assume that interest payments are made when
due and such loans are not prepaid. Interest payment obligations on
long-term debt carrying variable interest rates are not included as
management is not reasonably able to calculate such amounts. For
additional information concerning our variable interest rate debt, see
Item 8. Financial Statements and Supplementary Data – Note 11 to
Consolidated Financial Statements.
|
(2)
|
The
line of credit at First National Bank of Omaha had an outstanding balance
of $21.5 million as of December 31, 2009. This line of credit
matures June 24, 2010. See Item 8. Financial Statements and
Supplementary Data – Note 11 to Consolidated Financial
Statements.
|
As of December 31, 2009, the Company
does not have any material outstanding construction contracts.
Construction will not begin on any new properties until such time as
construction financing and equity are in place and management has determined
that market conditions are appropriate.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements that are likely to have a material impact on
our assets, liabilities, revenues or operating expenses.
52
ITEM
7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market risk includes risks that arise
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices and other market changes that affect market sensitive
instruments. In pursuing our business strategies, the primary market risk
to which we are currently exposed, and to which we expect to be exposed in the
future, is interest rate risk. Our primary interest rate exposure is to
the 30-day LIBOR rate. We use fixed interest rate financing to manage our
exposure to fluctuations in interest rates. We do not use any hedge or
other instruments to manage interest rate risk.
As of December 31, 2009, 49.18% of our
debt carried fixed interest rates, and 50.82% carried variable interest
rates. As of December 31, 2009, our fixed interest rate debt totaled
$209.6 million. Our variable interest rate debt totaled $216.6 million as
of December 31, 2009, which included amounts outstanding under our lines of
credit, and not the total available under the lines of credit.
As of
December 31, 2008, a total of $213.9 million of our debt, or 54.8%, carried
fixed interest rates. As of December 31, 2008, a total of $176.2 million
of our debt, or 45.2%, carried variable interest rates, which included amounts
outstanding under our lines of credit, and not the total available under the
lines of credit.
As the
hotels that were recently constructed mature, we endeavor work to refinance
these hotels with permanent loans. To the extent the Company is able to
obtain fixed-rate financing with reasonable terms, the permanent financing will
be fixed-rate loans.
As our
debts mature, the financing arrangements which carry fixed interest rates will
become subject to interest rate risk. In addition, as variable rate loans
mature, many lenders are imposing floor interest rates because of the low
interest rates experienced during the past few years. Approximately $134.4
million of the Company’s long-term debt will come due during 2010, which
includes amortizing principal paid in regular monthly payments. Of the
$134.4 million, approximately $83.5 million is the Fortress loan, for which
interest payments were previously paid by increasing the principal balance of
the loan, and not by paying interest through Company cash flow. The
refinanced loan is anticipated to carry an interest rate of 30-day LIBOR plus
875 basis points, with LIBOR plus 575 basis points being paid current, and the
remainder at maturity. There will also be a 2.0% LIBOR floor.
Consequently, the Company anticipates that its annual, out-of-pocket interest
payments to Fortress will increase by approximately $6.5 million. Of the
other loans that are maturing, approximately $1.7 million carries a fixed
interest rate, and $41.8 million carry variable interest rates. Assuming a
one percent (1.0%) increase in the interest rates on both the fixed interest
rate loan and the variable rate loans, we anticipate a total increase of
$435,000 in annual interest costs, in addition to the increase in interest to be
paid under the Fortress loan. Additional information concerning our fixed- and
variable-rate debt is included in Item 8. Financial Statements and
Supplementary Data – Note 11 to Consolidated Financial
Statements.
53
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index
to the Financial Statements on page F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 1, 2008, Gordon, Hughes
& Banks, LLP (“GH&B”) resigned as the Company’s independent registered
public accounting firm. No report on the Company’s financial statements
prepared by GH&B during the prior two fiscal years contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles. Further, during the
prior two fiscal years, and the interim period through the date of resignation,
there were no disagreements between the Company and GH&B on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of GH&B, would
have caused it to make reference to the subject matter of the disagreement in
connection with a report.
During
2008, GH&B entered into an agreement with Eide Bailly, LLP (“Eide Bailly”),
pursuant to which Eide Bailly acquired the operations of GH&B and certain of the
professional staff and shareholders of GH&B joined Eide Bailly either as
employees or partners of Eide Bailly and continue to practice as members of Eide
Bailly.
Concurrent
with the resignation of GH&B, the Company, through and with the approval of
its Audit Committee, engaged Eide Bailly as its independent registered public
accounting firm.
ITEM
9.A. CONTROLS AND PROCEDURES
Our
management conducted an evaluation, under the supervision and with the
participation of our principal executive and principal financial officers of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this report. Based on the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures were
effective in enabling us to record, process, summarize and report in a timely
manner the information required to be disclosed in reports we file under the
Exchange Act.
There was no change in the Company’s
internal control over financial reporting during the Company’s most recent
fiscal quarter that materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
54
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control
over financial reporting is a process designed under the supervision of the
Company's principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting
purposes in accordance with United States generally accepted accounting
principles.
As of
December 31, 2009, management conducted an assessment of the effectiveness of
the Company's internal control over financial reporting, based on the framework
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment,
management has determined that the Company's internal control over financial
reporting as of December 31, 2009, is effective.
The
Company's internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and acquisitions and
dispositions of assets; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with United States generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with authorizations
of management and the directors of the Company; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of Company assets that could have a material effect on the Company's
financial statements.
Management
has engaged Eide Bailly LLP, the independent registered public accounting firm
that audited the financial statements included in this Annual Report on
Form 10-K, to attest to the Company’s internal control over financial
reporting. Its report is included in Item 8. Financial Statements and
Supplementary Data.
ITEM
9.B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We are
managed by a Board of Managers and a Company Manager. The Company Manager
is The Summit Group, Inc., an affiliate of the Company and the Class C
Member. Day-to-day operations are managed by the Company Manager, through
its executive officers.
The Board of Managers generally
consists of seven Managers appointed as follows: four are appointed by the Class
C Member; one member with a significant membership interest in the Company is
appointed annually by the Class C Member (“Investor Representative”); one
independent Manager (“Independent Manager”) is appointed by the remaining
Managers; either one additional Investor Representative is appointed annually by
the Class C Member or one additional Independent Manager is appointed by the
Class C Member. For these purposes, an Independent Manager may be a member
of the Company, but shall not be an employee or officer. Furthermore, an
Independent Manager is not necessarily “independent” as defined by securities
rules and regulations. Upon a majority vote of the Board of Managers the
number of Managers on the Board may be increased to nine seats. In the
event the number of seats on the Board of Managers is increased to nine, the
additional seats shall consist of one additional person who shall be either an
Investor Representative or Independent Manager appointed annually by the Class C
Member and one nominee of the Class C Member. Each Manager shall hold
office for the term for which he is elected and thereafter until his successor
shall have been elected and qualified, or until his earlier death, resignation
or removal. Managers are not required to be members of the
Company.
55
As of March 26, 2010, there is one
vacant position on the Board of Managers. This position will be filled by
The Summit Group, Inc., the Class C Member, in accordance with the provisions of
the Third Amended and Restated Operating Agreement.
The
following sets forth certain information concerning each of our Managers and
Executive Officers.
Name
|
Age
|
Position
|
||
Kerry
W. Boekelheide
|
56
|
Chief
Executive Officer, Manager
|
||
Daniel
P. Hansen
|
41
|
Chief
Financial Officer, Manager
|
||
Craig
J. Aniszewski
|
47
|
Manager
|
||
Robert
G. Pulver
|
61
|
Manager
|
||
David
A. Timpe
|
62
|
Manager
|
||
Tyler
Stowater
|
|
48
|
|
Manager
|
Manager
Qualifications
As described in our Third Amended and
Restated Operating Agreement, with one exception, all of our managers are
appointed by the Class C Member, The Summit Group, Inc. This helps to
ensure that our Mangers have experience and expertise in the hotel industry, or
in other fields which are deemed relevant and important by our Class C
Member. With the exception of the “Independent Manager,” neither the
Company’s members nor its Board of Managers has any direct role in the
nomination of the candidates or election of our Managers. Therefore, the
following Manager biographies include a discussion of the specific experience,
qualifications, attributes or skills of the Managers, but do not include a
statement concerning management’s assessment of such experience, qualifications,
attributes or skills. The following does not apply to the “Independent
Manager,” Robert Pulver, and his biographical information does include an
assessment of his experience and qualifications.
Kerry W.
Boekelheide.
Kerry W.
Boekelheide, age 56, has been a Manager of the Company since January 2004.
He is an appointee of the Class C Member, and his term is from the time of
appointment until removal or resignation. Mr. Boekelheide is also a member
of the Compensation Committee. He has been the Chief Executive Officer of
the Company since April 24, 2006. Mr. Boekelheide is the sole owner of The
Summit Group, Inc., and is currently its sole director. The Summit Group,
Inc. was formed by Mr. Boekelheide and a partner in 1991. Mr. Boekelheide
bought out his partner in 2001. The Summit Group, Inc. is an affiliate of
the Company, and prior to the formation of the Company, developed and managed
numerous hotels. From 1980 through 1991, Mr. Boekelheide served in
management and executive officer positions with several hotel development and
management companies.
56
Daniel P.
Hansen.
Daniel
Hansen, age 41, has been a Manager of the Company since October 2005. He
is an appointee of the Class C Member, and his term is from the time of
appointment until removal or resignation. Mr. Hansen was appointed as the
Chief Financial Officer of the Company on March 4, 2008. He joined The
Summit Group, Inc., in 2003 as Vice President of Investor Relations, and became
the Executive Vice President and Chief Development Officer for The Summit Group,
Inc., in 2007. In these positions, his primary responsibilities included
oversight of investor relations, oversight and coordination of site acquisition,
development and construction activities, and general officer oversight
responsibilities such as strategic planning for the Company and development and
maintenance of franchisor relationships. From 1992 to 2003, Mr. Hansen was a
Vice-President and Regional Sales Manager for Merrill Lynch in the Texas Mid
South Region which included Texas, Louisiana, Arkansas and Oklahoma. His
responsibilities included marketing, training, and client
acquisition.
Craig J.
Aniszewski.
Craig
Aniszewski, age 47, has been a Manager of the Company since January 2004. He is
an appointee of the Class C Member, and his term is from the time of appointment
until removal or resignation. Mr. Aniszewski joined The Summit Group,
Inc., in 1997, as the Vice President of Operations and Development. He
became the Executive Vice President and Chief Operating Officer of The Summit
Group, Inc. in 2007. His primary responsibility is overseeing the
operations of the Company’s hotels. Prior to joining The Summit Group, Mr.
Aniszewski worked for Marriott International for thirteen years in several hotel
operations management positions.
Robert G.
Pulver.
Robert G.
Pulver, age 61, has been a Manager of the Company since July 2004 and is an
Independent Manager appointed by the Managers. He serves a one-year
term. Mr. Pulver is also a member of the Compensation Committee. He has
been the President and Chief Executive Officer of All-State Industries, Inc.
since 1974. All-State Industries manufactures rubber products. Mr.
Pulver is a Director of West Bancorporation, Inc. [WTBA], a public bank holding
company and West Des Moines State Bank. He is a member of the Board of
Directors of Blank Children’s Hospital. Our Board of Managers
believes that Mr. Pulver’s extensive experience in owning and operating a
business, his banking knowledge, and his experience as a public company director
give him the qualifications and skills to serve as a Manager.
57
David A.
Timpe
Mr. Timpe, age 62, has been a Manager
of the Company since October 2008 and is an Independent Manager appointed by the
Class C Member. Mr. Timpe serves a one-year term. He is also the
Chairperson of the Company’s Audit Committee. Mr. Timpe is a Certified
Public Accountant and is a Fellow of the Healthcare Financial Management
Association. He was a partner with Eide Bailly, LLP, a public accounting
firm, and retired from the firm on May 1, 2007. Mr. Timpe worked for
Eide Bailly, LLP and its predecessors for 37 years, and focused primarily on
compliance services (audits, cost reports and non-profit tax) for healthcare
industry clients. In March 2010, Mr. Timpe was appointed to the Board of
Directors of Granite City Food & Brewery [GCFB], a public food and brewery
restaurant chain.
Tyler
Stowater
Tyler Stowater, age 48, was appointed
as a Manager of the Company in July 2009. He is an Investor
Representative, appointed by the Class C Member and serves a one year
term. Mr. Stowater is also a member of the Audit Committee. Mr. Stowater
is a Member and Vice President of Bluestem Capital Company, LLC
(“Bluestem”). Mr. Stowater joined Bluestem in 2000 to oversee portfolio
management, with responsibilities including evaluation of prospective companies,
structuring, negotiating and performing due diligence for various investments
made by Bluestem and its affiliates. Mr. Stowater serves as a director or
manager for a number of private companies in which Bluestem has made one or more
investments.
Of the
Company’s Managers, Mr. Timpe and Mr. Pulver are considered “independent” as
defined by federal securities laws and by the New York Stock Exchange corporate
governance standards.
Holders
of Class A, Class A-1 and Class B Membership Interests have no right to nominate
or vote for the Managers of the Company.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the
Securities Exchange Act requires our executive officers and managers, and
persons who own more than ten percent of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the SEC.
Our officers and managers and greater than ten percent beneficial owners are
required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, based solely on our
review of the copies of such reports furnished to us and written representations
that no other reports were required during the fiscal year ended
December 31, 2009, all Section 16(a) filing requirements
applicable to our executive officers, managers and greater than ten percent
beneficial owners were satisfied, with the exception that David A. Timpe, a
Manager of the Company, filed one Form 4 report late.
Code
of Ethics
We have
adopted a Code of Business Conduct and Ethics, our Code of Ethics, relating to
the conduct of our business by our employees, executive officers and Managers.
Our Audit Committee retains responsibility for administering and interpreting
our Code of Ethics. Our Code of Ethics generally provides, among other things,
that our Managers, executive officers and employees must:
|
·
|
not
engage in any unlawful activity in conducting our
business;
|
58
|
·
|
avoid
conflicts of interest arising between the persons’ responsibilities
related our business and the person’s personal or family
interests;
|
|
·
|
not
divert corporate opportunities that are discovered through the use of our
property or information to himself or herself unless that opportunity has
first been presented to, and rejected by,
us;
|
|
·
|
not
compete with us;
|
|
·
|
deal
ethically and lawfully with our customers, suppliers, competitors and
employees;
|
|
·
|
maintain
complete and accurate business and financial
records;
|
|
·
|
not
disclose or distribute our confidential information, except when such
disclosure is authorized by us or required by
law;
|
|
·
|
protect
our assets that are entrusted to them and take steps to ensure that our
assets are used only for legitimate business purposes;
and
|
|
·
|
not
use our property or information for his or her improper personal
gain.
|
Our Code
of Ethics also contains compliance procedures, allows for the anonymous
reporting of a suspected violation of our Code of Ethics and specifically
forbids retaliation against any executive officer or employee who reports
suspected misconduct in good faith. The provisions of our Code of Ethics may
only be waived or amended by our Board of Managers or, if permitted, a committee
of our Board of Managers. Waivers of our Code of Ethics that apply to our
executive officers or Board of Managers must be filed with the Securities and
Exchange Commission.
The
Company does not maintain an Internet website. A copy of the Code of
Ethics is available in print to any member without charge upon written request
addressed to Summit Hotel Properties, LLC, Attn: General Counsel, 2701 South
Minnesota Avenue, Suite 6, Sioux Falls, SD 57105. Our Code of Ethics is
attached to this annual report as Exhibit 14.1.
Corporate
Governance
Executive
Officers
Kerry W. Boekelheide is our Chief
Executive Officer, and Daniel P. Hansen is our Chief Financial Officer.
The day-to-day responsibilities of these officers are limited as day-to-day
operations of the Company are managed by our Company Manager. The primary
responsibilities of our Chief Executive Officer include setting Company goals
and policies, providing Board support, and general oversight of the operations
of the Company. The primary responsibilities of our Chief Financial
Officer include setting financial, accounting and tax policies, and oversight of
the financial administration and controls of the Company.
Compensation
Committee
The Compensation Committee is comprised
of a designee appointed by Tyler Stowater, the Investor Representative on the
Board, and a representative appointed by The Summit Group. Robert
Pulver was designated by Paul Schock, the Investor Representative who resigned
from the Board of Managers during July 2009. Mr. Pulver has been retained
as the designee of the Investor Representative. Kerry W. Boekelheide has been
appointed by The Summit Group.
59
The Compensation Committee is
responsible for setting the compensation packages, including salary,
commissions, bonuses, and benefits of the Managers and executive officers of the
Company. In addition, the Compensation Committee reviews the reimbursement
paid to The Summit Group for its service as hotel manager and Company
Manager.
Audit
Committee
The Audit Committee is charged with
hiring our independent registered public accounting firm, setting policy and
procedure concerning our bookkeeping, accounting, tax return preparation and
financial controls. The Audit Committee may be comprised of two or three
Managers, none of whom shall be an employee or officer of the Company. One
of the Audit Committee members must be generally regarded as a financial
expert.
The Audit
Committee is currently comprised of Managers David Timpe and Tyler
Stowater. The Board of Managers has determined that Mr. Timpe is an Audit
Committee financial expert, as defined by federal securities laws, and is
considered “independent” as defined by federal securities laws and the New York
Stock Exchange corporate governance standards.
ITEM
11. EXECUTIVE COMPENSATION
Compensation
Committee Report
Our
executive officers and employee-Managers receive no salary or bonus directly
from the Company. Their compensation is paid by The Summit Group, Inc. and
a portion is reimbursed by us through the management fee, as further described
in Item 13. Certain Relationships and Related Transactions, and Director
Independence. Our equity compensation program is administered under the
direction of the Compensation Committee of our Board of Managers. The current
members of the Compensation Committee are Kerry W. Boekelheide and Robert
Pulver.
The
undersigned members of the Compensation Committee of the Board of Managers of
Summit Hotel Properties, LLC submit this report as follows:
The Compensation Committee is
responsible for establishing and reviewing equity incentive compensation
programs for our executive officers. To date, however, the Company does
not offer any long-term compensation programs. No options to purchase
membership interests are held by any party. There are no contracts,
agreements, plans or arrangements that provide for payment to any officer in
connection with any termination or change in any officer’s responsibilities, or
upon change in control of the Company. At this time, we do not anticipate
issuing equity-based compensation to any executive officers or employees but
reserve the right to do so based upon the recommendation of the Compensation
Committee.
60
As there is no compensation program, no
plans, no awards, no pension benefits, and no deferred compensation for any
employees or officers, no Compensation Discussion and Analysis has been prepared
by the Company or reviewed by the Compensation Committee, and no compensation
tables have been prepared, except for the Manager Compensation Table set forth
below.
Submitted by the
Compensation Committee
Kerry W. Boekelheide
Robert Pulver
Compensation
Committee Interlocks and Insider Participation
The Company has established a
Compensation Committee consisting of Robert Pulver and Kerry W.
Boekelheide. Mr. Pulver has not served as an employee or officer of the
Company, and does not have any relationships with the Company requiring
disclosure under applicable rules of the rules and regulations of the SEC.
Mr. Boekelheide is the Chief Executive
Officer of the Company. Furthermore, he is the Chairman of the Board of
Directors and sole shareholder of The Summit Group, Inc. Mr. Boekelheide
is also a Class A Member of the Company. In addition, Mr. Boekelheide is
the President and principal of Summit Capital Partners, LLC, which acts as a
broker-dealer for the Company’s securities offerings. These relationships
and compensation, distributions or other payments received during 2009 as a
result of such relationships is disclosed in Item 13. Certain
Relationships and Related Transactions, and Director Independence.
None of our executive officers serves
as a director of, or a member of the compensation committee of, any entity that
has one or more of its executive officers serving as a member of our Board of
Managers or Compensation Committee.
Compensation
of Managers
Members
of the Board of Managers who are also employees of the Company or The Summit
Group do not receive any compensation for their service as Managers. No
Managers receive perquisites or other personal benefits from the Company.
The Board of Managers determined that, for the year 2010, the usual $20,000
annual fee paid to non-employee Managers would be reduced by
10%.
61
The following table sets forth the
total compensation paid or earned by each of our Mangers for the fiscal year
ended December 31, 2009:
Total Fees Earned
|
||||
Name
|
or Paid in Cash
|
|||
Kerry
W. Boekelheide
|
$ | 0 | ||
Daniel
P. Hansen
|
$ | 0 | ||
Craig
J. Aniszewski
|
$ | 0 | ||
Robert
G. Pulver
|
$ | 20,000 | ||
David
A. Timpe
|
$ | 20,000 | ||
Tyler
Stowater(1)
|
$ | 10,000 |
(1)
Mr. Stowater was appointed to the Board on July 28, 2009, and thus received
one-half of the Manager fee for 2009. Pursuant to his agreement with
Bluestem Capital Company, LLC (“Bluestem”), Mr. Stowater does not personally
retain manager or director fees from any company in which Bluestem
invests. Such fees are assigned by Mr. Stowater to Bluestem.
Employment
Contracts
The
Company does not have employment contracts with its executive officers, as the
individuals who perform the functions of executive officers are employees of The
Summit Group.
Compensation
Policies and Practices Relating to Company’s Risk Management
As discussed above, our Executive
Officers are not compensated by the Company. The only employees of the
Company are the employees who work on a day-to-day basis in the Company’s
hotels. These Company employees include the hotel general managers, front
desk clerks, housekeepers and other hotel staff. All of our management and
centralized functions, including hotel regional managers, accounting, legal,
human resources and similar functions are provided by our Company Manager, The
Summit Group, Inc. Thus, the management and centralized-function employees
are not employees of the Company.
The general managers and sales managers
at our hotels are eligible for bonus compensation, based upon meeting certain
goals concerning the individual hotel’s profitability and sales.
Accordingly, there is no bonus plan that is tied to Company-wide performance
and, therefore, none of the Company’s bonus arrangements create incentives for
general managers and sales managers to subject the Company to systemic
risk. In addition, since bonuses are tied to profitability, there is no
incentive to engage in behavior that, for example, is designed to build revenues
growth without regard to profitability. Therefore, we do not believe that
our compensation policies and practices for our employees create risks that are
reasonably likely to have a material adverse effect on the Company or our
investors.
62
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
There are no outstanding options,
warrants or rights to purchase any class of Company security, and no securities
are available for issuance under equity compensation plans.
The
following table sets forth information with respect to the beneficial ownership
of the Company’s Membership Interests, as of December 31, 2009, by:
|
-
each person who is known by us to be the beneficial owner of 5 percent or
more of each Class of the Company’s voting membership
interests;
|
|
-
each manager, each manager nominee, our executive officers identified in
the “Executive Compensation” section below;
and
|
|
-
all of our managers, manager nominees and executive officers as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities.
Each time
the Company accepts new capital from the sale of membership interests, the
membership interests of all other members in all classes of membership are
re-calculated. Therefore, the beneficial ownership percentages set forth
in the table below are frequently adjusted slightly regardless of any
acquisition or disposition of interests by the persons listed in the table
below.
Except as
otherwise noted in the footnotes below, the individual parties listed below had
sole voting and investment power with respect to such
securities.
63
Certain
Beneficial Owners
Name and Address
|
Percent of
|
|||
of Beneficial Owner
|
Class (1)
|
|||
Class
A Interests
|
||||
Bellevue
Partners, L.L.C.
|
5.36 | %(2) | ||
122
S. Phillips Avenue, Suite 300
|
||||
Sioux
Falls, SD 57104
|
||||
Steven
T. Kirby
|
17.01 | %(3) | ||
122
S. Phillips Avenue, Suite 300
|
||||
Sioux
Falls, SD 57104
|
||||
Bluestem
Capital Company
|
15.40 | %(4) | ||
122
S. Phillips Avenue, Suite 300
|
||||
Sioux
Falls, SD 57104
|
||||
Class
A-1 Interests
|
||||
Bluestem
Capital Company
|
11.86 | %(5) | ||
122
S. Phillips Avenue, Suite 300
|
||||
Sioux
Falls, SD 57104
|
||||
Class
C Interests
|
||||
The
Summit Group, Inc.
|
100.00 | %(6) | ||
2701
S. Minnesota Ave., Ste. 6
|
||||
Sioux
Falls, SD 57105
|
Managers
and Executive Officers of the Company
Name
|
Percent
of
|
|||
of Beneficial Owner
|
Class (1)
|
|||
Class
A Interests
|
||||
Kerry
W. Boekelheide
|
8.38 | %(7) | ||
Tyler
Stowater
|
0.60 | %(8) | ||
Robert
G. Pulver
|
0.14 | % | ||
All
Executive Officers and Managers as a Group (3 persons)
|
9.12 | % | ||
Class
A-1 Interests
|
||||
David
A. Timpe
|
0.10 | % | ||
Tyler
Stowater
|
1.22 | % (9) | ||
All
Executive Officers and Mangers as a Group (2 persons)
|
1.32 | % | ||
Class
B Interests
|
||||
Craig
J. Aniszewski
|
1.05 | % | ||
Kerry
W. Boekelheide
|
62.63 | %(10) | ||
All
Executive Officers and Managers as a Group (2 persons)
|
63.68 | % | ||
Class
C Interests
|
||||
The
Summit Group, Inc.
|
100.00 | %(6) | ||
All
Executive Officers and Managers as a Group (1 person)
|
100.00 | % |
64
(1)
|
The
Company’s membership interests are presented as percentages of ownership,
rather than in shares or units.
|
(2)
|
Steven
T. Kirby holds sole voting and investment control over Bellevue Partners,
LLC.
|
(3)
|
Steven
T. Kirby may be deemed to be the beneficial owner of Class A interests,
including 10.04% of the Class A Interests held by Bluestem Capital
Company, L.L.C., in addition to the 5.36% of Class A Interests held by
Bellevue Partners, L.L.C., because of his sole voting and investment
control over that entity. Mr. Kirby disclaims beneficial
ownership of these securities except to the extent of his respective
pecuniary interest therein. Voting and investment power for those
securities beneficially held by Bluestem Capital Company, LLC is as
described in footnote (4). Mr. Kirby holds sole voting and
investment power for the remaining 1.6% securities beneficially
held.
|
(4)
|
Bluestem
Capital Company, LLC may be deemed to be the beneficial owner of Class A
Interests, including: 3.07% held by Bluestem Capital Partners I, LLC;
5.36% held by Bellevue Partners, LLC; 0.52% held by OSandY Partners, LLC;
0.60% held by Carrier Pasta, LLC; 4.59% held by Bluestem Growth &
Income Fund, LLC; and 1.26% held by Bluestem Growth & Income Fund II,
LLC. Bluestem Capital Company, LLC disclaims beneficial ownership of these
securities except to the extent of its respective pecuniary interest
therein. Steven T. Kirby holds sole voting and investment control
over Bluestem Capital Company, LLC and each of the entities listed in this
footnote (4), except he shares voting and investment power over Carrier
Pasta, LLC with John Dennis and Tyler
Stowater.
|
(5)
|
Bluestem
Capital Company may be deemed to be the beneficial owner of Class A-1
interests including: 6.44% held by Bluestem Growth & Income Fund
II, LLC, 4.20% held by Bluestem Select Opportunities Fund, LLC, and 1.22%
held by Bluestem Capital Investments, LLC. Bluestem Capital Company, LLC
disclaims beneficial ownership of these securities except to the extent of
its respective pecuniary interest therein. Steven T. Kirby holds
sole voting and investment power over securities held by Bluestem Growth
& Income Fund II, LLC and Bluestem Select Opportunities Fund,
LLC. Mr. Kirby shares voting and investment power over Bluestem
Capital Investments, LLC with Tyler Stowater and Sandy
Horst.
|
(6)
|
Kerry
W. Boekelheide is the sole stockholder of The Summit Group, Inc., and,
holds sole investment and voting control over the interests held by The
Summit Group, Inc.
|
(7)
|
Kerry
W. Boekelheide may be deemed to be the beneficial owner of Class A
membership interests, including: 2.79% held by TS One, Inc.; 2.19% held by
KS Two, Inc.; and 3.13% held by KS Three, Inc. Mr. Boekelheide
shares voting and investment power with James P. Koehler over the
securities held by KS Two, Inc. and KS Three, Inc. Mr. Boekelheide
shares voting and investment power with Gary Tharaldson over the
securities held by TS One, Inc. Mr. Boekelheide disclaims beneficial
ownership of these securities except to the extent of his pecuniary
interest therein.
|
(8)
|
Tyler
Stowater may be deemed the beneficial owner of Class A membership
interests, including 0.6% held by Carrier Pasta, LLC. Mr. Stowater shares
voting and investment power over Carrier Pasta, LLC with Steven T. Kirby
and John Dennis. Mr. Stowater disclaims beneficial ownership of
these securities except to the extent of his pecuniary interest
therein.
|
65
(9)
|
Tyler
Stowater may be deemed the beneficial owner of Class A-1 membership
interests, including 1.22% held by Bluestem Capital Investments, LLC. Mr.
Stowater shares voting and investment power over Bluestem Capital
Investments, LLC with Steven T. Kirby and Sandy Horst. Mr. Stowater
disclaims beneficial ownership of these securities except to the extent of
his pecuniary interest therein
|
(10)
|
Mr.
Boekelheide may be deemed the beneficial owner of Class B membership
interests, including: 5.07% held by SHB, Inc.; and 57.56% held by The
Summit Group, Inc. Mr. Boekelheide has shared investment and voting
power in SHB, Inc. with Michael Sahli. Mr. Boekelheide disclaims
beneficial ownership of these securities except to the extent of his
pecuniary interest therein
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
Summit Group, Inc.
General.
The
Summit Group is the Class C Member and the Company Manager. The Summit
Group, as Class C Member, is entitled to appoint 6 of the 7
Managers.
Management
Agreement.
We have
entered into a contract with The Summit Group whereby The Summit Group provides
us with certain hotel management services. For these services we reimburse The
Summit Group for all of its expenses related to the management of our hotels,
with certain exceptions. Such reimbursement, together with reimbursements
to The Summit Group in its capacity as Company Manager, may not exceed 4.5% of
the gross revenues of our hotels in any year. Expenses that are included
in the reimbursement subject to the 4.5% cap include: salaries and benefits of
The Summit Group employees who act as our executive officers and Managers;
office lease expenses; salaries, bonuses and benefits provided to The Summit
Group’s employees and executive officers; and all other overhead expenses.
Reimbursable expenses incurred by The Summit Group that are not included in the
4.5% cap include: expenses related to the acquisition and development of hotels;
expenses that are customarily paid for or performed directly by hotels, such as
bookkeeping and accounting expenses; and funds advanced for services performed
by third parties, such as accounting, tax and legal services. There is no
limit on the reimbursement of expenses that are not subject to the 4.5%
cap. The Compensation Committee reviews the reimbursements to The Summit
Group on an annual basis, or more frequently in its discretion. The Summit
Group cannot be removed, or the Hotel Management Agreement terminated, except
for cause as specified in the Hotel Management Agreement. In addition to
the restrictions on management fees set forth in the Hotel Management Agreement,
it is anticipated that the refinanced Fortress loan documents will restrict
management fees paid to The Summit Group to 3.0% of gross revenues, unless
otherwise approved by Fortress.
The
reimbursements to The Summit Group for its services as Hotel Manager and as
Company Manager during the year ended December 31, 2009, totaled $2,894,078
which was 2.4% of revenues from continuing and discontinued operations, December
31, 2008, totaled $4,186,593, which was 3.0% of revenues from continuing and
discontinued operations, and December 31, 2007 totaled $4,122,048, which was
3.1% of continuing and discontinued operations revenues. We also
reimbursed The Summit Group $589,012, $626,685 and $637,448 for accounting
services during the years ended December 31, 2009, 2008, and 2007,
respectively.
66
Membership
Interests.
The
Summit Group is the sole Class C Member of the Company. As of December 31,
2009, 2008, and 2007 the Class C Member owned approximately 43.4997%, 42.9911%,
and 42.8444% of the total membership interests of the Company,
respectively. During the years ended December 31, 2009, 2008, and 2007,
The Summit Group received $0, $6,683,725, and $5,612,615, respectively, in
distributions as a result of its Class C interest ownership.
The
Summit Group is a Class B Member of the Company. As of December 31, 2009,
2008, and 2007, it owned 57.56% of the Class B membership interests, and this
comprised 4.243%, 4.575%, and 4.671%, respectively, of the total membership
interests of the Company. The Summit Group received $0, $728,609, and
$611,875, in the years ended December 31, 2009, 2008, and 2007, respectively, in
distributions as a result of its Class B interest ownership.
The
Summit Group’s Sharing Ratio as a result of its combined Class B and Class C
membership interests was 47.7427 % as of December 31, 2009, and is subject to
increase in the event we issue additional membership interests, including as a
result of future private offerings or consolidation of additional
entities.
As of
December 31, 2009, 2008, and 2007, the Company had Accounts Payable to The
Summit Group in the amount of $494,248, $3,173,179, and $1,137,985,
respectively, relating to reimbursement of development expenses for acquired
properties and management expense.
Summit
Capital Partners, LLC
Summit Capital Partners, LLC fka Summit
Real Estate Investments, LLC (“SCP”) provides brokerage services in connection
with sales made under the Company’s private offerings. SCP is 100% owned
by Kerry W. Boekelheide, and is managed by its President, Kerry W.
Boekelheide. Mr. Boekelheide is a Principal, Executive Officer, and a
Manager of the Company. SCP may receive selling commissions no greater
than 6% of the gross purchase price per Company membership unit sold by
SCP. We have also agreed to pay SCP a 1% expense allowance fee on
the gross purchase price of Company membership units sold by SCP and/or other
broker-dealers contracted by SCP, and a placement agent fee of 1.5% of the gross
purchase price per Company membership unit sold by SCP. In the years ended
December 31, 2009, 2008, and 2007, we paid SCP a total of $570,600, $206,625,
and $0, respectively, in commissions and fees related to sales of Company
securities.
Kerry
W. Boekelheide
Kerry W.
Boekelheide is the sole voting owner and sole director of The Summit
Group. Mr. Boekelheide also is a Class A Member of the Company. As
of December 31, 2009, he owned 5.6102% of the Class A Membership Interests, and
this comprised 2.3410% of the total membership interests of the Company.
During the years ended December 31, 2009, 2008, and 2007, Mr. Boekelheide
received $168,935, $578,803, and $545,655, respectively, in distributions as a
result of his Class A interest ownership.
67
Review
Approval or Ratification of Transactions with Related Persons
The Company’s Third Amended and
Restated Operating Agreement (“Operating Agreement”) provides that no
transaction between a related person and the Company is void or voidable solely
by virtue of the existence of such relationship, or because the related person
participates in the meeting of Managers which authorizes the transaction, or
because such related person’s votes are counted for the purpose of authorizing
the transaction. The Operating Agreement further states that Managers may
own Membership Interests in the Company.
The
Operating Agreement provides that The Summit Group, Inc. shall be the Hotel
Manager for the Company and describes the compensation and reimbursements
payable to The Summit Group, Inc. as a result of such position. The
Compensation Committee retains responsibility for the review of all compensation
and reimbursements paid to The Summit Group, Inc.
All other
transactions with related parties are subject to the review and approval of the
Company Manager or the Board of Managers, as set forth in the Operating
Agreement. Transactions with related parties, except as set forth in the
Operating Agreement or otherwise approved by the Board of Managers, are to be
based upon terms no worse than those that could be received from an independent
third party. The Company believes that no transactions were entered into
with related parties between January 1, 2009 and December 31, 2009 that did not
comply with the above terms.
Manager
Independence
The Board of Managers currently
consists of six Managers, who are: Kerry W. Boekelheide, Craig J. Aniszewski,
Daniel P. Hansen, Robert Pulver, David Timpe, and Tyler Stowater. The
Managers were appointed as follows:
|
·
|
The
Class C Member is entitled to appoint four Managers –Kerry W. Boekelheide,
Craig J. Aniszewski, and Daniel Hansen are currently appointed. The
Class C Member is entitled to appoint a Manager to the vacant Manager
position.
|
|
·
|
One
member with a significant membership interest in the Company is appointed
annually by the Class C Member (“Investor Representative”) – Tyler
Stowater has been appointed in this
position.
|
|
·
|
One
independent Manager (“Independent Manager”) is appointed by the Managers –
Robert Pulver has been appointed in this
position.
|
|
·
|
Either
one additional Investor Representative is appointed annually by the Class
C Member or one additional Independent Manager is appointed by the Class C
Member. The Class C Member appointed an Independent Manager – David
A. Timpe has been appointed to this
position.
|
68
For these purposes, an Independent
Manager may be a member of the Company, but shall not be an employee or
officer. Each of these persons is either appointed by the Class C Member,
or by the Managers, who each has been appointed by the Class C
Member.
Pursuant to the New York Stock Exchange
corporate governance standards, only David A. Timpe and Robert G. Pulver are
independent Managers. Mr. Timpe is a member the Company’s Audit
Committee. Mr. Pulver is a member of the Company’s Compensation
Committee.
The Company does not maintain an
Internet website. The manner for appointment of the Board of Managers is
set forth in the Company’s Third Amended and Restated Operating Agreement, which
is attached to this annual report as Exhibit 3.2. Except where it is
clarified in this annual report that the Company is applying the definition of
“independent” as determined by the New York Stock Exchange corporate governance
standards, the Company’s definition of “Independent Manager” is set forth in the
Company’s Third Amended and Restated Operating Agreement.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees and Audit-Related Fees
Gordon
Hughes & Banks, LLP served as our independent registered public accounting
firm through the period ended October 31, 2008. Aggregate fees paid by the
Company for professional services rendered by Gordon Hughes & Banks for the
ten month period ended October 31, 2008, were as follows:
Ten Months Ended
|
||||
October 31, 2008
|
||||
Audit
Fees
|
$ | 83,906 | ||
Quarterly
Reviews
|
$ | 15,531 | ||
Audit-Related
Fees
|
$ | 0 | ||
Total
|
$ | 99,437 |
Eide Bailly, LLP, served as our
independent registered public accounting firm from November 1, 2008, through
December 31, 2009. Aggregate fees paid by the Company for professional
services rendered by Eide Bailly, LLP, for the year ended December 31, 2009
were as follows:
Two Months Ended
|
Twelve Months Ended
|
|||||||
December 31, 2008
|
December 31, 2009
|
|||||||
Audit
Fees
|
$ | 6,067 | $ | 92,807 | ||||
Quarterly
Reviews
|
$ | 0 | $ | 14,167 | ||||
Audit-Related
Fees (404 Audit)
|
$ | 0 | $ | 28,412 | ||||
Total
|
$ | 6,067 | $ | 135,386 |
69
Auditor
Fees Policy.
Our Board
of Directors has adopted an Audit Committee Charter which includes a policy
concerning the pre-approval of audit and non-audit services to be provided by
our independent accountants. The policy requires that all services provided by
our independent accountants, including audit services, audit-related services,
and other services, must be pre-approved by our Audit Committee. So long as is
in accordance with the Securities Exchange Act of 1934, engagement of our
independent accountants for de minimus non-audit related services, however, does
not require the approval of our Audit Committee.
Our Audit
Committee approved all audit and non-audit services provided to us by Eide
Bailly, LLP, and Gordon Hughes & Banks during the 2009 and 2008 fiscal
years, respectively.
Tax
Fees and All Other Fees
Eide Bailly, LLP provided Audit
Committee approved services for income tax preparation of $52,423 in 2009 and
$54,514 in 2008. Eide Bailly, LLP also provided audit services of $9,275
for The Summit Group, Inc., 401(k) plan in 2009 and $9,851 in 2008.
Tax
Fees and All Other Fees Policies.
The Audit Committee is responsible for
pre-approving all audit and non-audit services provided to the Company by our
principal accountants. Once pre-approved, the Company Manager is
responsible for hiring and setting the compensation for tax fees and all other
fees.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial
statements are included herein on pages F-1 – F-28.
The
following Exhibits are filed as part of this annual report:
Exhibit
|
|||
Number
|
Description of Exhibit
|
||
3.1
|
Articles
of Organization of Summit Hotel Properties, LLC (incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
||
3.2
|
Third
Amended and Restated Operating Agreement for Summit Hotel Properties, LLC
(incorporated by
reference to the Registrant’s Registration Statement on Form
10)
|
||
10.1
|
Hotel
Management Agreement between Summit Hotel Properties, LLC and The Summit
Group, Inc., dated February 11, 2004 (incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
70
10.2
|
First
Amendment to Hotel Management Agreement between The Summit Group, Inc. and
Summit Hotel Properties, LLC, dated April 24, 2006 (incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
||
10.3
|
Hotel
Management Agreement between The Summit Group, Inc. and Summit Hospitality
I, LLC, dated December 20, 2004 (incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
||
10.4
|
Hotel
Management Agreement between The Summit Group, Inc. and Summit Group of
Scottsdale, Arizona, LLC, d/b/a Springhill Suites by Marriott dated July
29, 2003 (identical in all respects to the Hotel Management Agreement
between The Summit Group, Inc., and Summit Group of Scottsdale, Arizona,
LLC, d/b/a Courtyard by Marriott, dated July 29, 2003, except in the
identification of the hotel under management. Such Hotel Management
Agreement is omitted.) (Incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
||
10.5
|
Management
Agreement between The Summit Group, Inc. and Summit Hospitality V, LLC,
dated April 12, 2007 (Incorporated by reference to
the Company’s Report on Form 10-K filed with the SEC on March 31,
2008)
|
||
10.6
|
Managing
Dealer Agreement between Summit Hotel Properties, LLC and Summit Capital
Partners, LLC dated October 31, 2005 (incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
||
10.7
|
Soliciting
Dealer Agreement between Summit Hotel Properties, LLC and Summit Capital
Partners, LLC dated October 31, 2005 (incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
||
10.8
|
Loan
Agreement between Summit Hospitality I, LLC and Lehman Brothers Bank, FSB
dated December 30, 2004 (incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
||
10.9
|
Loan
Agreement between Summit Hotel Properties, LLC and ING Life Insurance and
Annuity Company dated December 23, 2005 (incorporated by reference to
the Registrant’s Registration Statement on Form
10)
|
||
10.10
|
First
Amended and Restated Loan Agreement between Summit Hotel Properties, LLC
and First National Bank of Omaha, N.A. dated August 31, 2009 (“Credit
Pool”) (incorporated by
reference to the Company’s Report on Form 8-K filed with the SEC on
September 4, 2009)
|
||
10.11
|
First
Amended and Restated Loan Agreement between Summit Hotel Properties, LLC
and First National Bank of Omaha dated August 31, 2009 (“Acquisition
Line”) (incorporated by
reference to the Company’s Report on Form 8-K filed with the SEC on
September 4, 2009)
|
||
10.12
|
Loan
Agreement between Summit Hotel Properties, LLC and ING Life Insurance and
Annuity Company, dated June 15, 2006 (incorporated by reference to
Amendment No. 1 to the Registrant’s Registration Statement on Form
10)
|
||
10.13
|
First
Modification of Loan Agreement between Summit Hotel Properties, LLC and
ING Life Insurance and Annuity Company, dated April 24, 2007 (incorporated by reference to
the Company’s Report on Form 10-Q filed with the SEC on May 15,
2007)
|
71
10.14
|
Modification
of Promissory Note and Loan Agreement between Summit Hotel Properties, LLC
and ING Life Insurance and Annuity Company, dated November 28, 2007 (incorporated by reference to
the Company’s Report on Form 10-K filed with the SEC on March 31,
2008)
|
||
10.15
|
Loan
Agreement between Summit Hotel Properties, LLC and M&I Marshall &
Ilsley Bank for loan in the amount of $14,080,000.00, dated July 25,
2006 (incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC on July 31,
2006)
|
||
10.16
|
First
Amendment to Loan Agreement, Note and Collateral Security Documents
($14,080,000.00 loan) between Summit Hotel Properties, LLC and M&I
Marshall & Ilsley Bank, dated December 31, 2008 (incorporated by reference to
the Company’s Annual Report on Form 10-K filed with the SEC on March 31,
2009)
|
||
10.17
|
Loan
Agreement between Summit Hotel Properties, LLC and M&I Marshall &
Ilsley Bank for loan in the amount of $10,400,000.00, dated July 25,
2006 (incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC on July 31,
2006)
|
||
10.18
|
First
Amendment to Loan Agreement, Note and Collateral Security Documents
($10,400,000.00 loan) between Summit Hotel Properties, LLC and M&I
Marshall & Ilsley Bank, dated December 31, 2008 (incorporated by reference to
the Company’s Annual Report on Form 10-K filed with the SEC on March 31,
2009)
|
||
10.19
|
Loan
Agreement between Summit Hotel Properties, LLC and Fortress Credit Corp.
dated March 5, 2007 for a loan in the amount of $99,700,000 (incorporated
by reference to the Company’s Current Report on Form 8-K filed with the
SEC on March 8, 2007)
|
||
10.20
|
Forbearance
Agreement between Summit Hotel Properties, LLC and Drawbridge Special
Opportunities Fund LP and Fortress Credit Opportunities I LP dated March
4, 2010 for a loan in the amount of $99,700,000 (incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC on March 4,
2010)
|
||
10.21
|
Loan
Agreement between Summit Hotel Properties, LLC and General Electric
Capital Corporation dated April 30, 2007 for a loan in the amount of
$9,500,000 (incorporated
by reference to the Company’s Report on Form 10-Q filed with the SEC on
May 15, 2007)
|
||
10.22
|
Loan
Agreement between Summit Hotel Properties, LLC and General Electric
Capital Corporation dated August 15, 2007 for a loan in the amount of
$11,300,000 (incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC on August 21,
2007)
|
||
10.23
|
Loan
Modification Agreement between Summit Hotel Properties, LLC and General
Electric Capital Corporation ($11,300,000 loan) dated December 2008 (incorporated by reference to
the Company’s Annual Report on Form 10-K filed with the SEC on March 31,
2009)
|
||
10.24
|
Loan
Agreement between Summit Hospitality V, LLC and General Electric Capital
Corporation dated February 29, 2008 for a loan in the amount of
$11,400,000 (incorporated by reference to
the Company’s Report on Form 10-K filed with the SEC on March 31,
2008)
|
72
10.25
|
Loan
Agreement between Summit Hotel Properties, LLC and Compass Bank, dated
September 17, 2008 for a loan in the amount of $19,300,000 (incorporated by reference to
the Company’s Report on Form 10-Q filed with the SEC on November 13,
2008)
|
||
14.1
|
Code
of Ethics (incorporated
by reference to the Company’s Report on Form 10-K filed with the SEC on
March 30, 2007)
|
||
16.1
|
Correspondence
dated November 18, 2008 from Gordon, Hughes & Banks, LLP concerning
change in certifying accountant (incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC on November
20, 2008)
|
||
21.1
|
List
of Subsidiaries of the Registrant
|
||
31.1
|
Certification
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 – Chief
Executive Officer.
|
||
31.2
|
Certification
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 - Chief
Financial Officer.
|
||
32.1
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
Code – Chief Executive Officer.
|
||
32.2
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
Code - Chief Financial Officer.
|
||
99.1
|
List
of hotel properties with operating information
|
||
99.2
|
Reconciliation
of Non-GAAP Financial Measure
|
||
99.3
|
|
Amended
and Restated Audit Committee Charter adopted in July 2007 (incorporated by reference to
the Company’s Report on Form 10-Q filed with the SEC on August 14,
2007)
|
73
SIGNATURES
Pursuant to the requirements 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.
SUMMIT
HOTEL PROPERTIES, LLC
|
|||
Date: March
31, 2010
|
By:
|
/s/
|
Kerry W. Boekelheide
|
Kerry
W. Boekelheide
|
|||
Chief
Executive Officer and
Manager
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
|
Title
|
Date
|
||
/s/ Kerry W. Boekelheide
|
Chief
Executive Officer and Manager
|
March
31, 2010
|
||
Kerry
W. Boekelheide
|
||||
/s/ Daniel P. Hansen
|
Chief
Financial Officer and Manager
|
March
31, 2010
|
||
Daniel
P. Hansen
|
||||
/s/ Craig J. Aniszewski
|
Manager
|
March
31, 2010
|
||
Craig
J. Aniszewski
|
||||
/s/ Robert Pulver
|
Manager
|
March
31, 2010
|
||
Robert
Pulver
|
||||
/s/ David A. Timpe
|
Manager
|
March
31, 2010
|
||
David
A. Timpe
|
||||
/s/ Tyler Stowater
|
Manager
|
March
31, 2010
|
||
Tyler
Stowater
|
|
|
74
SUPPLEMENTAL
INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE
ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12
OF THE ACT
The Company did not furnish an annual
report or proxy materials to security holders during 2009. The Company
does not anticipate furnishing an annual report or proxy materials to security
holders subsequent to the filing of this annual report.
75
SUMMIT
HOTEL PROPERTIES, LLC
INDEX
TO FINANCIAL STATEMENTS AND SCHEDULES
Page
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-1
– F-3
|
Summit
Hotel Properties, LLC:
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-4
|
Consolidated
Statements of Operations for the years ended December 31, 2009, 2008 and
2007
|
F-5
|
Consolidated
Statements of Changes in Members’ Equity for the years ended December 31,
2009, 2008 and 2007
|
F-6
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007
|
F-7
– F-8
|
Notes
to Consolidated Financial Statements
|
F-9
–
F-28
|
76
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Managers
Summit
Hotel Properties, LLC
Sioux
Falls, South Dakota
We have
audited the accompanying consolidated balance sheets of Summit Hotel Properties,
LLC (the “Company”) as of December 31, 2009 and 2008 and the related
consolidated statements of operations, changes in members’ equity and cash flows
for each of the years in the two year period ended December 31, 2009 and 2008.
The Company’s management is responsible for these financial statements. 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, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Summit Hotel
Properties, LLC as of December 31, 2009 and 2008, and the consolidated results
of its operations and its cash flows for each of the years in the two-year
period ended December 31, 2009 and 2008 in conformity with accounting principles
generally accepted in the United States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Summit Hotel Properties,
LLC’s internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 31, 2010, expressed an
unqualified opinion on the Company’s internal control over financial
reporting.
/s/
Eide Bailly LLP
Greenwood
Village, Colorado
March 31,
2010
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Managers
Summit
Hotel Properties, LLC
Sioux
Falls, South Dakota
We have
audited Summit Hotel Properties, LLC (the “Company”) internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Summit Hotel Properties, LLC 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 of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included 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 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 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.
In our
opinion, Summit Hotel Properties, LLC maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of operations, members’ equity, and cash flows of Summit
Hotel Properties, LLC, and our report dated March 31, 2010, expressed an
unqualified opinion on those financial statements.
/s/
Eide Bailly LLP
Greenwood
Village, Colorado
March 31,
2010
F-2
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Managers
Summit
Hotel Properties, LLC
Sioux
Falls, South Dakota
We have
audited the accompanying consolidated statements of operations, changes in
members’ equity and cash flows of Summit Hotel Properties, LLC (the “Company”)
for the year ended December 31, 2007. These consolidated financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements 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
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of
internal control over financial reporting as
a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the
Company's internal control
over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, 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, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Summit Hotel
Properties, LLC for the year ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America.
/s/
Gordon, Hughes & Banks, LLP
Greenwood
Village, Colorado
March 21,
2008
F-3
SUMMIT
HOTEL PROPERTIES, LLC
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2009 AND 2008
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 8,239,225 | $ | 18,153,435 | ||||
Restricted
cash
|
1,755,053 | 1,679,027 | ||||||
Trade
receivables
|
2,608,198 | 2,622,164 | ||||||
Prepaid
expenses and other
|
1,416,480 | 2,170,955 | ||||||
Total
current assets
|
14,018,956 | 24,625,581 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
483,940,701 | 461,894,270 | ||||||
OTHER
ASSETS
|
||||||||
Deferred
charges and other assets, net
|
4,828,185 | 5,664,796 | ||||||
Land
held for sale
|
12,226,320 | - | ||||||
Other
noncurrent assets
|
4,074,179 | - | ||||||
Restricted
cash
|
331,190 | 2,570,374 | ||||||
Total
other assets
|
21,459,874 | 8,235,170 | ||||||
TOTAL
ASSETS
|
$ | 519,419,531 | $ | 494,755,021 | ||||
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Current
portion of long-term debt
|
$ | 134,370,900 | $ | 19,508,600 | ||||
Lines
of credit
|
21,457,943 | 12,288,500 | ||||||
Notes
payable
|
- | 7,469,865 | ||||||
Accounts
payable
|
1,088,265 | 3,770,908 | ||||||
Related
party accounts payable
|
494,248 | 3,173,179 | ||||||
Accrued
expenses
|
9,182,013 | 9,956,372 | ||||||
Total
current liabilities
|
166,593,369 | 56,167,424 | ||||||
LONG-TERM
DEBT, NET OF CURRENT PORTION
|
270,353,750 | 350,826,837 | ||||||
COMMITMENTS
AND CONTINGENCIES (NOTE 15)
|
||||||||
MEMBERS'
EQUITY
|
||||||||
Class
A, 1,166.62 units issued and outstanding
|
60,451,469 | 76,512,442 | ||||||
Class
A-1, 437.83 & 196.50 units issued and outstanding,
respectively
|
34,330,877 | 15,855,756 | ||||||
Class
B, 81.36 units issued and outstanding
|
1,891,187 | 3,007,247 | ||||||
Class
C, 173.60 units issued and outstanding
|
(12,576,658 | ) | (5,990,222 | ) | ||||
Total
Summit Hotel Properties, LLC members' equity
|
84,096,875 | 89,385,223 | ||||||
Noncontrolling
interest
|
(1,624,463 | ) | (1,624,463 | ) | ||||
Total
equity
|
82,472,412 | 87,760,760 | ||||||
TOTAL
LIABILITIES AND MEMBERS' EQUITY
|
$ | 519,419,531 | $ | 494,755,021 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
SUMMIT
HOTEL PROPERTIES, LLC
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009
|
2008
|
2007
|
||||||||||
REVENUES
|
||||||||||||
Room
revenues
|
$ | 118,959,822 | $ | 132,796,698 | $ | 112,043,997 | ||||||
Other
hotel operations revenues
|
2,239,914 | 2,310,764 | 1,845,333 | |||||||||
121,199,736 | 135,107,462 | 113,889,330 | ||||||||||
COSTS
AND EXPENSES
|
||||||||||||
Direct
hotel operations
|
42,070,893 | 42,380,950 | 35,021,263 | |||||||||
Other
hotel operating expenses
|
16,986,818 | 15,186,138 | 11,980,423 | |||||||||
General,
selling and administrative
|
24,017,471 | 25,993,091 | 22,008,912 | |||||||||
Repairs
and maintenance
|
6,151,474 | 8,008,854 | 10,404,860 | |||||||||
Depreciation
and amortization
|
23,971,118 | 22,307,426 | 16,135,758 | |||||||||
Loss
on impairment of assets
|
6,332,736 | - | - | |||||||||
119,530,510 | 113,876,459 | 95,551,216 | ||||||||||
INCOME
FROM OPERATIONS
|
1,669,226 | 21,231,003 | 18,338,114 | |||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||
Interest
income
|
49,805 | 194,687 | 446,219 | |||||||||
Interest
(expense)
|
(18,320,736 | ) | (17,025,180 | ) | (14,214,151 | ) | ||||||
Gain
(loss) on disposal of assets
|
(4,335 | ) | (389,820 | ) | (651,948 | ) | ||||||
(18,275,266 | ) | (17,220,313 | ) | (14,419,880 | ) | |||||||
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
(16,606,040 | ) | 4,010,690 | 3,918,234 | ||||||||
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
|
1,464,808 | 10,278,595 | 11,587,145 | |||||||||
NET
INCOME (LOSS) BEFORE INCOME TAXES
|
(15,141,232 | ) | 14,289,285 | 15,505,379 | ||||||||
STATE
INCOME TAX (EXPENSE)
|
- | (826,300 | ) | (715,187 | ) | |||||||
NET
INCOME (LOSS)
|
(15,141,232 | ) | 13,462,985 | 14,790,192 | ||||||||
NET
INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
- | 384,269 | 777,762 | |||||||||
NET
INCOME (LOSS) ATTRIBUTABLE TO SUMMIT HOTEL PROPERTIES, LLC
|
$ | (15,141,232 | ) | $ | 13,078,716 | $ | 14,012,430 | |||||
BASIC
AND DILUTED EARNINGS PER $100,000 CAPITAL UNIT
|
$ | (8,716.23 | ) | $ | 8,411.67 | $ | 9,012.19 | |||||
WEIGHTED
AVERAGE NUMBER OF UNITS OUTSTANDING FOR CALCULATION OF BASIC AND DILUTED
EARNINGS PER CAPITAL UNIT (based on $100,000 investment)
|
1,737.13 | 1,554.83 | 1,554.83 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
SUMMIT
HOTEL PROPERTIES, LLC
CONSOLIDATED
STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Equity
|
||||||||||||||||||||||||||||
#
of
|
Attributable
to
|
|||||||||||||||||||||||||||
Capital
|
Noncontrolling
|
|||||||||||||||||||||||||||
Units
|
Class
A
|
Class
A-1
|
Class
B
|
Class
C
|
Total
|
Interest
|
||||||||||||||||||||||
BALANCES,
JANUARY 1, 2007
|
1,554.83 | $ | 88,253,669 | $ | 11,035,274 | $ | 4,972,353 | $ | 3,961,011 | $ | 108,222,307 | $ | (1,511,494 | ) | ||||||||||||||
Net
Income (Loss)
|
- | 11,214,409 | 1,165,504 | 259,939 | 1,372,578 | 14,012,430 | 777,762 | |||||||||||||||||||||
Distributions
to members
|
- | (16,575,137 | ) | (1,528,017 | ) | (1,124,079 | ) | (5,612,615 | ) | (24,839,848 | ) | (969,000 | ) | |||||||||||||||
BALANCES,
DECEMBER 31, 2007
|
1,554.83 | $ | 82,892,941 | $ | 10,672,761 | $ | 4,108,213 | $ | (279,026 | ) | $ | 97,394,889 | $ | (1,702,732 | ) | |||||||||||||
|
||||||||||||||||||||||||||||
Class
A-1 units issued in private placement
|
63.25 | 5,614,466 | $ | 5,614,466 | ||||||||||||||||||||||||
Net
Income (Loss)
|
- | 10,785,507 | 1,136,502 | 184,178 | 972,529 | 13,078,716 | 384,269 | |||||||||||||||||||||
Distributions
to members
|
- | (17,166,006 | ) | (1,567,973 | ) | (1,285,144 | ) | (6,683,725 | ) | (26,702,848 | ) | (306,000 | ) | |||||||||||||||
BALANCES,
DECEMBER 31, 2008
|
1,618.08 | $ | 76,512,442 | $ | 15,855,756 | $ | 3,007,247 | $ | (5,990,222 | ) | $ | 89,385,223 | $ | (1,624,463 | ) | |||||||||||||
Class
A-1 units issued in private placement
|
241.33 | 22,123,951 | $ | 22,123,951 | ||||||||||||||||||||||||
Net
Income (Loss)
|
- | (6,318,133 | ) | (1,120,603 | ) | (1,116,060 | ) | (6,586,436 | ) | (15,141,232 | ) | - | ||||||||||||||||
Distributions
to members
|
- | (9,742,840 | ) | (2,528,227 | ) | - | - | (12,271,067 | ) | - | ||||||||||||||||||
BALANCES,
DECEMBER 31, 2009
|
1,859.41 | $ | 60,451,469 | $ | 34,330,877 | $ | 1,891,187 | $ | (12,576,658 | ) | $ | 84,096,875 | $ | (1,624,463 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
SUMMIT
HOTEL PROPERTIES, LLC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009
|
2008
|
2007
|
||||||||||
OPERATING
ACTIVITIES
|
||||||||||||
Net
income (loss)
|
$ | (15,141,232 | ) | $ | 13,078,716 | $ | 14,012,430 | |||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
24,125,066 | 23,027,566 | 18,887,126 | |||||||||
Amortization
of prepaid lease
|
118,501 | - | - | |||||||||
Unsuccessful
project costs
|
1,262,219 | - | - | |||||||||
Noncontrolling
interests in operations of consolidated LLC
|
- | 384,269 | 777,762 | |||||||||
(Gain)
loss on disposal of assets
|
(1,297,488 | ) | (8,604,779 | ) | (10,379,556 | ) | ||||||
Loss
on impairment of assets
|
6,332,736 | - | - | |||||||||
Changes
in assets and liabilities:
|
||||||||||||
Trade
receivables
|
13,966 | 570,544 | (41,035 | ) | ||||||||
Prepaid
expenses and other assets
|
315,891 | (307,109 | ) | (102,077 | ) | |||||||
Accounts
payable and related party accounts payable
|
(5,847,835 | ) | (1,656,286 | ) | 1,180,615 | |||||||
Accrued
expenses
|
(774,359 | ) | 316,909 | 1,601,614 | ||||||||
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
9,107,465 | 26,809,830 | 25,936,879 | |||||||||
INVESTING
ACTIVITIES
|
||||||||||||
Land
and hotel acquisitions and construction in progress
|
(14,810,896 | ) | (12,904,466 | ) | (3,841,941 | ) | ||||||
Purchases
of other property and equipment
|
(6,613,397 | ) | (6,628,779 | ) | (9,465,898 | ) | ||||||
Proceeds
from asset dispositions, net of closing costs
|
207,814 | 23,584,638 | 35,581,012 | |||||||||
Restricted
cash released (funded)
|
2,163,158 | (585,271 | ) | 164,348 | ||||||||
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(19,053,321 | ) | 3,466,122 | 22,437,521 | ||||||||
FINANCING
ACTIVITIES
|
||||||||||||
Proceeds
from issuance of long-term debt
|
223,518 | 4,837,000 | 8,853,669 | |||||||||
Principal
payments on long-term debt
|
(6,890,949 | ) | (20,909,992 | ) | (22,932,344 | ) | ||||||
Financing
fees on long-term debt
|
(945,442 | ) | (942,405 | ) | (1,277,528 | ) | ||||||
Proceeds
from issuance of notes payable and line of credit
|
4,860,000 | 18,510,867 | - | |||||||||
Principal
payments on notes payable and line of credit
|
(19,865 | ) | - | (7,432,397 | ) | |||||||
Proceeds
from equity contributions, net of commissions
|
15,075,451 | 5,614,466 | - | |||||||||
Distributions
to members
|
(12,271,067 | ) | (26,702,848 | ) | (24,839,848 | ) | ||||||
Distributions
to noncontrolling interest
|
- | (306,000 | ) | (969,000 | ) | |||||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
31,646 | (19,898,912 | ) | (48,597,448 | ) | |||||||
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(9,914,210 | ) | 10,377,040 | (223,048 | ) | |||||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
18,153,435 | 7,776,395 | 7,999,443 | |||||||||
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 8,239,225 | $ | 18,153,435 | $ | 7,776,395 |
(continued
on next page)
F-7
SUMMIT
HOTEL PROPERTIES, LLC
CONSOLIDATED
STATEMENTS OF CASH FLOWS – PAGE 2
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009
|
2008
|
2007
|
||||||||||
SUPPLEMENTAL
DISCLOSURE OF
CASH
FLOW INFORMATION:
|
||||||||||||
Cash
payments for interest, net of the amounts capitalized
below
|
$ | 17,810,544 | $ | 17,833,598 | $ | 15,867,060 | ||||||
Interest
capitalized
|
$ | 2,977,101 | $ | 3,829,267 | $ | 4,489,724 | ||||||
Cash
payments for state income taxes
|
$ | 728,514 | $ | 781,081 | $ | 356,187 | ||||||
SUPPLEMENTAL
DISCLOSURE OF
NON-CASH
FINANCIAL INFORMATION:
|
||||||||||||
Acquisitions
of hotel properties and land through issuance of debt
|
$ | - | $ | 16,447,237 | $ | 42,341,906 | ||||||
Construction
in progress financed through accounts payable
|
$ | 244,126 | $ | - | $ | - | ||||||
Construction
in progress financed through related party accounts
payable
|
$ | 242,135 | $ | 2,600,260 | $ | 690,629 | ||||||
Construction
in progress financed through issuance of debt
|
$ | 51,098,872 | $ | 38,765,692 | $ | 78,752,652 | ||||||
Conversion
of construction in progress to other assets
|
$ | 4,149,379 | $ | - | $ | - | ||||||
Issuance
of long-term debt for short-term debt
|
$ | 7,450,000 | $ | 12,772,819 | $ | - | ||||||
Issuance
of long-term debt to refinance existing long-term debt
|
$ | 22,215,852 | $ | 11,073,070 | $ | 3,286,331 | ||||||
Equity
contributions used to pay down debt
|
$ | 7,048,500 | $ | - | $ | - | ||||||
Financing
costs funded through construction draws
|
$ | - | $ | 1,651,886 | $ | - | ||||||
Sale
proceeds used to pay down long-term debt
|
$ | 6,134,285 | $ | 4,215,362 | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-8
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
NOTE
1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Business
Summit
Hotel Properties, LLC, “The Company”, (a South Dakota limited liability company)
was organized January 8, 2004, and is engaged in the business of developing,
owning and operating hotel properties.
The
Company has agreements for the use of various trade names, trademarks and
service marks which include Carlson Hospitality, Choice Hotels International,
Hilton Hotel Corporation, Intercontinental Hotels Group, Hyatt Hotel Corporation
and Marriott International. The Company also owns and
operates one independent non-franchised hotel. As of December
31, 2009, the Company owned and managed 65 hotels, representing approximately
6,533 rooms located in 19 states. As of December 31, 2008, the Company
owned and managed 62 hotels, representing approximately 5,854 rooms located in
19 states. As of December 31, 2007, the Company owned and managed 64
hotels, representing approximately 5,863 rooms located in 19
states. The Company’s hotel properties are located throughout various
regions of the United States. Hotels operating in any given region
are potentially susceptible to adverse economic and competitive conditions as
well as unique trends associated with that particular region. The
potential adverse affect of such conditions on the Company’s business, financial
position, and results of its operations is mitigated due to the diversified
locations of the Company’s properties. The Company has only one
operating segment.
Basis
of Presentation and Consolidation
The
Company is a 49% owner and the primary beneficiary of Summit Group of
Scottsdale, AZ, LLC (“Scottsdale”), which qualifies as a variable interest
entity. Accordingly, the financial position and results of operations
and cash flows of Scottsdale have been included in the accompanying consolidated
financial statements. The entity was formed for the purpose of
purchasing two hotel properties in Scottsdale, AZ and its activities primarily
relate to owning and operating those two hotel properties. As of
December 31, 2009 and for the year then ended, Scottsdale had assets of
$19,771,907, liabilities of $14,251,068, revenues of $5,848,427, and expenses of
$5,825,455. As of December 31, 2008 and for the year then ended, Scottsdale
had assets of $21,291,843, liabilities of $14,725,106, revenues of $8,871,475
and expenses of $7,049,137. As of December 31, 2007 and for the year then
ended, Scottsdale had assets of $21,842,939, liabilities of $15,429,670,
revenues of $10,062,022, and expenses of $7,468,129. Included in the
consolidated assets are assets as of December 31, 2009 totaling $18,533,866
which represent collateral for obligations of Scottsdale. The
Company’s maximum exposure to loss is $5,520,839. Apart from that
amount, creditors and the beneficial holders of Scottsdale have no recourse to
the assets or general credit of the Company. All significant
intercompany balances and transactions have been eliminated in
consolidation. The Company is a Class A Member and receives a 10%
priority distribution on their capital contribution before distributions to
other classes. Class A members may also receive additional operating
distributions based on their Sharing Ratio. These additional
distributions are determined by the managing member and are based on excess cash
from operations after normal operating expenses, loan payments, priority
distributions, and reserves. Any income generated by the LLC is first
allocated to Class A members up to the 10% priority return.
The
Company has adopted FASB Accounting Standards Codification (“ASC”) 810, Consolidation. Under Topic 810,
variable interest entities (“VIEs”) are required to be consolidated by their
primary beneficiaries if they do not effectively disperse risks among the
parties involved. The primary beneficiary of a VIE is the party that
absorbs a majority of the entity’s expected losses, receives a majority of its
expected residual returns, or both, as a result of holding variable
interests. In applying Topic 810, management has utilized available
information and reasonable assumptions and estimates in evaluating whether an
entity is a VIE and which party is the primary beneficiary. These
assumptions and estimates are subjective and the use of different assumptions
could result in different conclusions.
(continued
on next page)
F-9
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
Beginning
on October 1, 2004, the Company considered its interest in Summit Group of
Scottsdale, AZ, LLC, a VIE in which the Company is the primary
beneficiary. As per the provisions of Topic 810, the Company’s
interest in the VIE has been included in the accompanying consolidated financial
statements.
The
Company is the 100% owner of several special purpose entities which were
established due to various lending requirements. These entities
include Summit Hospitality I, LLC; Summit Hospitality II, LLC; Summit
Hospitality III, LLC; Summit Hospitality IV, LLC; and Summit Hospitality V,
LLC. All assets, liabilities, revenues, and expenses of these
wholly-owned subsidiaries are reflected on the financial
statements.
The
Company has evaluated all subsequent events through March 29, 2010, the date the
financial statements were issued.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these
estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At times, cash on
deposit may exceed the federally insured limit. The Company maintains its cash
with high credit quality financial institutions. Due to the financial
institution crisis and economic downturn that occurred in the second half of
2008, management has assessed the risks of each of the financial institutions
where the Company has deposits in excess of insured limits and believes the risk
of loss to still be minimal.
Receivables
and Credit Policies
Trade
receivables are uncollateralized customer obligations resulting from the rental
of hotel rooms and the sales of food, beverage, catering and banquet services
due under normal trade terms requiring payment upon receipt of the
invoice. Trade receivables are stated at the amount billed to the
customer and do not accrue interest. Customer account balances with
invoices dated over 60 days old are considered delinquent. Payments
of trade receivables are allocated to the specific invoices identified on the
customer’s remittance advice or, if unspecified, are applied to the earliest
unpaid invoices.
The
Company reviews the collectability of the receivables monthly. A
provision for losses on receivables is determined on the basis of previous loss
experience and current economic conditions. There were no material
uncollectible receivables and no allowance for doubtful accounts recorded as of
December 31, 2009 and 2008, respectively. The Company incurred bad
debt expense of $88,125, $172,481, and $94,155 for 2009, 2008 and 2007,
respectively.
(continued
on next page)
F-10
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
Property
and Equipment
Buildings
and major improvements are recorded at cost and depreciated using the
straight-line method over 27 to 40 years, the estimated useful lives of the
assets. Hotel equipment, furniture and fixtures are recorded at cost
and depreciated using the straight-line method over the estimated useful lives
of the related assets of 2 to 15 years. Development costs and other
overhead costs are allocated to building and equipment on a prorated
basis. The Company periodically re-evaluates fixed asset lives based
on current assessments of remaining utilization that may result in changes in
estimated useful lives. Such changes are accounted for prospectively
and will increase or decrease depreciation expense. Depreciation
expense from continuing operations for the year ended December 31, 2009 and 2008
totaled $21,748,782 and $20,085,238, respectively. Expenditures that
materially extend a property’s life are capitalized. These costs may
include hotel refurbishment, renovation and remodeling
expenditures. Normal maintenance and repair costs are expensed as
incurred. When depreciable property is retired or disposed of, the
related cost and accumulated depreciation is removed from the accounts and any
gain or loss is reflected in current operations.
Capitalized
Development and Interest Costs
The
Company capitalizes all hotel development costs and other direct overhead costs
related to the purchase and construction of hotels. Additionally, the
Company capitalizes the interest costs associated with constructing new
hotels. Capitalized development, direct overhead and interest are
depreciated over the estimated lives of the respective
assets. Organization and start-up costs are expensed as
incurred. For the years ended December 31, 2009, 2008 and 2007, the
Company capitalized interest of $2,977,101, $3,829,267, and $4,489,724,
respectively.
Assets
Held for Sale
Properties
are classified as other noncurrent assets when management determines that they
are excess and intends to list them for sale. These assets are
recorded at the lower of cost or fair value and consist of land only at December
31, 2009. Excess properties are classified as assets held for sale in
current assets when they are under contract for sale, or otherwise probable that
they will be sold within the next twelve months. There are no assets
that fit this classification at December 31, 2009.
Long-Lived
Assets and Impairment
The
Company applies the provisions of FASB ASC 360, Property Plant and Equipment,
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. FASB ASC 360 requires a long-lived
asset to be sold to be classified as “held for sale” in the period in which
certain criteria are met, including that the sale of the asset within one year
is probable. FASB ASC 360 also requires that the results of
operations of a component of an entity that either has been disposed of or is
classified as held for sale be reported in discontinued operations if the
operations and cash flows of the component have been or will be eliminated from
the Company’s ongoing operations.
The
Company periodically reviews the carrying value of its long-term assets in
relation to historical results, current business conditions and trends to
identify potential situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying value of such
assets may not be recoverable, the Company would estimate the undiscounted sum
of the expected cash flows of such assets to determine if such sum is less than
the carrying value of such assets to ascertain if an impairment
exists. If an impairment exists, the Company would determine the fair
value by using quoted market prices, if available for such assets, or if quoted
market prices are not available, the Company would discount the expected future
cash flows of such assets.
(continued
on next page)
F-11
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
During
2009, the Company has determined that six land parcels were deemed to be
impaired and written down to their fair market value. Carrying value
of the assets exceeded fair value by $6,332,736, with fair value being
determined by reference to the estimated quoted market prices of such assets as
defined in Level 3 Inputs as discussed under Fair Value and in Note
4. An impairment loss of that amount has been charged to operations
in 2009.
Deferred
Charges
These
assets are carried at cost and consist of deferred financing fees and initial
franchise fees. Costs incurred in obtaining financing are capitalized
and amortized on the straight-line method over the term of the related debt,
which approximates the interest method. Initial franchise fees are capitalized
and amortized over the term of the franchise agreement using the straight line
method. Amortization expense from continuing operations for the year
ended December 31, 2009 and 2008 totaled $2,222,336 and $2,439,178,
respectively.
Restricted
Cash
Restricted
cash consists of certain funds maintained in escrow for property taxes,
insurance and certain capital expenditures. Funds may be disbursed
from the account upon proof of expenditures and approval from the
lenders. See also Note 8.
Income
Taxes
Summit Hotel Properties,
LLC is a
limited liability company and, as such, all federal taxable income of the
limited liability company flows through and is
taxable to the members of the Company. The Company
has adopted the provisions of FASB ASC 740, Income Taxes, on January 1,
2009. The implementation of this standard had no impact on the financial
statements. As of both the date of adoption, and as of December 31, 2009, the
unrecognized tax benefit accrual was zero.
The
Company will recognize future accrued interest and penalties related to
unrecognized tax benefits in income tax expense if incurred. The Company
is no longer subject to Federal tax examinations by tax authorities for years
before 2006.
The
Company has elected to pay state income taxes at the Company level in all of the
states in which it does business. The Company’s estimated state
income tax expenses at current statutory rates were $0, $826,300, and $715,187,
for the years ended December 31, 2009, 2008 and 2007,
respectively.
Members’
Capital Contributions and Profit and Loss Allocations
The
Company is organized as a limited liability company and can issue to its members
Class A, Class A-1, Class B and Class C units.
(continued
on next page)
F-12
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
Approximate
sharing ratios are as follows:
2009
|
2008
|
2007
|
||||||||||
Class
A
|
42 | % | 45 | % | 46 | % | ||||||
Class
A-1
|
7 | 4 | 3 | |||||||||
Class
B
|
7 | 8 | 8 | |||||||||
Class
C
|
44 | 43 | 43 | |||||||||
100 | % | 100 | % | 100 | % |
The
limited liability company operating agreement provides that net profits are
allocated to cover a 10% priority return to Class A members, 8% priority return
to Class A-1 members, then the balance is allocated based on ownership of common
membership units. Net losses are allocated to members based on
ownership of common membership units.
Only
Class A and A-1 members contribute capital. These members receive
an 8-10% priority return on their capital contributions before
distributions to other classes. Class A and A-1 members may also
receive additional operating distributions based on their Sharing
Ratio. These additional distributions are determined by the managing
member and are based on excess cash from operations after normal operating
expenses, loan payments, priority distributions, and reserves. Class
A and A-1 members have voting rights on creation of new classes of membership,
amendments to the Articles of Organization, and dissolution of the
company. Class A and A-1 memberships are sold in units of $100,000
each. Class B members do not have voting rights and receive
distributions in accordance with their Sharing Ratio after Class A and A-1
members have received their priority return. The Class C member is
The Summit Group, Inc. (SGI), a related party. SGI has limited voting
rights, in addition to the right to appoint members to the
Board. SGI, however, has significant authority to manage the hotel
properties and acts as the Company’s Manager. SGI receives
distributions in accordance with its Sharing Ratio after Class A and A-1 members
have received their priority return.
Costs
paid for syndication are charged directly to equity against the proceeds
raised. The Company’s operating agreement contains extensive
restrictions on the transfer of membership interests. In addition,
the transferability of membership interests is restricted by federal and state
law. The membership interests may not be offered, sold, transferred,
pledged, or hypothecated to any person without the consent of The Summit Group,
Inc., a related party and 44% owner of the Company through its holding of 100%
of the outstanding Class C units.
Earnings
per Capital Unit
For
purposes of calculating basic earnings per capital unit, capital units issued by
the Company are considered outstanding on the effective date of issue and are
based on a $100,000 capital unit.
Noncontrolling
Interests
Summit
Group of Scottsdale, AZ, LLC has made distributions to noncontrolling members in
excess of income allocations to those members. Their excess is
reflected in the consolidated balance sheets.
(continued
on next page)
F-13
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
Concentrations
of Credit Risk
The
Company grants credit to qualified customers generally without collateral, in
the form of accounts receivable. The Company believes its risk of loss is
minimal due to its periodic evaluations of the credit worthiness of the
customers.
Advertising
and Marketing Costs
The
Company expenses all advertising and marketing costs as they are incurred. Total
costs for the years ended December 31, 2009, 2008 and 2007 were $9,015,388,
$9,588,243, and $8,647,625, respectively. Of this total cost, $880,534,
$846,971, and $669,491, represented general advertising expense for 2009, 2008
and 2007, respectively, and $8,134,854, $8,741,272, and $7,978,134, represented
national media fees required by the hotel franchise agreements for 2009, 2008
and 2007, respectively. These costs are reported as components of
general, selling and administrative costs in the accompanying consolidated
statements of operations.
Sales
Taxes
The
Company has customers in states and municipalities in which those governmental
units impose a sales tax on certain sales. The Company collects those sales
taxes from its customers and remits the entire amount to the various
governmental units. The Company’s accounting policy is to exclude the tax
collected and remitted from revenue and cost of revenue.
Revenue
Recognition
The
Company’s hotel revenues are derived from room rentals and other sources, such
as charges to guests for long-distance telephone service, fax machine use, movie
and vending commissions, meeting and banquet room revenue, restaurant and bar
revenue, and parking and laundry services. The Company recognizes
hotel revenue on a daily basis based on an agreed upon daily rate after the
guest has stayed at one of its hotels for a day, used its lodging facilities and
received related lodging services and amenities. The Company believes
that the credit risk with respect to trade receivables is limited, because
approximately 90% of the Company’s revenue is related to credit card
transactions, which are typically reimbursed within 2-3
days. Reserves for any uncollectible accounts, if material, are
established for accounts that age beyond a predetermined acceptable
period. The Company had not recorded any such reserves at December
31, 2009 and 2008.
Adopted
Accounting Standards
The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB.” The FASB sets generally
accepted accounting principles (GAAP) that we follow to ensure we consistently
report our financial condition, results of operations, and cash
flows. In June 2009, the FASB issued FASB ASC 105, Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification,
sometimes referred to as the Codification or ASC, as the sole source of
authoritative GAAP. The FASB finalized the Codification
effective for periods ending on or after September 1, 2009. Prior
FASB standards are no longer being issued by the FASB. Pursuant to
the provisions of FASB ASC 105, the Company has updated references to GAAP in
its financial statements issued for the years ended December 31, 2009 and
2008. The Codification will have no effect on the Company’s
consolidated financial statements as it is for disclosure purposes
only.
(continued
on next page)
F-14
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
In
January 2009, the Company adopted FASB ASC 810, Consolidation, which changes
the accounting and reporting standards of noncontrolling interests (previously
called minority interest) in consolidated financial statements. ASC
810 requires that equity attributable to noncontrolling interests be recognized
in equity separate from that of the Company’s and that consolidated net income
now includes the results of operations attributable to its noncontrolling
interests. A reconciliation of noncontrolling interests from the beginning of
the reporting period to the end is required either in the notes to the financial
statements or as part of the consolidated statement of changes in equity, if
presented. Further, this provision requires a separate schedule that
shows the effects of any changes in the Company’s ownership interest in its
subsidiaries on the Company’s equity. The effects on our consolidated
financial statements include the reclassification of previously classified
minority interest as noncontrolling interest in a subsidiary with no effect on
net income or loss.
In
January 2009, the Company adopted FASB ASC 805, Business Combinations, which
includes the primary requirements as follows: (i) Upon initially
obtaining control, the acquiring entity in a business combination must recognize
100% of the fair values of the acquired assets, including goodwill, and assumed
liabilities, with only limited exceptions even if the acquirer has not acquired
100% of its target. As a consequence, the current step acquisition
model will be eliminated. (ii) Contingent consideration arrangements
will be fair valued at the acquisition date and included on that basis in the
purchase price consideration. The concept of recognizing contingent
consideration at a later date when the amount of that consideration is
determinable beyond a reasonable doubt, will no longer be
applicable. (iii) All transaction costs will be expensed as
incurred. This ASC is effective for business combinations in which
the acquisition date is on or after the first annual reporting period beginning
on or after December 15, 2008. The adoption of this ASC did not have a
material impact on the Company’s consolidated financial statements.
In
January 2009, the Company adopted FASB ASC 815, Derivatives and Hedging,
which is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. This ASC has had no impact on the
consolidated financial statements as the Company does not have derivative
instruments or hedging activities.
Future
Adoption of Accounting Standards
In June
2009, the FASB issued an update to ASC 810, Consolidations, and changed
the consolidation guidance applicable to a variable interest
entity. Among other things, it requires a qualitative analysis to be
performed in determining whether an enterprise is the primary beneficiary of a
variable interest entity. FASB ASC 810 is effective for interim and
annual reporting periods ending after November 15, 2009. The Company
is currently evaluating the effect that ASC 810 will have on its consolidated
financial statements.
Fair
Value
Effective
January 1, 2008, the Company adopted FASB ASC 820, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. FASB ASC 820 also establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1)
and lowest priority to unobservable inputs (Level 3). The three
levels of the fair value hierarchy under Topic 820 are described
below:
(continued
on next page)
F-15
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
Level 1 –
Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2 –
Inputs reflect quoted prices for identical assets or liabilities in markets that
are not active; quoted prices for similar assets or liabilities in active
markets; inputs other than quoted prices that are observable for the asset or
the liability; or inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Level 3 –
Unobservable inputs reflecting the Company’s own assumptions incorporated in
valuation techniques used to determine fair value. These assumptions are
required to be consistent with market participant assumptions that are
reasonable available.
Our
estimates of the fair value of financial instruments as of December 31, 2009 and
2008 were determined using available market information and appropriate
valuation methods. Considerable judgment is necessary to interpret
market data and develop estimated fair value. The use of different
market assumptions or estimation methods may have a material effect on the
estimated fair value amounts.
The
Company’s financial instruments consist primarily of cash and cash equivalents,
trade receivables, accounts payable, and debt obligations. The fair
values of cash and cash equivalents, trade receivables, and accounts payable
approximate their carrying values due to the short-term nature of these
instruments. At December 31, 2009 and 2008, the Company’s long-term
debt obligations consisted of fixed and variable rate debt that had a carrying
value of $404,724,650 and $370,335,437, respectively, and a fair value, based on
current market interest rates of $384,856,147 and $403,573,174,
respectively. The Company has classified their long-term debt
instruments as Level 2 in the hierarchy of FASB ASC 820 described
above.
FASB
issued an update to ASC 820 which the Company adopted effective January 1,
2009. This update requires that non-financial assets and
non-financial liabilities be disclosed at fair value in the financial statements
if these items occur regularly, such as in determining impairment loss or the
value of assets held for sale as described below.
The
following tables summarize the changes in fair value of our Level 3
non-financial assets for the year ended December 31, 2009 (See Note
4):
Fair Value Measurement of Assets Using Level 3
Inputs
|
||||
Beginning
balance at January 1, 2009
|
$ | 18,559,056 | ||
Total
impairment
|
(6,332,736 | ) | ||
Ending
balance at December 31, 2009
|
$ | 12,226,320 | ||
Impairment
for 2009 included in earnings attributable to the change in unrealized
losses relating to assets held for sale.
|
$ | (6,332,736 | ) |
(continued
on next page)
F-16
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
NOTE
2 - PREPAID EXPENSES AND OTHER
Prepaid
expenses and other at December 31, 2009 and 2008, are comprised of the
following:
2009
|
2008
|
|||||||
Prepaid
insurance expense
|
$ | 781,144 | $ | 743,491 | ||||
Other
prepaid expense
|
635,336 | 1,427,464 | ||||||
$ | 1,416,480 | $ | 2,170,955 |
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2009 and 2008 are comprised of the
following:
2009
|
2008
|
|||||||
Land
|
$ | 75,412,012 | $ | 90,014,168 | ||||
Hotel
buildings and improvements
|
391,942,914 | 321,115,322 | ||||||
Furniture,
fixtures and equipment
|
87,642,374 | 64,738,527 | ||||||
Construction
in progress
|
8,551,354 | 45,387,313 | ||||||
563,548,654 | 521,255,330 | |||||||
Less
accumulated depreciation
|
79,607,953 | 59,361,060 | ||||||
$ | 483,940,701 | $ | 461,894,270 |
The
construction in progress asset accounts consist of 5 hotels under development
which the Company anticipates will be constructed in 2011 and
2012. During 2007, the Company purchased land in Houston,
TX for $1,864,000, San Antonio, TX for $10,420,000, Portland, OR for $3,650,000,
El Paso, TX for $2,614,000 and Ft. Myers, FL for
$3,307,500. Construction has been completed on one hotel in San
Antonio, one in Ft. Myers, and two hotels in Portland. During 2008,
the Company purchased land in Twin Falls, ID for $2,212,000, Spokane, WA for
$1,730,000, and Missoula, MT for $1,379,000. Construction on one of
the Twin Falls sites has been completed.
NOTE
4 - ASSETS HELD FOR SALE
As a part
of regular policy, the Company periodically reviews hotels based on established
criteria such as age of hotel property, type of franchise associated with hotel
property, and adverse economic and competitive conditions in the region
surrounding the property.
During
2009, the Company completed a comprehensive review of its investment strategy
and of its existing hotel portfolio to identify properties which the Company
believes are either non-core or no longer complement the business as required by
FASB ASC 360. As of December 31, 2009 and 2008, the Company had no
hotels that met the Company’s criteria of held for sale classification. The
Company has committed to sell six parcels of land that were originally purchased
for development and thus, their net book value, as defined in Level 3 Inputs, is
recorded as assets held for sale as of December 31, 2009.
(continued
on next page)
F-17
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
Assets
held for sale at December 31, 2009 and December 31, 2008 are comprised of the
following:
2009
|
2008
|
|||||||
Land
|
$ | 12,226,320 | $ | - |
NOTE
5 - OTHER NONCURRENT ASSETS
Other
noncurrent assets at December 31, 2009 and 2008, are comprised of the
following:
2009
|
2008
|
|||||||
Prepaid
land lease
|
$ | 3,635,595 | $ | - | ||||
Seller
financed notes receivable
|
438,584 | - | ||||||
$ | 4,074,179 | $ | - |
NOTE
6 - DISCONTINUED OPERATIONS
The
Company has reclassified its consolidated financial statements of operations for
the years ended December 31, 2009, 2008 and 2007 and its consolidated balance
sheets as of December 31, 2009 and 2008, as a result of implementing FASB ASC
360 to reflect discontinued operations of eleven consolidated hotel properties
sold or to be sold during these periods pursuant to the plan for hotel
dispositions. This reclassification has no impact on the Company’s
net income or the net income per share. During 2007, the
Company sold six hotel properties located in Coeur D’Alene, ID; Pueblo, CO;
Lincoln, NE; Fenton, MO; and Detroit, MI for approximately $36,095,000 with net
proceeds of $35,581,000. During 2008, the Company sold three hotel
properties located in Lewiston, ID; Jackson, MS; and Overland Park, KS and two
hotel properties located in Kennewick, WA for approximately $28,575,000 with net
proceeds of $27,775,000. During 2009, the Company sold two hotel
properties located in Ellensburg, WA and St. Joesph, MO for approximately
$6,810,000 with net proceeds of $6,342,000.
Condensed
financial information of the results of operations for these hotel properties
included in discontinued operations are as follows:
(continued
on next page)
F-18
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
2009
|
2008
|
2007
|
||||||||||
REVENUES
|
$ | 1,133,690 | $ | 6,825,908 | $ | 20,859,130 | ||||||
COSTS
AND EXPENSES
|
||||||||||||
Direct
hotel operations
|
348,065 | 2,210,724 | 7,484,861 | |||||||||
Other
hotel operating expenses
|
135,122 | 813,490 | 2,746,811 | |||||||||
General,
selling and administrative
|
258,495 | 1,058,716 | 4,088,156 | |||||||||
Repairs
and maintenance
|
36,091 | 199,290 | 1,096,351 | |||||||||
Depreciation
and amortization
|
153,948 | 720,140 | 2,751,368 | |||||||||
931,721 | 5,002,360 | 18,167,547 | ||||||||||
INCOME
FROM OPERATIONS
|
201,969 | 1,823,548 | 2,691,583 | |||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||
Interest
income
|
116 | 16,790 | (22,818 | ) | ||||||||
Interest
(expense)
|
(39,100 | ) | (556,342 | ) | (2,113,124 | ) | ||||||
Gain
(loss) on disposal of assets
|
1,301,823 | 8,994,599 | 11,031,504 | |||||||||
1,262,839 | 8,455,047 | 8,895,562 | ||||||||||
INCOME
(LOSS) FROM DISCONTINUED
OPERATIONS
|
$ | 1,464,808 | $ | 10,278,595 | $ | 11,587,145 |
NOTE
7 - ACQUISITIONS
The
Company applies the principles of FASB ASC 805, Business Combinations, in
accounting for its acquisitions. The Company determines the cost of
the acquired property based upon the fair value of assets distributed as
consideration and the fair value of liabilities incurred. The cost of
the acquired entity includes all direct costs of the business combination
whereas indirect and general expenses are expensed as incurred. The
Company allocates the cost of the acquired entity to the assets acquired and
liabilities assumed based upon their estimated fair market values at the date of
acquisition. To determine fair value of the various components acquired, the
Company engages independent valuation consultants and other third-party
real-estate appraisals as necessary. The Company allocates the cost
of the acquired property based upon the relative fair values of the various
components contained in the appraisals. In certain cases, the cost of
the property acquired may be less than the fair value contained in the
appraisals. In these cases, the Company reduces the fair values based
upon the relative value of the components of the acquisition. The
excess of the cost of the acquisition over the fair value will be assigned to
intangible assets if the intangible asset is separable and if it arises from a
contractual or other legal right. Any remaining excess of the cost of
acquisition over fair values assigned to separable assets is recognized as
goodwill. Further, many of the Company’s hotel acquisitions to date
have been aggregated in accordance with Topic 805 and has resulted in
an aggregated purchase price allocation. Since its inception, the
Company’s acquisitions and subsequent purchase price allocations have resulted
in no goodwill.
The
Company’s strategy is to pursue the acquisition of additional hotels under the
investment parameters established in the Company’s Operating
Agreement. In accordance with this strategy, the Company has made the
following acquisitions.
On
October 30, 2008, the Company purchased a hotel property in Flagstaff, AZ for
approximately $10,750,000. Essentially all of the assets purchased
were allocated to property and equipment.
(continued
on next page)
F-19
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
The
following table illustrates the allocation of the respective purchase prices for
each of the aggregated property purchases discussed above during 2009 and
2008:
2009
|
2008
|
|||||||
Current
assets
|
$ | - | $ | - | ||||
Property
and equipment
|
- | 10,750,000 | ||||||
Intangible
assets
|
- | - | ||||||
Total
assets acquired
|
- | 10,750,000 | ||||||
Current
liabilities
|
- | - | ||||||
Long-term
debt
|
- | - | ||||||
Total
liabilities assumed
|
- | - | ||||||
Net
assets acquired
|
$ | - | $ | 10,750,000 |
NOTE
8 - DEFERRED
CHARGES AND OTHER ASSETS
Deferred
charges and other assets at December 31, 2009 and 2008, are comprised of the
following:
2009
|
2008
|
|||||||
Initial
franchise fees
|
$ | 2,596,042 | $ | 2,270,544 | ||||
Deferred
financing costs
|
8,204,003 | 7,415,091 | ||||||
10,800,045 | 9,685,635 | |||||||
Less
accumulated amortization
|
5,971,860 | 4,020,839 | ||||||
Total
|
$ | 4,828,185 | $ | 5,664,796 |
Future
amortization expense is expected to be approximately:
2010
|
$ | 1,542,341 | ||
2011
|
1,174,959 | |||
2012
|
672,118 | |||
2013
|
357,098 | |||
2014
|
300,868 | |||
Thereafter
|
780,801 | |||
$ | 4,828,185 |
(continued
on next page)
F-20
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
NOTE
9 - RESTRICTED CASH
Property
|
FF&E
|
|||||||||||||||||||
Financing
Lender
|
Taxes
|
Insurance
|
Reserves
|
2009
|
2008
|
|||||||||||||||
Wells
Fargo (Scottsdale)
|
$ | - | $ | - | $ | - | $ | - | $ | 1,556,520 | ||||||||||
Wells
Fargo (Lehman)
|
641,402 | 625,694 | 331,190 | 1,598,286 | 1,954,937 | |||||||||||||||
National
Western Life
|
31,178 | - | - | 31,178 | - | |||||||||||||||
Capmark
(ING)
|
128,504 | - | - | 128,504 | 195,166 | |||||||||||||||
Capmark
(ING)
|
145,061 | - | - | 145,061 | 501,778 | |||||||||||||||
Capmark
(ING)
|
83,473 | - | - | 83,473 | 31,485 | |||||||||||||||
Capmark
(ING)
|
99,741 | - | - | 99,741 | 9,515 | |||||||||||||||
$ | 1,129,359 | $ | 625,694 | $ | 331,190 | $ | 2,086,243 | $ | 4,249,401 |
The
Company has financing arrangements under which an agreed upon percentage of
gross income is required to be deposited into a special reserve account for
future replacements of furniture, fixtures and equipment. Some
financing arrangements also include provisions that restricted cash must be
maintained in escrow for property taxes and insurance. Funds may be
disbursed from the account upon proof of expenditures and approval from the
lender.
NOTE
10 - ACCRUED EXPENSES
Accrued
expenses at December 31, 2009 and 2008 are comprised of the
following:
2009
|
2008
|
|||||||
Accrued
sales and other taxes
|
$ | 5,238,690 | $ | 5,910,209 | ||||
Accrued
salaries and benefits
|
1,400,729 | 1,838,615 | ||||||
Accrued
interest
|
1,303,999 | 1,109,577 | ||||||
Other
accrued expenses
|
1,238,595 | 1,097,971 | ||||||
$ | 9,182,013 | $ | 9,956,372 |
(continued
on next page)
F-21
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
NOTE
11 - DEBT OBLIGATIONS
The
Company's debt obligations at December 31, 2009 and 2008 are as
follows:
Interest
|
Maturity
|
|||||||||||
Payee
|
Rate
|
Date
|
2009
|
2008
|
||||||||
Lehman
Brothers Bank
|
Fixed
(5.4025%)
|
1/11/2012
|
$ | 78,980,016 | $ | 81,016,607 | ||||||
ING
Investment Management
|
Fixed
(5.60%)
|
1/1/2012
|
30,088,766 | 31,211,603 | ||||||||
Fixed
(6.10%)
|
7/1/2012
|
30,416,427 | 31,445,191 | |||||||||
Fixed
(6.61%)
|
11/1/2013
|
6,412,683 | 6,578,270 | |||||||||
Fixed
(6.34%)
|
7/1/2012
|
8,122,717 | 8,319,000 | |||||||||
75,040,593 | 77,554,064 | |||||||||||
National
Western Life Insurance
|
(i) |
Fixed
(8.0%)
|
1/1/2015
|
14,000,000 | - | |||||||
Chambers
Bank
|
Fixed
(6.5%)
|
6/24/2010
|
1,669,020 | 1,742,534 | ||||||||
JP
Morgan
|
Fixed
(7.5%)
|
11/11/2024
|
- | 14,180,289 | ||||||||
Bank
of the Ozarks
|
(h) |
Variable
(6.75% at 12/31/09)
|
6/29/2012
|
5,794,427 | - | |||||||
MetaBank
|
(g) |
Variable
(5.0% at 12/31/09)
|
4/1/2012
|
7,450,000 | - | |||||||
BNC
National Bank
|
Fixed
(5.01%)
|
11/1/2013
|
5,910,962 | 6,092,607 | ||||||||
(f) |
Variable
(3.0% at 12/31/09
|
4/1/2016
|
5,755,882 | 2,041,373 | ||||||||
and
3.0% at 12/31/08)
|
|
11,666,844 | 8,133,980 | |||||||||
M
& I Bank
|
Variable
(4.13% at 12/31/09
|
12/31/2010
|
9,895,727 | 9,895,727 | ||||||||
and
6.8% at 12/31/08)
|
12/31/2010
|
11,524,451 | 11,524,451 | |||||||||
|
21,420,178 | 21,420,178 | ||||||||||
General
Electric Capital Corp.
|
Fixed
(3.36%)
|
12/1/2017
|
9,122,315 | 9,396,990 | ||||||||
Variable
(2.05% at 12/31/09
|
|
|||||||||||
and
3.6% at 12/31/08)
|
3/1/2019
|
11,300,000 | 9,557,647 | |||||||||
(c) |
Variable
(3.0% at 12/31/09
|
4/1/2014
|
11,400,000 | 9,887,995 | ||||||||
and
4.4% at 12/31/08)
|
|
31,822,315 | 28,842,632 | |||||||||
Fortress
Credit Corp.
|
(b) |
Variable
(5.98% at 12/31/09
|
3/5/2010
|
83,524,828 | 74,899,566 | |||||||
and
6.63% at 12/31/08)
|
|
|||||||||||
First
National Bank of Omaha
|
(a) |
Variable
(5.5% at 12/31/09
|
7/1/2010
|
20,400,000 | 24,400,000 | |||||||
and
3.03% at 12/31/08)
|
|
|||||||||||
First
National Bank of Omaha
|
(a) |
Fixed
(5.25%)
|
7/1/2013
|
16,081,630 | 16,889,585 | |||||||
First
National Bank of Omaha
|
(a) |
Fixed
(6.62%)
|
4/1/2012
|
- | 2,971,977 | |||||||
First
National Bank of Omaha
|
Fixed
(5.25%)
|
2/1/2014
|
8,771,867 | 13,462,622 | ||||||||
Bank
of Cascades
|
(d) |
Variable
(6.0% at 12/31/09
|
9/30/2011
|
12,445,888 | 1,862,974 | |||||||
and
6.0% at 12/31/08)
|
|
|||||||||||
Compass
Bank
|
(e) |
Variable
(4.5% at 12/31/09
|
5/17/2018
|
15,657,044 | 2,958,429 | |||||||
and
3.0% at 12/31/08)
|
||||||||||||
Total
long-term debt
|
404,724,650 | 370,335,437 | ||||||||||
Less
current portion
|
(134,370,900 | ) | (19,508,600 | ) | ||||||||
Total
long-term debt, net of current portion
|
$ | 270,353,750 | $ | 350,826,837 |
(continued
on next page)
F-22
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(a) The
Company has a credit pool agreement with the First National Bank of Omaha
providing the Company with medium-term financing up to $35,000,000 on a
revolving basis through June 2010. The agreement allows for two-year
interest only notes and five-year amortizing notes, for which the term of an
individual note can extend beyond the term of the agreement. Interest
on unpaid principal is payable monthly at a rate LIBOR plus 4.0% and a floor of
between 5.25% and 5.50%. The amount of credit available on this
agreement to the Company was $0 at December 31, 2009.
(b) On
March 5, 2007, the Company closed on a loan with Fortress Credit Corporation to
refinance the debt on several construction projects and provide equity for the
acquisition, development and construction of additional real estate and hotel
properties. The loan is in the amount of $99,700,000. The current
balance on this note is $83,524,828 and carries a variable interest rate of
30-day LIBOR plus 575 basis points. The maturity date of the note is March
5, 2010. The amount of credit available on this loan was $16,175,172 at
December 31, 2009.
(c) On
February 29, 2008, the Company entered into a loan with General Electric Capital
Corporation in the amount of $11,400,000 to fund the land acquisition and hotel
construction located in San Antonio, TX. The loan carries a variable
interest rate of 90 day LIBOR plus 225 basis points and matures in May,
2014. The current balance is approximately $11,400,000.
(d) On
October 3, 2008, the Company entered into a loan with Bank of the Cascades in
the amount of $13,270,000 to fund the land acquisition and hotel construction of
the Residence Inn located in Portland, OR. The loan carries a
variable interest rate of Prime, with a floor of 6%, and matures September 30,
2011. The current balance is approximately
$12,445,888. The amount of credit available on this loan was
approximately $824,000 at December 31, 2009.
(e) On
September 17, 2008, the Company entered into a loan with Compass Bank in the
amount of $19,250,000 to fund the land acquisition and hotel construction of the
Courtyard by Marriott located in Flagstaff, AZ. The loan carries a
variable interest rate of Prime minus 25 basis points and matures May 17,
2018. The current balance is approximately
$15,657,044. The amount of credit available on this loan was
approximately $3,593,000 at December 31, 2009.
(f) On
October 1, 2008, the Company entered into a loan with BNC National Bank in the
amount of $6,460,000 to fund the land acquisition and hotel construction of the
Holiday Inn Express located in Twin Falls, ID. The loan carries a
variable interest rate of Prime minus 25 basis points and matures April 1,
2016. The current balance is approximately
$5,755,882. The amount of credit available on this loan was
approximately $704,000 at December 31, 2009.
(g) On
March 10, 2009, the Company entered into a loan modification agreement with
MetaBank in the amount of $7,450,000 on the Boise, ID Cambria
Suites. The loan modification extended the maturity date to April 1,
2012.
(h) On
June 29, 2009, the Company entered into a loan with Bank of the Ozarks in the
amount of $10,816,000 to fund the hotel construction located in Portland,
OR. The loan carries a variable interest rate of 90 day LIBOR plus
400 basis points with a floor of 6.75% and matures on June 29,
2012. The current balance is approximately $5,794,427. The
amount of credit available on this loan was approximately $4,778,000 at December
31, 2009.
(i) On
December 9, 2009, the Company entered into two loans with National Western Life
Insurance Company in the amounts of $8,650,000 and $5,350,000 to refinance the
JP Morgan debt on the two Scottsdale, AZ hotels. The loans carry a
fixed rate of 8.0% and mature on January 1, 2015. The current balance
on the two notes is $14,000,000.
(continued
on next page)
F-23
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
Maturities
of long-term debt for each of the next five years are estimated as
follows:
2010
|
$ | 134,370,900 | ||
2011
|
19,601,500 | |||
2012
|
147,401,500 | |||
2013
|
36,369,600 | |||
2014
|
28,574,200 | |||
Thereafter
|
38,406,950 | |||
$ | 404,724,650 |
At
December 31, 2009 and 2008, the Company owned 64 and 62 properties,
respectively, that were pledged as collateral on various credit agreements, as
well as accounts receivable and intangible assets. Some of the credit agreements
were also guaranteed by the affiliated members of the Company and certain
affiliated entities. Significant covenants in the credit agreements require the
Company to maintain minimum debt service coverage ratios. The
weighted average interest rate for all borrowings was 5.40% and 5.01% at
December 31, 2009 and 2008, respectively.
NOTE
12 - LINES OF CREDIT AND NOTES PAYABLE
The
Company has a line-of-credit agreement with the First National Bank of Omaha
providing the Company with short-term financing up to $28,200,000 on a revolving
basis. Interest on unpaid principal is payable monthly at a rate
equal to LIBOR plus 4.0%, with a floor of 5.5%. The amount of
outstanding on this line-of-credit was $21,457,943 and $12,288,500 at December
31, 2009 and 2008, respectively, which also represents the maximum amount of
borrowings during the year. This line-of-credit is secured by a
mortgage on the specific hotels financed.
NOTE
13 - MEMBERS’ EQUITY
The
Company was formed on January 8, 2004. As specified in the Company’s
Operating Agreement, the Company has four classes of membership capital units
authorized: Class A, A-1, B and C.
On
October 21, 2008, the Company issued a “Confidential Private Placement
Memorandum” (PPM) for the purpose of acquiring additional
investors. The PPM offered up to $100,000,000 of Class A-1 membership
units. For the period ended December 31, 2008, the Company issued
63.25 units in connection with this offering. The Company received
proceeds of the offering (net of expenses) of $5,614,466. For
the period ended December 31, 2009, the company issued 241.33 units in
connection with this offering. The Company received proceeds of the
offering (net of expenses) of $22,123,951. The offering closed on
October 20, 2009.
NOTE
14 - FRANCHISE AGREEMENTS
The
Company operates hotels under franchise agreements with various hotel chains
expiring through 2025. The franchise agreements are for 3-20 year terms. Under
the franchise agreements, the Company pays royalties of 2.5% to 5.0% of room
revenues and national advertising and media fees of 3% to 4% of total room
revenues.
(continued
on next page)
F-24
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
For the
years ended December 31, 2009, 2008 and 2007, the Company incurred royalties of
$5,402,948, $6,172,495, and $5,852,019, respectively, and advertising and
national media fees of $8,134,854, $8,741,272, and $7,978,134,
respectively.
The
franchise agreements include restrictions on the transfer of the franchise
licenses and the sale or lease of the hotel properties without prior written
consent of the franchisor.
NOTE
15 - BENEFIT PLANS
The
Company has a qualified contributory retirement plan (the Plan), under Section
401(k) of the Internal Revenue Code which covers all full-time employees who
meet certain eligibility requirements. Voluntary contributions may be made to
the Plan by employees. Discretionary matching Company contributions of $69,385
and $68,543 were made in the years ended December 31, 2008 and 2007,
respectively. The Plan was changed to a Safe Harbor Plan effective
for the 2008 calendar year. This Plan requires a mandatory employer
contribution. Therefore, the Company accrued $137,135 for employer
contributions for the 2008 calendar year. The plan was converted back
to a discretionary match during the fourth quarter 2009. Therefore,
the employer contributions expense for the first three quarters of 2009 was
$116,020.
NOTE
16 - COMMITMENTS AND CONTINGENCIES
The
Company leases land for two of its Ft. Smith properties under the terms of
operating ground lease agreements expiring August 2022 and May
2030. The lease on the Ellensburg property was transferred with the
sale of that hotel in 2009. The Company has options to renew the
other leases for periods that range from 5-30 years. The Company has
a prepaid land lease on the Portland hotels with a remaining balance of
$3,635,595 on December 31, 2009. This lease expires in June
2084. Total rent expense for these leases for the years ended
December 31, 2009, 2008 and 2007 was $321,916, $235,549, and $248,246,
respectively.
Approximate
future minimum rental payments for noncancelable operating leases in excess of
one year are as follows:
2010
|
$ | 237,475 | ||
2011
|
241,855 | |||
2012
|
246,366 | |||
2013
|
251,012 | |||
2014
|
255,798 | |||
Thereafter
|
6,994,127 | |||
$ | 8,226,633 |
(continued
on next page)
F-25
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
NOTE
17 - RELATED PARTY TRANSACTIONS
Pursuant
to a management agreement, The Summit Group, Inc. (a related party through
common ownership and management control) provides management and accounting
services for the Company. The agreement provides for the Company to
reimburse The Summit Group, Inc. for its actual overhead costs and expenses
relating to the managing of the hotel properties. At no time will the
reimbursed management expenses exceed 4.5% of annual gross
revenues. For the periods ended December 31, 2009, 2008 and 2007, the
Company paid reimbursed management expenses of $2,894,078, $4,186,593, and
$4,122,048, respectively, and reimbursed accounting services of $589,012,
$626,685, and $637,448, respectively. The Company also reimbursed for
maintenance and purchasing services of $530,457, $641,526, and $691,174, for the
periods ended December 31, 2009, 2008, and 2007,
respectively. At December 31, 2009 and 2008, the Company had
accounts payable of $252,113 and $572,919, respectively, to The Summit Group,
Inc. The Company cannot remove The Summit Group, Inc. as its manager
except for cause as specified in the agreement.
As of
December 31, 2009 and 2008, the Company had accounts payable to The Summit
Group, Inc. for $242,135 and $2,600,260 relating to reimbursement and
development expenses for 5 and 17 new hotel properties,
respectively. The Company reimbursed The Summit Group, Inc. for
development expenses in the amount of $1,300,000 and $1,995,000 for the years
ended December 31, 2009 and 2008, respectively.
In 2008,
the Company issued a private placement memorandum (PPM) for the purpose of
acquiring additional investors. Summit Capital Partners, LLC (SCP), a
related party through common ownership and management control, brokered
securities related to the PPM for the company. For the year ended
December 31, 2008, capital contributions of $6,325,000 (cash proceeds received
net of expenses equaled $5,614,466) was raised with the assistance of
SCP. Commission expense paid to SCP for the year ended December 31,
2008 was $206,625. For the year ended December 31, 2009, capital
contributions of $24,133,000 (cash proceeds received net of expenses equaled
$22,123,951) was raised with the assistance of SCP. Commission
expense paid to SCP for the year ended December 31, 2009 was
$570,600.
NOTE
18 - SUBSEQUENT EVENTS
The
Company and Fortress Credit Corp (“Fortress”) have agreed to the material terms
of an extension of the Company’s loan with Fortress (“Fortress Loan”). In
March 2007 the Company entered into the Fortress Loan, in the amount of $99.7
million and with a maturity date of March 5, 2010. To permit the parties
to finalize the definitive documentation for the extension, Fortress has agreed
to forbear from declaring a default or otherwise enforcing its rights under the
Fortress Loan until April 5, 2010. The extension is anticipated to be for
a period of one year, with an option for an additional six month extension
contingent on meeting certain requirements.
NOTE
19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected
consolidated quarterly financial data (in thousands, except per unit amounts)
for 2009, 2008 and 2007 is summarized below. The sum of the quarterly
earnings (loss) per unit amounts may not equal the annual earnings per unit
amounts due primarily to changes in the number of common units and common unit
equivalents outstanding from quarter to quarter. The matters which
affect the comparability of our quarterly results include
seasonality.
(continued
on next page)
F-26
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
Three
Months Ended
|
||||||||||||||||||||
Year
Ended
|
||||||||||||||||||||
3/31
|
6/30
|
9/30
|
12/31
|
12/31
|
||||||||||||||||
2009:
|
||||||||||||||||||||
Total
revenue
|
$ | 29,301 | $ | 31,293 | $ | 32,211 | $ | 28,395 | $ | 121,200 | ||||||||||
Net
income (loss) from continuing operations before minority
interests
|
(1,698 | ) | (1,619 | ) | (6,914 | ) | (6,375 | ) | (16,606 | ) | ||||||||||
Less
minority interests in operations of consolidated
partnerships
|
(123 | ) | (63 | ) | 393 | (207 | ) | - | ||||||||||||
Net
income (loss) from continuing operations
|
(1,575 | ) | (1,556 | ) | (7,307 | ) | (6,168 | ) | (16,606 | ) | ||||||||||
Discontinued
operations
|
104 | 1,697 | (336 | ) | - | 1,465 | ||||||||||||||
Net
income (loss) before income taxes
|
(1,471 | ) | 141 | (7,643 | ) | (6,168 | ) | (15,141 | ) | |||||||||||
Less
state income tax
|
- | - | (20 | ) | 20 | - | ||||||||||||||
Net
income (loss)
|
$ | (1,471 | ) | $ | 141 | $ | (7,623 | ) | $ | (6,188 | ) | $ | (15,141 | ) | ||||||
Net
income (loss) per unit:
|
$ | (893.99 | ) | $ | 82.31 | $ | (4,422.24 | ) | $ | (3,482.31 | ) | $ | (8,716.23 | ) | ||||||
2008:
|
||||||||||||||||||||
Total
revenue
|
$ | 32,381 | $ | 35,556 | $ | 38,018 | $ | 29,152 | $ | 135,107 | ||||||||||
Net
income (loss) from continuing operations before minority
interests
|
459 | 2,688 | 5,337 | (4,473 | ) | 4,011 | ||||||||||||||
Less
minority interests in operations of consolidated
partnerships
|
244 | 73 | (158 | ) | 225 | 384 | ||||||||||||||
Net
income (loss) from continuing operations
|
215 | 2,615 | 5,495 | (4,698 | ) | 3,627 | ||||||||||||||
Discontinued
operations
|
290 | 1,751 | 8,048 | 189 | 10,278 | |||||||||||||||
Net
income (loss) before income taxes
|
505 | 4,366 | 13,543 | (4,509 | ) | 13,905 | ||||||||||||||
Less
state income tax
|
- | 309 | 895 | (378 | ) | 826 | ||||||||||||||
Net
income (loss)
|
$ | 505 | $ | 4,057 | $ | 12,648 | $ | (4,131 | ) | $ | 13,079 | |||||||||
Net
income (loss) per unit:
|
$ | 324.79 | $ | 2,609.29 | $ | 8,134.65 | $ | (2,656.88 | ) | $ | 8,411.67 | |||||||||
2007:
|
||||||||||||||||||||
Total
revenue
|
$ | 25,855 | $ | 29,105 | $ | 30,590 | $ | 28,339 | $ | 113,889 | ||||||||||
Net
income (loss) from continuing operations before minority
interests
|
2,624 | 875 | 2,919 | (2,500 | ) | 3,918 | ||||||||||||||
Less
minority interests in operations of consolidated
partnerships
|
333 | 219 | (107 | ) | 333 | 778 | ||||||||||||||
Net
income (loss) from continuing operations
|
2,291 | 656 | 3,026 | (2,833 | ) | 3,140 | ||||||||||||||
Discontinued
operations
|
6 | 3,561 | 2,076 | 5,944 | 11,587 | |||||||||||||||
Net
income (loss) before income taxes
|
2,297 | 4,217 | 5,102 | 3,111 | 14,727 | |||||||||||||||
Less
state income tax
|
72 | 411 | 298 | (66 | ) | 715 | ||||||||||||||
Net
income (loss)
|
$ | 2,225 | $ | 3,806 | $ | 4,804 | $ | 3,177 | $ | 14,012 | ||||||||||
Net
income (loss) per unit:
|
$ | 1,431.02 | $ | 2,447.86 | $ | 3,089.73 | $ | 2,043.31 | $ | 9,012.19 |
(continued
on next page)
F-27
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
NOTE
20 - PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The
following condensed pro forma financial information is presented as if the
acquisitions discussed in Note 6 had been consummated as of the beginning of the
period presented but is not necessarily indicative of what actual results of
operations of the Company would have been assuming the acquisitions had been
consummated at that time nor does it purport to represent the results of
operations for future periods.
For
the year ended December 31:
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Total
revenue
|
$ | 121,199,736 | $ | 142,583,370 | $ | 136,638,460 | ||||||
Net
income before minority interests
|
(15,293,861 | ) | 12,984,433 | 14,040,192 | ||||||||
Minority
interests in operations of consolidated
partnerhips
|
- | 384,269 | 777,762 | |||||||||
Net
income
|
$ | (15,293,861 | ) | $ | 12,600,164 | $ | 13,262,430 | |||||
Net
income per unit:
|
$ | (8,817.32 | ) | $ | 8,103.89 | $ | 8,529.83 |
F-28