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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period ended September 30, 2003
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File No.1-14537
LODGIAN, INC.
(Exact name of registrant as specified in its charter)
Delaware | 52-2093696 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3445 Peachtree Road, N.E., Suite 700, Atlanta, GA | 30326 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code(404) 364-9400
(Former name, former address and former fiscal year, if changed since last report):Not applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer as defined by section 12-b — 2 of the Act. Yes o No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class | Outstanding as of November 12, 2003 | |||
Common | 7,024,391 |
This Form 10-Q is available, free of charge, on the registrant’s website (www.lodgian.com)
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LODGIAN, INC. AND SUBSIDIARIES
INDEX
Page | ||||
PART I. | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements: | |||
Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (unaudited) | 1 | |||
Condensed Consolidated Statements of Operations for the Successor Three Months Ended September 30, 2003, the Predecessor Three Months Ended September 30, 2002, the Successor Nine Months Ended September 30, 2003 and the Predecessor Nine Months Ended September 30, 2002 (unaudited) | 2 | |||
Condensed Consolidated Statement of Stockholders’ Equity for the Successor Nine Months Ended September 30, 2003 (unaudited) | 3 | |||
Condensed Consolidated Statements of Cash Flows for the Successor Nine Months Ended September 30, 2003 and the Predecessor Nine | 4 | |||
Months Ended September 30, 2002 (unaudited) | ||||
Notes to Condensed Consolidated Financial Statements (unaudited) | 5 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 41 | ||
Item 4. | Controls and Procedures | 41 | ||
PART II. | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 43 | ||
Item 2. | Changes in Securities | 43 | ||
Item 6. | Exhibits and Reports on Form 8-K | 43 | ||
Signatures | 45 |
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 | December 31, 2002 | |||||||||||
(Unaudited in thousands, except per share data) | ||||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 10,529 | $ | 10,875 | ||||||||
Cash, restricted | 7,607 | 19,384 | ||||||||||
Accounts receivable ( net of allowances: 2003 - $1,382; 2002 -$1,594) | 9,930 | 10,681 | ||||||||||
Inventories | 5,497 | 7,197 | ||||||||||
Prepaid expenses and other current assets | 17,078 | 15,118 | ||||||||||
Assets held for sale | 78,383 | — | ||||||||||
Total current assets | 129,024 | 63,255 | ||||||||||
Property and equipment, net | 579,892 | 664,565 | ||||||||||
Deposits for capital expenditures | 16,036 | 22,349 | ||||||||||
Other assets | 13,747 | 12,495 | ||||||||||
$ | 738,699 | $ | 762,664 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Liabilities not subject to compromise | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 10,060 | $ | 12,380 | ||||||||
Other accrued liabilities | 37,287 | 43,625 | ||||||||||
Advance deposits | 2,150 | 1,786 | ||||||||||
Current portion of long-term debt | 18,123 | 14,550 | ||||||||||
Liabilities related to assets held for sale | 60,570 | — | ||||||||||
Total current liabilities | 128,190 | 72,341 | ||||||||||
Long-term debt: | ||||||||||||
12.25% Cumulative preferred shares subject to mandatory redemption | 138,131 | — | ||||||||||
Long-term debt — other | 411,993 | 387,924 | ||||||||||
Total long-term debt | 550,124 | 387,924 | ||||||||||
Liabilities subject to compromise | — | 93,816 | ||||||||||
Total liabilities | 678,314 | 554,081 | ||||||||||
Minority interests | 3,724 | 3,616 | ||||||||||
Commitments and contingencies 12.25% Cumulative preferred shares subject to mandatory redemption | — | 126,510 | ||||||||||
Stockholders’ equity: | ||||||||||||
Common stock, $.01 par value, 30,000,000 shares authorized; 7,200,000 and 7,000,000 issued and outstanding at September 30, 2003 and December 31, 2002, respectively | 72 | 70 | ||||||||||
Additional paid-in capital | 89,821 | 89,223 | ||||||||||
Unearned stock compensation | (558 | ) | — | |||||||||
Accumulated deficit | (33,600 | ) | (10,836 | ) | ||||||||
Accumulated other comprehensive gain | 926 | — | ||||||||||
Total stockholders’ equity | 56,661 | 78,457 | ||||||||||
$ | 738,699 | $ | 762,664 | |||||||||
See notes to condensed consolidated financial statements.
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LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data) | ||||||||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | |||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Rooms | $ | 63,246 | $ | 64,361 | $ | 178,855 | $ | 186,802 | ||||||||||||||
Food and beverage | 16,524 | 16,954 | 52,339 | 54,469 | ||||||||||||||||||
Other | 2,807 | 3,186 | 8,360 | 10,014 | ||||||||||||||||||
82,577 | 84,501 | 239,554 | 251,285 | |||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Direct: | ||||||||||||||||||||||
Rooms | 17,942 | 17,646 | 50,430 | 50,385 | ||||||||||||||||||
Food and beverage | 12,126 | 12,672 | 36,465 | 39,012 | ||||||||||||||||||
Other | 2,026 | 2,161 | 5,847 | 6,691 | ||||||||||||||||||
32,094 | 32,479 | 92,742 | 96,088 | |||||||||||||||||||
50,483 | 52,022 | 146,812 | 155,197 | |||||||||||||||||||
General, administrative and other | 34,232 | 32,512 | 104,726 | 98,525 | ||||||||||||||||||
Depreciation and amortization | 7,707 | 12,084 | 22,765 | 34,633 | ||||||||||||||||||
Other operating expenses | 41,939 | 44,596 | 127,491 | 133,158 | ||||||||||||||||||
8,544 | 7,426 | 19,321 | 22,039 | |||||||||||||||||||
Other income (expenses): | ||||||||||||||||||||||
Interest income and other | 113 | 176 | 321 | 4,865 | ||||||||||||||||||
Interest expense: | ||||||||||||||||||||||
Preferred stock dividend | (4,027 | ) | — | (4,027 | ) | — | ||||||||||||||||
Other interest expense | (7,692 | ) | (8,386 | ) | (20,962 | ) | (24,214 | ) | ||||||||||||||
(Loss) income before income taxes, reorganization items and minority interests | (3,062 | ) | (784 | ) | (5,347 | ) | 2,690 | |||||||||||||||
Reorganization items | — | (3,408 | ) | (2,045 | ) | (11,159 | ) | |||||||||||||||
Loss before income taxes and minority interest | (3,062 | ) | (4,192 | ) | (7,392 | ) | (8,469 | ) | ||||||||||||||
Minority interests | 99 | 1,348 | (118 | ) | 17 | |||||||||||||||||
Loss before income taxes — continuing operations | (2,963 | ) | (2,844 | ) | (7,510 | ) | (8,452 | ) | ||||||||||||||
Provision for income taxes - continuing operations | (76 | ) | (76 | ) | (227 | ) | (227 | ) | ||||||||||||||
Loss — continuing operations | (3,039 | ) | (2,920 | ) | (7,737 | ) | (8,679 | ) | ||||||||||||||
Discontinued operations: | ||||||||||||||||||||||
Loss from discontinued operations before income taxes | (607 | ) | (1,637 | ) | (7,433 | ) | (6,845 | ) | ||||||||||||||
Income tax provision | — | — | — | — | ||||||||||||||||||
Loss from discontinued operations | (607 | ) | (1,637 | ) | (7,433 | ) | (6,845 | ) | ||||||||||||||
Net loss | (3,646 | ) | (4,557 | ) | (15,170 | ) | (15,524 | ) | ||||||||||||||
Preferred stock dividend | — | — | (7,594 | ) | — | |||||||||||||||||
Net loss attributable to common stock | $ | (3,646 | ) | $ | (4,557 | ) | $ | (22,764 | ) | $ | (15,524 | ) | ||||||||||
Basic and diluted loss per common share: | ||||||||||||||||||||||
Net loss attributable to common stock | $ | (0.52 | ) | $ | (0.16 | ) | $ | (3.25 | ) | $ | (0.54 | ) | ||||||||||
Upon emergence from Chapter 11, the Company adopted fresh start reporting. As a result, all assets and liabilities were restated
to reflect their fair values. The consolidated financial statements of the new reporting entity (the “Successor”) are not
comparable to the reporting entity prior to the Company’s emergence from Chapter 11 (the “Predecessor”).
See notes to condensed consolidated financial statements.
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LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
ACCUMULATED | |||||||||||||||||||||||||||||
COMMON STOCK | ADDITIONAL | UNEARNED | OTHER | TOTAL | |||||||||||||||||||||||||
PAID-IN | STOCK | ACCUMULATED | COMPREHENSIVE | STOCKHOLDERS’ | |||||||||||||||||||||||||
SHARES | AMOUNT | CAPITAL | COMPENSATION | DEFICIT | GAIN (net of tax) | EQUITY | |||||||||||||||||||||||
(Unaudited in thousands, except share data) | |||||||||||||||||||||||||||||
Balance, December 31, 2002 | 7,000,000 | $ | 70 | $ | 89,223 | $ | — | $ | (10,836 | ) | $ | — | $ | 78,457 | |||||||||||||||
Issuance of restricted stock | 200,000 | 2 | 598 | (600 | ) | — | — | — | |||||||||||||||||||||
Amortization of unearned stock compensation | — | — | — | 42 | — | — | 42 | ||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||
Net loss | — | — | — | — | (15,170 | ) | — | (15,170 | ) | ||||||||||||||||||||
Currency translation adjustments (related taxes estimated at nil) | — | — | — | — | — | 926 | 926 | ||||||||||||||||||||||
Total comprehensive loss | — | — | — | — | — | (14,244 | ) | ||||||||||||||||||||||
Preferred dividends* | — | — | — | — | (7,594 | ) | — | (7,594 | ) | ||||||||||||||||||||
7,200,000 | $ | 72 | $ | 89,821 | $ | (558 | ) | $ | (33,600 | ) | $ | 926 | $ | 56,661 | |||||||||||||||
The comprehensive loss for the Successor three months ended September 30, 2003 and the Predecessor three months ended September 30, 2002 was $3.6 million and $5.0 million, respectively. The comprehensive loss for the Predecessor nine months ended September 30, 2002 was $15.4 million. | ||
* | Represent dividends accrued for the period January 1, to June 30, 2003 (dividends accrued for the period July 1, to September 30, 2003 are reflected in interest expense). |
See notes to condensed consolidated financial statements.
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LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended | ||||||||||||
September 30, 2003 | September 30, 2002 | |||||||||||
(Unaudited in thousands) | ||||||||||||
Successor | Predecessor | |||||||||||
Operating activities: | ||||||||||||
Net loss | $ | (15,170 | ) | $ | (15,524 | ) | ||||||
Add: loss from discontinued operations | 7,433 | 6,845 | ||||||||||
Loss — continuing operations | (7,737 | ) | (8,679 | ) | ||||||||
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 22,765 | 34,633 | ||||||||||
Gain on extinguishment of debt | — | (4,419 | ) | |||||||||
Amortization of unearned stock compensation | 42 | — | ||||||||||
Preferred stock dividends | 4,027 | — | ||||||||||
Minority interests | 118 | (17 | ) | |||||||||
Write-off and amortization of deferred financing costs | 2,588 | — | ||||||||||
Other | 690 | (14 | ) | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable, net of allowances | (1,200 | ) | (1,716 | ) | ||||||||
Inventories | (111 | ) | 26 | |||||||||
Prepaid expenses, other assets and restricted cash | 8,970 | (6,097 | ) | |||||||||
Accounts payable | (1,902 | ) | 9,461 | |||||||||
Other accrued liabilities | (7,116 | ) | 10,817 | |||||||||
Advance deposits | 700 | 319 | ||||||||||
Net cash provided by operating activities | 21,834 | 34,314 | ||||||||||
Investing activities: | ||||||||||||
Capital improvements | (26,074 | ) | (16,652 | ) | ||||||||
Withdrawals (deposits) for capital expenditures | 6,974 | (1,199 | ) | |||||||||
Other | (278 | ) | (767 | ) | ||||||||
Net cash used in investing activities | (19,378 | ) | (18,618 | ) | ||||||||
Financing activities: | ||||||||||||
Proceeds from issuance of long-term debt | 80,000 | — | ||||||||||
Proceeds from working capital revolver | 2,000 | — | ||||||||||
Principal payments on long-term debt | (81,503 | ) | (1,117 | ) | ||||||||
Payments of deferred loan costs | (1,836 | ) | (500 | ) | ||||||||
Other | (1,272 | ) | — | |||||||||
Net cash used in financing activities | (2,611 | ) | (1,617 | ) | ||||||||
Cash flows used in discontinued operations: | ||||||||||||
Net cash used in discontinued operations | (191 | ) | (193 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | (346 | ) | 13,886 | |||||||||
Cash and cash equivalents at beginning of period | 10,875 | 14,007 | ||||||||||
10,529 | 27,893 | |||||||||||
Less: cash of discontinued operations | (481 | ) | (721 | ) | ||||||||
Cash and cash equivalents at end of period | $ | 10,048 | $ | 27,172 | ||||||||
Supplemental cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest (net of amounts capitalized: 2003 - $898; 2002 - - $365) | $ | 20,634 | $ | 25,058 | ||||||||
Income taxes, net of refunds | $ | 218 | $ | 125 | ||||||||
Supplemental disclosure of non-cash investing and | ||||||||||||
financing activities: | ||||||||||||
Preferred stock dividend accrued | $ | 11,621 | $ | — | ||||||||
Upon emergence from Chapter 11, the Company adopted fresh start reporting. As a result, all assets and liabilities were restated
to reflect their fair values. The consolidated financial statements of the new reporting entity (the “Successor”) are not
comparable to the reporting entity prior to the Company’s emergence from Chapter 11 (the “Predecessor”).
See notes to consolidated financial statements.
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. | Business Summary |
Lodgian, Inc. (“Lodgian” or the “Company”) is one of the largest independent owners and operators of full-service hotels in the United States. At September 30, 2003, Lodgian managed a portfolio of 97 hotels (18,265 rooms located in 30 states and Canada). The portfolio included 92 hotels which were wholly-owned, four in which the Company had a controlling financial interest and exercised control and one in which the Company had a minority equity interest. All of the hotels are owned in operating subsidiaries or other legal entities.
Lodgian’s hotels are primarily full-service properties which offer food and beverage services, meeting space and banquet facilities and compete in the mid-price and upscale segments of the lodging industry. Lodgian believes that these segments have more consistent demand generators than other segments of the lodging industry and have recently experienced less development of new properties than other lodging segments, such as limited service, economy and budget segments.
Of the Company’s 97 hotel portfolio, 82 are Crowne Plaza, Holiday Inn and Marriott brand hotels and ten are affiliated with six other nationally recognized hospitality brands. The Company’s strong brand affiliations bring many benefits in terms of guest loyalty and market share premiums.
2. | General |
The condensed consolidated financial statements include the accounts of Lodgian, Inc., its wholly-owned subsidiaries and four joint ventures in which Lodgian has a controlling financial interest (owns at least 50% of the voting interest) and exercises control (collectively “Lodgian” or the “Company”). Lodgian believes it has control of the joint ventures when the Company is the general partner and has control of the joint ventures’ assets and operations. The interests of the third parties to the joint venture agreements are reflected in minority interests. One unconsolidated entity (the “Unconsolidated Entity”) which owns one hotel is accounted for using the equity method of accounting. The Company’s investment in this entity is included in other assets. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accounting policies followed for quarterly financial reporting are disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2002, within this Quarterly Report and within the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2003 and June 30, 2003.
As previously reported in the Company’s Form 10-K for the year ended December 31, 2002, the Company and substantially all of its subsidiaries which owned hotel properties filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code on December 20, 2001, in the Southern District of New York. The Bankruptcy Court confirmed the Company’s First Amended Joint Plan of Reorganization (the “Joint Plan of Reorganization”) on November 5, 2002, and on November 25, 2002, the Company and entities owning 78 hotels officially emerged from Chapter 11. Pursuant to the terms of the Joint Plan of Reorganization, an additional eight wholly-owned hotels were returned to the lender in January 2003 in satisfaction of outstanding debt obligations and one wholly-owned hotel was returned to the lessor of a capital lease.
Of the Company’s 97 hotel portfolio, eighteen hotels, previously owned by two subsidiaries (Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C.), were not part of the Joint Plan of Reorganization. On April 24, 2003, the Bankruptcy Court confirmed the plan of reorganization relating to these eighteen hotels (the “Impac Plan of Reorganization”). These eighteen hotels remained in Chapter 11 until May 22, 2003, the date on which the Company, through eighteen newly-formed subsidiaries (one for each hotel), finalized an $80 million financing with Lehman Brothers Holdings, Inc. (the “Lehman Financing”). The Lehman Financing was primarily used to settle the remaining amount due to the secured lender of these hotels (See Note 8 to these Condensed Consolidated Financial Statements). The Impac Plan of
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Reorganization also provided for a pool of funds of approximately $0.3 million to be paid to the general unsecured creditors of the eighteen hotels.
The effects of the Joint Plan of Reorganization were recorded in accordance with the American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code,” effective November 22, 2002. SOP 90-7 required the application of Fresh Start Accounting. As a result, the Consolidated Financial Statements subsequent to the Company’s emergence from Chapter 11 are those of a new reporting entity (the “Successor”) and are not comparable with the financial statements of the Company prior to the effective date of the Joint Plan of Reorganization (the “Predecessor”).
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2003, the results of its operations for the three and nine months ended September 30, 2003 (Successor) and 2002 (Predecessor) and its cash flows for the nine months ended September 30, 2003 (Successor) and 2002 (Predecessor). The results for interim periods are not necessarily indicative of the results for the entire year. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Form 10-K for the year ended December 31, 2002.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current period’s presentation.
3. | Stock-based compensation |
As previously disclosed in the Company’s Form 10-K for the year ended December 31, 2002, on November 25, 2002, the Company adopted a new Stock Incentive Plan (the “Stock Incentive Plan”) which replaced the Option Plan previously in place. In accordance with the Stock Incentive Plan, awards to acquire up to 1,060,000 shares of common stock could be granted to officers or other key employees or consultants of the Company as determined by a committee appointed by the Board of Directors. Awards may consist of stock options, stock appreciation rights, stock awards, performance share awards, section 162(m) awards or other awards determined by the committee. Stock options granted pursuant to the Stock Incentive Plan cannot be granted at an exercise price which is less than 100% of the fair market value per share on the date of the grant. Vesting, exercisability, payment and other restrictions pertaining to any awards made pursuant to the Stock Incentive Plan are determined by the committee.
Pursuant to the Stock Incentive Plan, the committee made the following awards during the third quarter 2003:
• | July 15, 2003 — W. Thomas Parrington, the Company’s Chief Executive Officer, was awarded 200,000 shares of restricted stock. These vest equally over three years commencing on July 15, 2004. Mr. Parrington was also granted incentive stock options to acquire 100,000 shares of the Company’s common stock at an exercise price of $3.00 per share (the average of the high and low price of the stock at the date of grant). The closing price of the stock on the date of grant was also $3.00. The options also vest equally over three years commencing on July 15, 2004. |
• | September 5, 2003 — Other awards were made to certain of the Company’s employees and to members of the audit committee. The employees received incentive stock options to acquire 337,000 shares of the Company’s common stock while each of the three members of the audit committee received non-qualified options to acquire 5,000 shares of the Company’s common stock. The exercise price of the awards granted on September 5, 2003 was $5.07 (the average of the high and low price of the stock at the date of grant). |
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The closing price of the stock on the date of grant was $5.00. One-third of the options granted on September 5, 2003 vested at the date of grant, one-third will vest on September 5, 2004 and the remaining one-third will vest on September 5, 2005. |
All options expire ten years from the date of grant. |
Presented below is a summary of the stock option plan activity for the nine months ended September 30, 2003:
Weighted Average | |||||||||
Options | Exercise Price | ||||||||
Balance, December 31, 2002 | — | ||||||||
Granted (during the third quarter) | 452,000 | $ | 4.61 | ||||||
Exercised | — | ||||||||
Forfeited | — | — | |||||||
Balance, September 30, 2003 | 452,000 | $ | 4.61 | ||||||
Restricted | |||||
stock | |||||
Balance, December 31, 2002 | — | ||||
Granted (during the third quarter) | 200,000 | ||||
Exercised | — | ||||
Forfeited | — | ||||
Balance, September 30, 2003 | 200,000 | ||||
Options exercisable and the weighted average exercise price of these options at September 30, 2003, were 117,333 and $5.07, respectively. As of September 30, 2003, none of the restricted stock was vested.
The following table summarizes information for options outstanding and exercisable at September 30, 2003:
Options outstanding | Options exercisable | |||||||||||||||||||
Weighted average | Weighted average | Weighted average | ||||||||||||||||||
Range of prices | Number | remaining life (in years) | exercise prices | Number | exercise prices | |||||||||||||||
$3.00 to $3.50 | 100,000 | 9.8 | $ | 3.00 | — | $ | 3.00 | |||||||||||||
$3.51 to $5.07 | 352,000 | 9.9 | $ | 5.07 | 117,333 | $ | 5.07 | |||||||||||||
452,000 | 117,333 | |||||||||||||||||||
The income tax benefit, if any, associated with the exercise of stock options is credited to additional paid-in capital.
The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Under APB No. 25, if the exercise price of the Company’s employee stock options is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under SFAS No. 123, “Accounting for Stock-Based Compensation,” compensation cost is measured at the grant date based on the estimated value of the award and is recognized over the service (or vesting) period.
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income and earnings per share and the entity’s accounting policy decisions with respect to stock-based employee compensation. Certain of the disclosure requirements are required for all companies, regardless of whether the fair value method or the intrinsic value method is used to account for stock-based employee compensation arrangements. The Company continues to account for stock issued to employees, using the intrinsic value method in accordance with the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The amendments to SFAS No. 123 were effective for financial statements for fiscal years ended after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company was required to adopt SFAS No. 148 on November 22, 2002 upon its emergence from Chapter 11.
Had the compensation cost of the Company’s Stock Option Plan been recognized under SFAS No. 123, based on the fair market value at the grant dates, the Company’s pro forma net loss and net loss per share would have been reflected as follows:
Three months ended | Nine months ended | |||||||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | |||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||
Loss — continuing operations: | ||||||||||||||||||||
As reported | $ | (3,039 | ) | $ | (2,920 | ) | $ | (7,737 | ) | $ | (8,679 | ) | ||||||||
Pro forma | (3,501 | ) | (2,920 | ) | (8,199 | ) | (8,679 | ) | ||||||||||||
Loss from discontinued operations, net of taxes: | ||||||||||||||||||||
As reported | (607 | ) | (1,637 | ) | (7,433 | ) | (6,845 | ) | ||||||||||||
Pro forma | (607 | ) | (1,637 | ) | (7,433 | ) | (6,845 | ) | ||||||||||||
Net loss: | ||||||||||||||||||||
As reported | (3,646 | ) | (4,557 | ) | (15,170 | ) | (15,524 | ) | ||||||||||||
Pro forma | (4,108 | ) | (4,557 | ) | (15,632 | ) | (15,524 | ) | ||||||||||||
Net loss attributable to common stock: | ||||||||||||||||||||
As reported | (3,646 | ) | (4,557 | ) | (22,764 | ) | (15,524 | ) | ||||||||||||
Pro forma | (4,108 | ) | (4,557 | ) | (23,226 | ) | (15,524 | ) | ||||||||||||
Loss from continuing operations attributable to common stock before discontinued operations: | ||||||||||||||||||||
As reported | (3,039 | ) | (2,920 | ) | (15,331 | ) | (8,679 | ) | ||||||||||||
Pro forma | (3,501 | ) | (2,920 | ) | (15,793 | ) | (8,679 | ) | ||||||||||||
Basic and diluted earnings (loss) per common share: | ||||||||||||||||||||
Loss — continuing operations | ||||||||||||||||||||
As reported | $ | (0.43 | ) | $ | (0.10 | ) | $ | (1.11 | ) | $ | (0.30 | ) | ||||||||
Pro forma | (0.50 | ) | (0.10 | ) | (1.17 | ) | (0.30 | ) | ||||||||||||
Loss from discontinued operations, net of taxes | ||||||||||||||||||||
As reported | (0.09 | ) | (0.06 | ) | (1.06 | ) | (0.24 | ) | ||||||||||||
Pro forma | (0.09 | ) | (0.06 | ) | (1.06 | ) | (0.24 | ) | ||||||||||||
Net loss | ||||||||||||||||||||
As reported | (0.52 | ) | (0.16 | ) | (2.17 | ) | (0.54 | ) | ||||||||||||
Pro forma | (0.59 | ) | (0.16 | ) | (2.23 | ) | (0.54 | ) | ||||||||||||
Net loss attributable to common stock: | ||||||||||||||||||||
As reported | (0.52 | ) | (0.16 | ) | (3.25 | ) | (0.54 | ) | ||||||||||||
Pro forma | (0.59 | ) | (0.16 | ) | (3.32 | ) | (0.54 | ) | ||||||||||||
Loss from continuing operations attributable to common stock before discontinued operations: | ||||||||||||||||||||
As reported | (0.43 | ) | (0.10 | ) | (2.19 | ) | (0.30 | ) | ||||||||||||
Pro forma | (0.50 | ) | (0.10 | ) | (2.26 | ) | (0.30 | ) |
The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for those options granted in 2003:
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three months ended | Nine months ended | |||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | |||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||
Expected life of option | 10 years | — | 10 years | — | ||||||||||
Risk free interest rate | 4.09% | — | 4.09% | — | ||||||||||
Expected volatility | 55.75% | — | 55.75% | — | ||||||||||
Expected dividend yield | — | — | — |
The fair value of options granted during the third quarter 2003 is as follows:
Weighted average fair value of options granted | $ | 3.21 | ||
Total number of options granted (in thousands) | 452 | |||
Total fair value of options granted (in thousands) | $ | 1,449 |
4. | Discontinued operations |
As previously reported, pursuant to the terms of the Joint Plan of Reorganization, eight wholly-owned hotels were returned to the lender in January 2003 in satisfaction of outstanding debt obligations and one wholly-owned hotel was returned to the lessor of a capital lease. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, the assets, liabilities and results of operations of these nine hotels are reported in Discontinued Operations as of and for the three and nine months ended September 30, 2003 and 2002. Due primarily to the application of fresh start accounting in November 2002, in which these and other assets were adjusted to their respective fair values, there was no gain or loss on this transaction.
The following combined condensed table summarizes the assets and liabilities of these nine hotels as of December 31, 2002:
December 31, 2002 | |||||||
(In thousands) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 177 | |||||
Accounts receivable, net | 517 | ||||||
Inventories | 570 | ||||||
Prepaid expenses and other current assets | 432 | ||||||
Total current assets | 1,696 | ||||||
Property and equipment, net | 15,649 | ||||||
Deposits for capital expenditures | 904 | ||||||
Other assets | 20 | ||||||
$ | 18,269 | ||||||
LIABILITIES Liabilities not subject to compromise Current liabilities: | |||||||
Accounts payable | $ | 330 | |||||
Other accrued liabilities | 1,267 | ||||||
Advance deposits | 60 | ||||||
Total current liabilities | 1,657 | ||||||
Long-term debt subject to compromise | 15,922 | ||||||
Total liabilities | $ | 17,579 | |||||
In addition, in June 2003, the Company embarked on a plan to sell 14 hotels, 3 land parcels and an office building. Four additional hotels were identified for sale during the third quarter of 2003. The strategy to sell these assets is part of management’s plans to:
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
• | pay down the Lehman Financing by at least $20 million to minimize interest costs (see Note 8); |
• | provide additional funding for the Company’s capital expenditure program to comply with franchisor requirements and improve brand quality; and |
• | dispose of certain hotels which are performing below the standard set by management for the entire portfolio. |
In connection with this strategy, where the carrying values of the assets exceeded the estimated fair values, net of selling costs, the carrying values were reduced and impairment charges were recorded. Fair value is determined using quoted market prices, when available, or other accepted valuation techniques. The impairment charges recorded during the nine months ended September 30, 2003 related to 6 hotels and 2 land parcels and approximated $5.1 million ($1.7 million for the three months ended September 30, 2003). Where the estimated selling prices, net of selling costs, exceeded the carrying values, no adjustments were recorded. Management classifies an asset as held for sale if it expects to dispose of it within one year. While the completion of these dispositions is probable, the sale of these assets is subject to market conditions and there can be no assurance that the Company will finalize the sale of any or all of these assets. In accordance with SFAS No. 144, the results of operations of all assets identified as held for sale (including the related impairment charges) are reported in Discontinued Operations for the three and nine months ended September 30, 2003 and 2002. The assets held for sale and the liabilities related to these assets are separately disclosed on the face of the Condensed Consolidated Balance Sheet as of September 30, 2003.
The following combined condensed table summarizes the assets and liabilities relating to the properties identified as held for sale as of September 30, 2003:
September 30, 2003 | ||||||
(In thousands) | ||||||
ASSETS | ||||||
Accounts receivable, net of allowances | $ | 1,986 | ||||
Inventories | 1,354 | |||||
Prepaid expenses and other current assets | 394 | |||||
Property and equipment, net | 70,532 | |||||
Other assets | 4,117 | |||||
$ | 78,383 | |||||
LIABILITIES | ||||||
Accounts payable | $ | 1,548 | ||||
Other accrued liabilities | 3,214 | |||||
Advance deposits | 524 | |||||
Current portion of long-term debt | 774 | |||||
Long-term debt | 54,510 | |||||
Total liabilities | $ | 60,570 | ||||
The condensed combined results of operations included in Discontinued Operations for the three and nine months ended September 30, 2003 and 2002 were as follows:
10
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three months ended | Nine months ended | |||||||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | |||||||||||||||||
(Unaudited in thousands) | ||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||
Revenues: | ||||||||||||||||||||
Rooms | $ | 14,012 | $ | 17,923 | $ | 35,170 | $ | 49,216 | ||||||||||||
Food and beverage | 2,789 | 4,144 | 8,094 | 12,500 | ||||||||||||||||
Other | 519 | 777 | 1,552 | 2,411 | ||||||||||||||||
17,320 | 22,844 | 44,816 | 64,127 | |||||||||||||||||
Operating expenses: | ||||||||||||||||||||
Direct: | ||||||||||||||||||||
Rooms | 3,872 | 5,491 | 10,388 | 15,397 | ||||||||||||||||
Food and beverage | 2,264 | 3,447 | 6,411 | 10,134 | ||||||||||||||||
Other | 379 | 570 | 1,126 | 1,735 | ||||||||||||||||
6,515 | 9,508 | 17,925 | 27,266 | |||||||||||||||||
10,805 | 13,336 | 26,891 | 36,861 | |||||||||||||||||
General, administrative and other | 8,165 | 10,442 | 23,515 | 30,547 | ||||||||||||||||
Depreciation and amortization | 274 | 3,385 | 3,160 | 9,819 | ||||||||||||||||
Impairment of long-lived assets | 1,680 | — | 5,128 | — | ||||||||||||||||
Other operating expenses | 10,119 | 13,827 | 31,803 | 40,366 | ||||||||||||||||
686 | (491 | ) | (4,912 | ) | (3,505 | ) | ||||||||||||||
Interest expense | (1,293 | ) | (121 | ) | (2,521 | ) | (370 | ) | ||||||||||||
Loss before income taxes and reorganization items | (607 | ) | (612 | ) | (7,433 | ) | (3,875 | ) | ||||||||||||
Reorganization items | — | (1,025 | ) | — | (2,970 | ) | ||||||||||||||
Loss before income taxes | (607 | ) | (1,637 | ) | (7,433 | ) | (6,845 | ) | ||||||||||||
Provision for income taxes | — | — | — | — | ||||||||||||||||
Net loss | $ | (607 | ) | $ | (1,637 | ) | $ | (7,433 | ) | $ | (6,845 | ) | ||||||||
5. | Cash, restricted |
Restricted cash as of September 30, 2003 consists of amounts reserved for letter of credit collateral, a deposit required by the Company’s bankers and cash reserved pursuant to certain loan agreements.
6. | Loss per share |
The following table sets forth the computation of basic and diluted loss per share:
(Unaudited in thousands, except per share data) | |||||||||||||||||||
Three months ended | Nine months ended | ||||||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | ||||||||||||||||
Successor | Predecessor | Successor | Predecessor | ||||||||||||||||
Basic and diluted loss per share: | |||||||||||||||||||
Numerator: | |||||||||||||||||||
Loss — continuing operations | $ | (3,039 | ) | $ | (2,920 | ) | $ | (7,737 | ) | $ | (8,679 | ) | |||||||
Loss from discontinued operations, net of taxes | (607 | ) | (1,637 | ) | (7,433 | ) | (6,845 | ) | |||||||||||
Net loss | (3,646 | ) | (4,557 | ) | (15,170 | ) | (15,524 | ) | |||||||||||
Preferred stock dividend | — | — | (7,594 | ) | — | ||||||||||||||
Net loss attributable to common stock | (3,646 | ) | (4,557 | ) | (22,764 | ) | (15,524 | ) | |||||||||||
Loss — continuing operations | (3,039 | ) | (2,920 | ) | (7,737 | ) | (8,679 | ) | |||||||||||
Preferred stock dividend | — | — | (7,594 | ) | — | ||||||||||||||
Loss from continuing operations attributable to common stock before discontinued operations | $ | (3,039 | ) | $ | (2,920 | ) | $ | (15,331 | ) | $ | (8,679 | ) | |||||||
Denominator: | |||||||||||||||||||
Denominator for basic and diluted loss per share - weighted-average shares | 7,000 | 28,480 | 7,000 | 28,480 | |||||||||||||||
Basic and diluted loss per common share: | |||||||||||||||||||
Loss — continuing operations | $ | (0.43 | ) | $ | (0.10 | ) | $ | (1.11 | ) | $ | (0.30 | ) | |||||||
Loss from discontinued operations, net of taxes | (0.09 | ) | (0.06 | ) | (1.06 | ) | (0.24 | ) | |||||||||||
Net loss | (0.52 | ) | (0.16 | ) | (2.17 | ) | (0.54 | ) | |||||||||||
Net loss attributable to common stock | (0.52 | ) | (0.16 | ) | (3.25 | ) | (0.54 | ) | |||||||||||
Loss from continuing operations attributable to common stock before discontinued operations | $ | (0.43 | ) | $ | (0.10 | ) | $ | (2.19 | ) | $ | (0.30 | ) | |||||||
The computation of diluted loss per share for the Successor periods ended September 30, 2003, as calculated above, did not include the shares associated with the assumed conversion of the restricted stock (200,000 shares), stock options (options to acquire 452,000 shares of common stock), and A and B warrants (rights to acquire 1,510,638 and 1,029,366 shares of common stock, respectively) because their inclusion would have been antidilutive. The computation of diluted loss per share for the Predecessor periods ended September 30, 2002, as calculated above, did not include shares associated with the assumed
11
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conversion of the CRESTS (8,169,935 shares) or stock options because their inclusion would also have been antidilutive.
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Other accrued liabilities
At September 30, 2003 and December 31, 2002, other accrued liabilities consisted of the following:
September 30, 2003 | December 31, 2002 | |||||||
(In thousands) | ||||||||
Salaries and related costs | $ | 17,389 | $ | 17,293 | ||||
Property and sales taxes | 14,648 | 16,668 | ||||||
Professional fees | 786 | 807 | ||||||
Provision for state income taxes | 2,409 | 2,219 | ||||||
Franchise fee accrual | 1,754 | 1,388 | ||||||
Accrued interest | 1,167 | 1,524 | ||||||
Accrual for allowed claims | 880 | 1,749 | ||||||
Other | 1,468 | 1,977 | ||||||
40,501 | 43,625 | |||||||
Less : accrued liabilities related to assets held for sale | (3,214 | ) | — | |||||
$ | 37,287 | $ | 43,625 | |||||
8. | Long-term debt |
Set forth below, by debt pool, is a summary of the Company’s long-term debt along with the applicable interest rates and the related carrying values of the property, plant and equipment which collateralize the long-term debt.
September 30, 2003 | |||||||||||||||
Number | Property, plant | Long-term | Interest | ||||||||||||
of Hotels | and equipment, net | obligations | rates | ||||||||||||
Exit financing: | |||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Senior | $ | 216,684 | LIBOR plus 2.36% | ||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Mezzanine | 83,524 | LIBOR plus 8.2546% (through November 30, 2003) | |||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Total | 56 | 411,215 | 300,208 | ||||||||||||
Computer Share Trust Company of Canada | 1 | 13,617 | 7,245 | 7.88% | |||||||||||
Lehman financing: | |||||||||||||||
Lehman Brothers Holdings, Inc. — May 22, 2003 | 18 | 74,808 | 79,746 | Higher of LIBOR plus 5.25% or 7.25% | |||||||||||
Working capital loan: | |||||||||||||||
OCM Real Estate Opportunities Fund II — Revolver | — | 4,320 | 2,000 | 10.00% | |||||||||||
Other financing: | |||||||||||||||
Column Financial, Inc. — January 1, 1995 | 9 | 62,132 | 27,824 | 10.59% | |||||||||||
Lehman Brothers Holdings, Inc.— June 30, 1997 | 5 | 38,504 | 23,517 | $16,576 at 9.40%; $6,941 at 8.90% | |||||||||||
JP Morgan Chase Bank | 2 | 9,174 | 10,771 | 7.25% | |||||||||||
DDL Kinser | 1 | 3,228 | 2,408 | 8.25% | |||||||||||
First Union Bank | 1 | 4,343 | 3,371 | 9.38% | |||||||||||
Column Financial, Inc. — June 6, 1995 | 1 | 5,577 | 9,037 | 9.45% | |||||||||||
Column Financial, Inc. — January 1, 1995 | 1 | 6,186 | 3,238 | 10.74% | |||||||||||
Robb Evans, Trustee | 1 | 11,433 | 7,105 | Prime plus 0.25% | |||||||||||
21 | 140,577 | 87,271 | |||||||||||||
96 | 644,537 | 476,470 | 6.33% | ||||||||||||
Long-term debt — other: | |||||||||||||||
Deferred credits | 5,481 | ||||||||||||||
Deferred rent on a long-term ground lease | 2,465 | ||||||||||||||
Unsecured notes | — | — | 770 | ||||||||||||
Other | 214 | ||||||||||||||
— | — | 8,930 | |||||||||||||
Property, plant and equipment — other | — | 5,887 | — | ||||||||||||
96 | 650,424 | 485,400 | |||||||||||||
Held for sale | (18 | ) | (70,532 | ) | (55,284 | ) | |||||||||
78 | $ | 579,892 | $ | 430,116 | |||||||||||
12
Table of Contents
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Substantially all of the Company’s property and equipment are pledged as collateral for long-term obligations. Certain of the mortgage notes are subject to a prepayment penalty if repaid prior to their maturity.
The maturities of these debt obligations as of September 30, 2003 are as follows:
Long-term | ||||||||||||||||||||||||||||
obligations | Maturities(1) | |||||||||||||||||||||||||||
September 30, 2003 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter | ||||||||||||||||||||||
Exit financing: | ||||||||||||||||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Senior | $ | 216,684 | $ | 3,068 | $ | 213,616 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Mezzanine | 83,524 | 1,182 | 82,342 | — | — | — | — | |||||||||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Total | 300,208 | 4,250 | 295,958 | — | — | — | — | |||||||||||||||||||||
Computer Share Trust Company of Canada | 7,245 | 208 | 227 | 245 | 265 | 6,300 | — | |||||||||||||||||||||
Lehman financing: | ||||||||||||||||||||||||||||
Lehman Brothers Holdings, Inc. — May 22, 2003 | 79,746 | 1,104 | 78,642 | — | — | — | — | |||||||||||||||||||||
Working capital loan: | ||||||||||||||||||||||||||||
OCM Real Estate Opportunities Fund II — Revolver | 2,000 | 2,000 | — | — | — | — | — | |||||||||||||||||||||
Other financing: | ||||||||||||||||||||||||||||
Column Financial, Inc. — January 1, 1995 | 27,824 | 2,184 | 2,426 | 2,696 | 2,996 | 3,329 | 14,193 | |||||||||||||||||||||
Lehman Brothers Holdings, Inc. — June 30, 1997 | 23,517 | 468 | 513 | 562 | 21,974 | |||||||||||||||||||||||
JP Morgan Chase Bank | 10,771 | 520 | 560 | 603 | 652 | 705 | 7,731 | |||||||||||||||||||||
DDL Kinser | 2,408 | 96 | 2,312 | — | — | — | — | |||||||||||||||||||||
First Union Bank | 3,371 | 48 | 53 | 59 | 3,211 | — | — | |||||||||||||||||||||
Column Financial, Inc. — June 6, 1995 | 9,037 | 389 | 427 | 469 | 516 | 566 | 6,670 | |||||||||||||||||||||
Column Financial, Inc. — January 1, 1995 | 3,238 | 133 | 149 | 165 | 184 | 205 | 2,402 | |||||||||||||||||||||
Robb Evans, Trustee | 7,105 | 7,105 | — | — | — | — | — | |||||||||||||||||||||
87,271 | 10,943 | 6,440 | 4,554 | 29,533 | 4,805 | 30,996 | ||||||||||||||||||||||
476,470 | 18,505 | 381,267 | 4,799 | 29,798 | 11,105 | 30,996 | ||||||||||||||||||||||
Long-term debt — other | 8,930 | 392 | 4,729 | 302 | 261 | 227 | 3,019 | |||||||||||||||||||||
485,400 | 18,897 | 385,996 | 5,101 | 30,059 | 11,332 | 34,015 | ||||||||||||||||||||||
Held for sale | (55,284 | ) | (774 | ) | (54,510 | ) | — | — | — | — | ||||||||||||||||||
$ | 430,116 | $ | 18,123 | $ | 331,486 | $ | 5,101 | $ | 30,059 | $ | 11,332 | $ | 34,015 | |||||||||||||||
(2) | ||||||||||||||||||||||||||||
(1) | Years 1 to 5 are for periods commencing on October 1 and ending on September 30. | |
(2) | As more fully discussed below this table, optional extensions are available on 97% of the debt due in year 2. |
Exit financing:
On emergence from Chapter 11 on November 25, 2002, the Company received exit financing of $309.0 million comprised of three separate components as follows:
• | Senior debt of $224.0 million from Merrill Lynch Mortgage Lending, Inc. (“Merrill”), accruing interest at the rate of LIBOR plus 2.2442%, secured by, among other things, first mortgage liens on the fee simple or leasehold interests in 55 of the Company’s hotels; |
• | Mezzanine debt of $78.7 million from Merrill, accruing interest at the rate of LIBOR plus 9.00%, secured by the equity interest in the subsidiaries of 56 hotels (the 55 which secure the Senior Debt and one additional hotel); and |
• | Debt provided through Computershare Trust Company of Canada, a Canadian lender, of $10.0 million Canadian dollars (equated to approximately $6.3 million U.S. dollars at inception) maturing in December 2007, accruing interest at the rate of 7.879% secured by a mortgage on the Windsor property. |
In March 2003, as permitted by the terms of the Senior and Mezzanine debt agreements, Merrill exercised the right to “resize” the Senior and Mezzanine debt amounts, prior to the securitization of the mortgage loan. As a result, the principal amount of the Senior Debt was decreased from $223.5 million (initially $224.0 less $0.5 million of principal payments) to $218.1 million, and the initial principal amount of the Mezzanine Debt was increased from $78.7 million to $84.1 million. Though the blended interest rate on the Merrill debt remained at LIBOR plus 4% at the date of the resizing, the interest rate on the Senior debt was modified to LIBOR plus 2.36% and the interest rate on the Mezzanine debt was modified to LIBOR plus 8.2546%. The interest rate on the Mezzanine debt will, however, increase to 8.7937% after November 30, 2003.
13
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Senior and Mezzanine debt matures in November 2004. There are, however, three one-year options to renew which could extend the facility for an additional three years. The first option to extend the maturity date of the Senior and Mezzanine debt by up to one year (i.e. to November 2005) is available as long as no events of default occur in respect of the payment of principal, interest and other required payments. The second and third extension terms are available only if no events of default (as defined by the agreement) exist and are subject to minimum Debt Service Coverage Ratio and Debt Yield requirements (as defined). Payments of principal and interest on all three portions of the facility are due monthly; however, the principal payments on the Senior and Mezzanine debts may be deferred during the first twelve months of the agreement.
The Senior and Mezzanine debt agreements provide that when either the Debt Yield (as defined) for the trailing 12-month period is below 12.75% during the first year of the loan ending November 2003 (13.25% and 13.5% during the second and third years, respectively) or the Debt Service Coverage Ratio (as defined) is below 1.20, excess cash flows (after payment of operating expenses, management fees, required reserves, principal and interest) produced by the 56 properties must be deposited in a special deposit account. These funds cannot be transferred to the parent company, but can be used for capital expenditures on these properties with lender’s approval, or for principal and interest payments. Funds placed into the special deposit account are released to the borrowers when the Debt Yield and the Debt Service Coverage Ratio are sustained above the minimum requirements for three consecutive months. At March 31, 2003, the Debt Yield for the 56 properties fell below the 12.75% threshold and, therefore, the excess cash produced by the 56 properties was retained in the special deposit account. As of September 30, 2003, $0.3 million was being retained in the special deposit account (subsequently utilized for capital expenditure). As of September 30, 2003, the Debt Yield remained below the minimum requirements.
Lehman financing:
As previously discussed, on May 22, 2003, the Company completed an $80 million financing underwritten by Lehman Brothers Holdings, Inc. which was primarily utilized to settle debts secured by the eighteen hotels previously owned by Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C. (both Lodgian subsidiaries). The Lehman Financing, provided to eighteen newly-formed subsidiaries (one for each hotel), is a two-year term loan with an optional one-year extension and bears interest at the higher of 7.25% or LIBOR plus 5.25%. The one-year extension is only available if, at the time of electing to extend and at the initial maturity date, there are no events of default. If the Company opts for the one-year extension, an extension fee of $3.0 million is payable. Pursuant to the terms of the agreement, additional interest of $4.4 million is also payable prior to the maturity date (May 22, 2005 or the new maturity date, if the Company opts for the extension). If, however, the Company makes one or more prepayments totaling at least $20 million in aggregate on or before March 1, 2004, the additional interest payable will be reduced to $3.6 million. Payments of principal and interest on the Lehman Facility are due monthly. If an event of default occurs, default interest, which equates to an additional 3.25%, is payable for the period of the default.
Working capital/related party loan:
On September 18, 2003, the Company drew down the full availability of $2.0 million under the revolver issued by OCM Real Estate Opportunities Fund II, L.P. (the “OCM Fund”). The loan is secured by two land parcels located in California and New Jersey, bears interest at the rate of 10% per annum and matures on May 1, 2004.
Oaktree Capital Management, LLC (“Oaktree”) is the beneficial owner of 1,664,752 shares of the Company’s common stock including 1,578,611 shares owned by the OCM Fund. Oaktree is the general partner of the OCM Fund; accordingly, Oaktree may be deemed to beneficially own the shares owned by the OCM Fund.
Russel S. Bernard, a Principal of Oaktree, and Sean F. Armstrong, a Managing Director of Oaktree, are also directors of Lodgian.
Other financing:
On November 25, 2002, the effective date of the Joint Plan of Reorganization, loans approximating $83.5 million, secured by 20 hotel properties, were substantially reinstated on their original
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
terms, except for the extension of certain maturities. The terms of one loan, in the amount of $2.5 million and secured by one hotel, were amended to provide for a new interest rate as well as a new maturity date.
The Company through its wholly owned subsidiaries owes approximately $10.9 million under Industrial Revenue Bonds (“IRB’s”) issued on the Holiday Inn Lawrence, Kansas and Holiday Inn Manhattan, Kansas properties. The IRB’s require a minimum debt service coverage ratio (“DSCR”) (as defined), calculated as of the end of each calendar year. For the year ended December 31, 2002, the cash flows of the two properties were insufficient to meet the minimum DSCR requirements due in part to renovations that were being performed at the properties during 2002. The trustee of the IRB’s may give notice of default, at which time the Company could remedy the default by depositing with the trustee an amount currently estimated at less than $1 million. In the event a default is declared and not cured, the properties could be subject to foreclosure and the Company would be obligated pursuant to a partial guaranty of not more than $1.0 million. Total revenues for these two hotels approximated $2.1 million and $1.8 million for the three months ended September 30, 2003 and 2002, respectively, and $6.0 million and $5.3 million for the nine months ended September 30, 2003 and 2002, respectively.
On September 30, 2003, first mortgage debt of approximately $7.1 million of Macon Hotel Associates, L.L.C. (“MHA”) became due. The Company owns 60% of MHA, and MHA’s sole asset is the Crowne Plaza Hotel in Macon, Georgia. The lender has agreed to extend the term of the debt to December 31, 2003, while the Company explores alternative financing opportunities. However, there can be no assurance that the Company will complete a refinancing on or before the due date or that the lender will grant further extensions. If the Company is not able to refinance the debt and the lender does not grant further extensions, the property could be subject to foreclosure. Total revenues for the Crowne Plaza Hotel in Macon, Georgia were approximately $1.4 million and $1.3 million for the three months ended September 30, 2003 and 2002, respectively, and $4.3 million and $4.5 million for the nine months ended September 30, 2003 and 2002, respectively. The debt of approximately $7.1 million is included in the current portion of long-term debt in the accompanying condensed consolidated balance sheet.
Loan/franchise agreements:
The Company is subject to certain property maintenance and quality standard compliance requirements under its franchise agreements. The Company periodically receives notifications from its franchisors of events of non-compliance with such agreements. In the past, management has cured most cases of non-compliance within the applicable cure periods and the events of non-compliance did not result in events of default under the respective loan agreements. However, in selected situations and based on economic evaluations, management may elect to not comply with the franchisor requirements. In such situations, the Company will either select an alternative franchisor or operate the property independent of any franchisor (see Note 11).
9. | 12.25% Cumulative preferred shares subject to mandatory redemption |
On July 1, 2003, pursuant to the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, the Company reclassified its Mandatorily Redeemable 12.25% Cumulative Preferred Stock (“Preferred Stock”) to the liability section of its Condensed Consolidated Balance Sheet and began presenting the related dividends in interest expense ($4.0 million for the three months ended September 30, 2003). Prior to the adoption of SFAS No. 150, the Company had presented the Preferred Stock between liabilities and equity in its Consolidated Balance Sheet (“mezzanine” section) and had reported the Preferred Stock dividend as a deduction from retained earnings. In accordance with SFAS No. 150, the prior periods have not been restated.
The preferred stock consists of 5,000,000 shares with a par value of $0.01 (issued at $25.00 per share). The new preferred stock accumulates dividends at the rate of 12.25%, is cumulative and is compounded annually. The first dividend is payable on November 21, 2003 and is payable via the issuance of additional shares of preferred stock (fractional shares will be paid in cash). The number of shares to be issued, as dividends, on November 21, 2003 approximates 612,500 shares less the fractional shares (which will be paid in cash). Changes in the fair value of Lodgian’s common stock would not affect the settlement amounts. The board of directors will determine whether the dividends due November 21, 2004 and 2005 will be paid in cash or in kind via the issue of additional shares of preferred stock. The preferred
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
stock is subject to redemption at any time, at the Company’s option (including a premium during the first five years) and to mandatory redemption on November 21, 2012. If the preferred stock is redeemed during the first five years, the initial premium payable is 5%. This premium is reduced by 1% for each succeeding year through 2007. This premium percentage would be applied against the preferred stock plus any dividends accrued but not paid. If the Company were to redeem the preferred stock on September 30, 2003, the amount payable would be $145.0 million (including the premium payable).
10. | Income taxes |
The Company recorded income tax provisions of $0.1 million and $0.2 million for the three and nine months ended September 30, 2003, respectively. The provisions for the Predecessor three and nine months ended September 30, 2002 were also $0.1 million and $0.2 million, respectively. Both related primarily to provisions for state income taxes.
11. | Commitments and Contingencies |
Franchisor agreements:
As of November 11, 2003, the Company had received termination notices from franchisors with respect to two properties (this does not include two hotels for which the Company has met all of the requirements to “cure” but has not received the cure letter from the franchisor). Though not in default, the Company was not in strict compliance with the terms of four other franchise agreements. In addition, default notices were received from a franchisor with respect to five hotels. For the default to be rescinded by the franchisor, these five hotels must continuously achieve certain minimum quality scores at each review (carried out every six months) over a two-year period. The Company met the requirements for the first two of these reviews. Notices from the franchisors primarily resulted from physical conditions being below brand standards. The Company is working with the franchisors to cure the default conditions and has a capital improvement program to address the capital improvements required by the franchisors, the re-branding of several hotels and general renovation projects intended to ultimately improve the operations of the hotels. Subject to availability of funds, the Company expects to spend approximately $74.7 million in aggregate on all 97 hotels, during the two years ending December 2004. As of September 30, 2003, the Company had deposited approximately $16.1 million in escrow for such improvements.
While it is the Company’s belief that it will cure all defaults under the franchise agreements before the applicable termination dates, there can be no assurance that it will be able to do so or be able to obtain additional time in which to cure the defaults. The license agreements are subject to cancellation in the event of a default, including the failure to operate the hotel in accordance with the quality standards and specification of the licensors. In the event of a franchise termination, management may seek to license the hotel with another nationally-recognized brand. The Company believes that the loss of a license for any individual hotel would not have a material adverse effect on the Company’s financial condition and results of operations, since the Company would either select an alternative franchisor or operate the hotel independent of a franchisor.
Flag changes:
As part of the Impac Plan of Reorganization, the Company elected to reject the license agreement relating to its hotel in Cincinnati, Ohio and ceased operating this hotel as a Holiday Inn on May 23, 2003; the hotel is currently being operated as an independent hotel. In addition, the Company made the following franchise changes during 2003:
• | The previously independent hotel in Pensacola, Florida was converted to a Holiday Inn Express on April 4, 2003; |
• | The previously independent hotel in Dothan, Alabama was converted to a Holiday Inn Express on May 23, 2003; |
• | The former Holiday Inn — Dothan in Alabama was converted to a Quality Inn on May 23, 2003; |
• | The former independent hotel in Louisville, Kentucky was converted to a Clarion Hotel on June 2, 2003. |
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Letters of credit:
As of September 30, 2003, the Company had issued three irrevocable letters of credit totaling $4.9 million as guarantees to Zurich American Insurance Company, Donlen Fleet Management Services and U.S. Food Services. The Zurich letter of credit has since been reduced by $0.8 million and the U.S Food Services letter of credit has since been cancelled. As of November 11, 2003, the remaining two letters of credit totaled $3.6 million. These letters of credit will expire in November 2004 but may require renewal beyond that date. All letters of credit are backed by the Company’s cash (classified as restricted cash in the accompanying Condensed Consolidated Balance Sheet).
Self-insurance:
The Company is self insured up to certain limits (deductibles) with respect to employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers’ compensation and auto liability. The Company establishes liabilities for these self-insured obligations annually, based on actuarial valuations and the Company’s history of claims. Should unanticipated events cause these claims to escalate beyond normal expectations, the Company’s financial condition and results of operations could be adversely affected. As of September 30, 2003, the Company had approximately $9.6 million accrued for such liabilities.
Litigation:
The Company was a party in litigation with Hospitality Restoration and Builders, Inc. (“HRB”), a general contractor hired to perform work on six of the Company’s hotels. The litigation involved hotels in Texas (filed in the District Court of Harris County in October 1999), Illinois (in the United States District Court, Northern District of Illinois, Eastern Division in February 2000) and New York (filed in the Supreme Court, New York County in July 1999). In general, HRB claimed that the Company breached contracts to renovate the hotels by not paying for work performed. The Company contended that it was over-billed by HRB and that a significant portion of the completed work was defective. In July 2001, the parties agreed to settle the litigation pending in Texas and Illinois. In exchange for mutual dismissals and full releases, the Company paid HRB $750,000. With respect to the matter pending in the state of New York, HRB claimed that it was owed $10.7 million. The Company asserted a counterclaim of $7 million. In February 2003, the Company and HRB agreed to settle the litigation pending in the state of New York. In exchange for mutual dismissals and full releases, the Company paid HRB $625,000. The Company provided fully for this liability in its Consolidated Financial Statements for the year ended December 31, 2002 (was reflected in general, administrative and other expenses in the Statement of Operations).
The Company is party to other legal proceedings arising in the ordinary course of business, the impact of which would not, either individually or in the aggregate, in management’s opinion, have a material adverse effect on its financial position or results of operations. Certain of these claims are limited to the amounts available under the Company’s disputed claims reserve.
12. | New Accounting Pronouncements |
In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) which elaborates on the disclosures to be made by a guarantor in its financial statements. It also requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee at the inception of a guarantee. The disclosure requirements of FIN 45 were effective for the Company as of December 31, 2002. The recognition provisions of FIN 45 will be applied on a prospective basis to guarantees issued after December 31, 2002. The requirements of FIN 45 did not have a material impact on the Company’s financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN 46 is effective immediately for certain disclosure requirements for variable interest entities created after January 31, 2003. In October 2003, the FASB deferred the implementation date of FIN 46, for variable interest entities which existed prior to February 1, 2003, until the first period
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ending after December 15, 2003. At September 30, 2003, the Company had no variable interest entities and therefore FIN 46 is not expected to impact the Company’s financial position and results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative as discussed in SFAS No. 133. In addition, SFAS No. 149 clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 amends certain other existing pronouncements, resulting in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company adopted SFAS No. 149 on July 1, 2003. The adoption did not have a material impact on its financial position and results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which aims to eliminate diversity in practice by requiring that certain types of freestanding instruments be reported as liabilities by their issuers including mandatorily redeemable instruments issued in the form of shares which unconditionally obligate the issuer to redeem the shares for cash or by transferring other assets. These instruments were previously presented in various ways, as part of liabilities, as part of equity, or between the liabilities and equity sections (sometimes referred to as “mezzanine” reporting). The provisions of SFAS No. 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003. For pre-existing instruments, SFAS No. 150 was effective as of the beginning of the first interim period which commenced after June 15, 2003 (July 1, 2003 for the Company). As disclosed in Note 9, to these Condensed Consolidated Financial Statements (“Note 9”), the Company adopted SFAS No. 150 in the third quarter of 2003. The adoption impacted the treatment of the Company’s Mandatorily Redeemable 12.25% Cumulative Preferred Stock (“Preferred Stock”), previously presented between total liabilities and stockholders’ equity. As a result of the adoption of SFAS No. 150, the Company’s Preferred Stock has been included as part of long-term debt in the accompanying Condensed Consolidated Financial Statements and the Preferred Stock dividends ($4.0 million for the three months ended September 30, 2003), was included in interest expense. The preferred stock dividends for the period January 1, 2003 to June 30, 2003 ($7.6 million) continues to be shown as a deduction from retained earnings (see Note 9 for disclosures required under SFAS No. 150). On October 29, 2003, the FASB decided to defer the effective date of SFAS No. 150 related to non-controlling interests. As a result, until the FASB establishes further guidance, Lodgian will not have to measure its mandatorily redeemable minority interests at fair value.
13. | Related party transactions |
Richard Cartoon, the Company’s Executive Vice President and Chief Financial Officer between October 4, 2001 and October 13, 2003, is a principal in a business that the Company retained in October 2001 to provide Richard Cartoon’s services as Chief Financial Officer and other restructuring support and services. In addition to amounts paid for Richard Cartoon’s services, the Company was billed $56,000 and $178,000, including expenses, for other support and services provided by associates of Richard Cartoon, LLC for the three and nine months ended September 30, 2003, respectively. Richard Cartoon, LLC may continue to provide restructuring support and services in the short-term.
See Note 8 regarding the $2.0 million revolver issued by the OCM Fund.
14. | Subsequent event |
In October 2003, management committed to a plan to sell one additional hotel. Though there can be no assurance, management plans to dispose of this hotel within one year, if the market permits. This hotel is included in the accompanying Condensed Consolidated Financial Statements as an asset held for use. The net carrying value of the property, plant and equipment of this hotel both as of September 30,
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2003 and December 31, 2002 was $1.5 million; related long-term debt approximated $1.7 million both as of September 30, 2003 and December 31, 2002. Total revenues were $0.8 million and $0.6 million for the three months ended September 30, 2003 and 2002, respectively, and $2.1 million and $1.7 million for the nine months ended September 30, 2003 and 2002, respectively.
On November 12, 2003, the Company closed on the sale of its North Miami hotel. The hotel was sold for $3.3 million and is included in the accompanying Condensed Consolidated Financial Statements as an asset held for sale. Revenues for this hotel were $0.4 million and $0.3 million for the three months ended September 30, 2003 and 2002, respectively, and $1.2 million and $1.1 million for the nine months ended September 30, 2003 and 2002, respectively. The carrying value of the property, plant and equipment for this hotel as of September 30, 2003 was $2.3 million.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business Summary
Lodgian, Inc. (“Lodgian” or the “Company”) is one of the largest independent owners and operators of full-service hotels in the United States. At September 30, 2003, Lodgian managed a portfolio of 97 hotels (18,265 rooms located in 30 states and Canada). The portfolio included 92 hotels which were wholly-owned, four in which the Company had a controlling financial interest and exercised control and one in which the Company had a minority equity interest. All of the hotels are owned in operating subsidiaries or other legal entities.
Lodgian’s hotels are primarily full-service properties which offer food and beverage services, meeting space and banquet facilities and compete in the mid-price and upscale segments of the lodging industry. Lodgian believes that these segments have more consistent demand generators than other segments of the lodging industry and have recently experienced less development of new properties than other lodging segments, such as limited service, economy and budget segments.
Of the Company’s 97 hotel portfolio, 82 are Crowne Plaza, Holiday Inn and Marriott brand hotels and ten are affiliated with six other nationally recognized hospitality brands. The Company’s strong brand affiliations bring many benefits in terms of guest loyalty and market share premiums.
Chapter 11 proceedings
As previously discussed in the Notes to the unaudited Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q, the Company and substantially all of its subsidiaries which owned hotel properties filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code on December 20, 2001, in the Southern District of New York. The Bankruptcy Court confirmed the Company’s First Amended Joint Plan of Reorganization (the “Joint Plan of Reorganization”) on November 5, 2002 and on November 25, 2002, the Company and entities owning 78 hotels officially emerged from Chapter 11. Pursuant to the terms of the Joint Plan of Reorganization, eight wholly-owned hotels were returned to the lender in January 2003 in satisfaction of outstanding debt obligations and one wholly-owned hotel was returned to the lessor of a capital lease.
Of the Company’s 97 hotel portfolio, eighteen hotels, previously owned by two subsidiaries (Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C.), were not part of the Joint Plan of Reorganization. On April 24, 2003, the Bankruptcy Court confirmed the plan of reorganization relating to these eighteen hotels (the “Impac Plan of Reorganization”). These eighteen hotels remained in Chapter 11 until May 22, 2003, the date on which the Company, through eighteen newly-formed subsidiaries (one for each hotel), finalized an $80 million financing with Lehman Brothers Holdings, Inc. (the “Lehman Financing”). The Lehman Financing was primarily used to settle the remaining amount due to the secured lender of these hotels. The Impac Plan of Reorganization also provided for a pool of funds of approximately $0.3 million to be paid to the general unsecured creditors of the eighteen hotels.
The effects of the Joint Plan of Reorganization were recorded in accordance with the American Institute of Certified Public Accountant’s Statement of Position (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code,” effective November 22, 2002. SOP 90-7 required the application of Fresh Start Accounting. As a result, the Consolidated Financial Statements subsequent to the Company’s emergence from Chapter 11 are those of a new reporting entity (the “Successor”) and are not comparable with the financial statements of the Company prior to the effective date of the Joint Plan of Reorganization (the “Predecessor”).
Discontinued operations
Pursuant to the terms of the Joint Plan of Reorganization, eight wholly-owned hotels were returned to the lender in January 2003 in satisfaction of outstanding debt obligations and one wholly-owned hotel was returned to the lessor of a capital lease. The assets, liabilities and results of operations of these
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nine hotels are reported in Discontinued Operations as of and for the three and nine months ended September 30, 2003 and 2002. Due primarily to the application of fresh start accounting in November 2002, in which these and other assets were adjusted to their respective fair values, there was no gain or loss on this transaction.
In addition, in June 2003, the Company embarked on a plan to sell 14 hotels, 3 land parcels and an office building. Five additional hotels were identified for sale (four during the third quarter of 2003 and one in October 2003). The strategy to sell these assets is part of management’s plans to:
• | pay down the Lehman Financing by at least $20 million to minimize interest costs (see Note 8 to the Condensed Consolidated Financial Statements presented elsewhere in this report); |
• | provide additional funding for the Company’s capital expenditure program to comply with franchisor requirements and improve brand quality; and |
• | dispose of certain hotels which are performing below the standard set by management for the entire portfolio. |
In connection with this strategy, where the carrying values of the assets exceeded the estimated fair values, net of selling costs, the carrying values were reduced and impairment charges were recorded. Fair value is determined using quoted market prices, when available, or other accepted valuation techniques. The impairment charges recorded during the nine months ended September 30, 2003 related to 6 hotels and 2 land parcels and approximated $5.1 million ($1.7 million for the three months ended September 30, 2003). Where the estimated selling prices, net of selling costs, exceeded the carrying values, no adjustments were recorded. Management classifies an asset as held for sale if it expects to dispose of it within one year. While the completion of these dispositions is probable, the sale of these assets is subject to market conditions and there can be no assurance that the Company will finalize the sale of any or all of these assets. In accordance with SFAS No. 144, the results of operations of all assets identified as held for sale (including the related impairment charges) are reported in Discontinued Operations for the three and nine months ended September 30, 2003 and 2002. The assets held for sale and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheet as of September 30, 2003, included in “Item 1. Financial Statements.”
As previously discussed, in October 2003, management committed to a plan to sell one additional hotel. Though there can be no assurance, management plans to dispose of this hotel within the next year, if the market permits. This hotel is included in the Condensed Consolidated Financial Statements, presented elsewhere in this report, as an asset held for use. The net carrying value of the property, plant and equipment of this hotel both as of September 30, 2003 and December 31, 2002 was $1.5 million; related long-term debt approximated $1.7 million both as of September 30, 2003 and December 31, 2002. Total revenues were $0.8 million and $0.6 million for the three months ended September 30, 2003 and 2002, respectively, and $2.1 million and $1.7 million for the nine months ended September 30, 2003 and 2002, respectively.
On November 12, 2003, the Company closed on the sale of its North Miami hotel. The hotel was sold for $3.3 million and is included in the Condensed Consolidated Financial Statements, included elsewhere in this Form 10-Q, as an asset held for sale. Revenues for this hotel were $0.4 million and $0.3 million for the three months ended September 30, 2003 and 2002, respectively, and $1.2 million and $1.1 million for the nine months ended September 30, 2003 and 2002, respectively. The carrying value of the property, plant and equipment for this hotel as of September 30, 2003 was $2.3 million.
Forward-looking statements/risk factors
The following discussion should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related notes thereto included elsewhere herein.
The discussion below and elsewhere in this Form 10-Q includes statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These include management’s expectations, statements that describe anticipated revenues, capital expenditures, other financial items, the Company’s business plans and objectives, the expected impact of competition, government regulation, litigation and other factors on the Company’s
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future financial condition and results of operations. The words “may,” “should,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “plan”, and similar expressions are intended to identify forward-looking statements. Such risks and uncertainties, any one of which may cause actual results to differ materially from those described in the forward-looking statements, include or relate to, among other things:
• | Risks associated with the Company’s ability to maintain its existing franchise affiliations which could affect the Company’s revenue generating capabilities; |
• | The impact of potential litigation and/or governmental inquiries and investigations involving the Company; |
• | The effect of competition and the economy on the Company’s ability to maintain margins on existing operations, including uncertainties relating to competition; |
• | The Company’s ability to generate sufficient cash flows from operations to meet its obligations; |
• | The effectiveness of changes in management and the ability of the Company to retain qualified individuals to serve in senior management positions; |
• | Risks associated with reductions in hotel values which are dependent upon the successful operation of the hotels; |
• | Risks associated with increases in the cost of debt; |
• | Risks associated with the holders of the Company’s common stock exercising significant control over the Company and selling large blocks of shares; |
• | Risks associated with the Company’s ability to meet the continuing listing requirements of the American Stock Exchange; |
• | Risks associated with self-insured claims escalating beyond expectations; |
• | Risks associated with the Company’s ability to comply with the terms of its loan agreements; |
• | Risks associated with the Company’s short operating history since the effective date of its Joint Plan of Reorganization; |
• | Risks associated with environmental, state and federal regulations; |
• | Risks associated with normal collective bargaining contract negotiations; |
• | Risks associated with the Company’s high level of encumbered assets which could affect its ability to access additional working capital; and |
• | Risks as a result of the short time that the public market for the Company’s new securities has existed. |
Many of these factors are not within the Company’s control and readers are cautioned not to put undue reliance on these forward looking statements.
General Overview
Management believes that the results of operations in the hotel industry are best explained by three key performance measures: occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) levels. These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns since most of the Company’s hotels experience lower occupancy levels in the fall and winter months (November through February) which may result in lower revenues, lower net income and less cash flow during these months. RevPAR is derived by dividing room revenues by the number of available room nights for a given period or, alternatively, by multiplying the occupancy by the ADR.
Presented in the tables below are hotel data, by category (first table) and by geographic region (second table) for the three and nine months ended September 30, 2003 and 2002 (shown for those hotels owned as of September 30, 2003):
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Capital expenditure | Three months ended | Nine months ended | ||||||||||||||||||||||||
Nine months ended | ||||||||||||||||||||||||||
September 30, 2003 | September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | ||||||||||||||||||||||
Upper Upscale | (in thousands $) | Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||
Number of properties | - continuing | $ | 12,545 | 4 | 4 | 4 | 4 | |||||||||||||||||||
Number of rooms | 825 | 825 | 825 | 825 | ||||||||||||||||||||||
Occupancy | 62.9 | % | 69.8 | % | 60.7 | % | 67.4 | % | ||||||||||||||||||
Average daily rate | $ | 90.69 | $ | 93.58 | $ | 90.74 | $ | 94.01 | ||||||||||||||||||
RevPAR | $ | 57.01 | $ | 65.32 | $ | 55.09 | $ | 63.32 | ||||||||||||||||||
Upscale | ||||||||||||||||||||||||||
Number of properties | - continuing | 1,792 | 18 | 18 | 18 | 18 | ||||||||||||||||||||
Number of rooms | 3,156 | 3,156 | 3,156 | 3,156 | ||||||||||||||||||||||
Occupancy | 66.7 | % | 67.6 | % | 67.1 | % | 68.4 | % | ||||||||||||||||||
Average daily rate | $ | 80.54 | $ | 80.42 | $ | 83.16 | $ | 83.77 | ||||||||||||||||||
RevPAR | $ | 53.75 | $ | 54.39 | $ | 55.79 | $ | 57.29 | ||||||||||||||||||
Midscale with Food & Beverage | ||||||||||||||||||||||||||
Number of properties | - continuing | 7,756 | 44 | 43 | 44 | 43 | ||||||||||||||||||||
- discontinued | 818 | 15 | 16 | 15 | 16 | |||||||||||||||||||||
Number of rooms | 11,805 | 11,655 | 11,805 | 11,655 | ||||||||||||||||||||||
Occupancy | 64.7 | % | 63.8 | % | 58.8 | % | 60.3 | % | ||||||||||||||||||
Average daily rate | $ | 72.93 | $ | 72.94 | $ | 71.26 | $ | 71.31 | ||||||||||||||||||
RevPAR | $ | 47.19 | $ | 46.53 | $ | 41.91 | $ | 43.03 | ||||||||||||||||||
Midscale without Food & Beverage | ||||||||||||||||||||||||||
Number of properties | - continuing | 2,149 | 9 | 8 | 9 | 8 | ||||||||||||||||||||
- discontinued | 33 | 1 | — | 1 | — | |||||||||||||||||||||
Number of rooms | 1,282 | 1,047 | 1,282 | 1,047 | ||||||||||||||||||||||
Occupancy | 58.1 | % | 57.6 | % | 54.2 | % | 58.4 | % | ||||||||||||||||||
Average daily rate | $ | 57.04 | $ | 54.50 | $ | 57.70 | $ | 56.21 | ||||||||||||||||||
RevPAR | $ | 33.12 | $ | 31.41 | $ | 31.25 | $ | 32.81 | ||||||||||||||||||
Independent Hotels | ||||||||||||||||||||||||||
Number of properties | - continuing | 1,577 | 3 | 5 | 3 | 5 | ||||||||||||||||||||
- discontinued | 1,463 | 2 | 2 | 2 | 2 | |||||||||||||||||||||
Number of rooms | 957 | 1,342 | 957 | 1,342 | ||||||||||||||||||||||
Occupancy | 37.0 | % | 51.5 | % | 40.0 | % | 46.2 | % | ||||||||||||||||||
Average daily rate | $ | 66.83 | $ | 66.65 | $ | 71.80 | $ | 74.08 | ||||||||||||||||||
RevPAR | $ | 24.73 | $ | 31.13 | $ | 28.69 | $ | 34.22 | ||||||||||||||||||
All Hotels | ||||||||||||||||||||||||||
Number of properties | - continuing | 25,819 | 78 | 78 | 78 | 78 | ||||||||||||||||||||
- discontinued | 2,314 | 18 | 18 | 18 | 18 | |||||||||||||||||||||
Number of rooms | 18,025 | 18,025 | 18,025 | 18,025 | ||||||||||||||||||||||
Occupancy | 63.0 | % | 63.1 | % | 59.0 | % | 60.9 | % | ||||||||||||||||||
Average daily rate | $ | 73.92 | $ | 74.07 | $ | 73.68 | $ | 74.23 | ||||||||||||||||||
RevPAR | $ | 46.59 | $ | 46.74 | $ | 43.49 | $ | 45.20 |
Upper Upscale: Hilton and Marriott | ||
Upscale: Courtyard by Marriott, Crowne Plaza, Radisson and Residence Inn | ||
Midscale with Food & Beverage: Clarion, Doubletree Club, Four Points, Holiday Inn, Holiday Inn Select, Holiday Inn SunSpree Resort and Quality Inn | ||
Midscale without Food & Beverage: Fairfield Inn and Holiday Inn Express |
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Capital expenditure | Three months ended | Nine months ended | |||||||||||||||||||||||
Nine months ended | |||||||||||||||||||||||||
September 30, 2003 | September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | |||||||||||||||||||||
Northeast Region | (in thousands $) | Successor | Predecessor | Successor | Predecessor | ||||||||||||||||||||
Number of properties | - continuing | $ | 5,763 | 29 | 29 | 29 | 29 | ||||||||||||||||||
- discontinued | 192 | 7 | 7 | 7 | 7 | ||||||||||||||||||||
Number of rooms | 6,771 | 6,771 | 6,771 | 6,771 | |||||||||||||||||||||
Occupancy | 70.9 | % | 71.8 | % | 62.4 | % | 64.2 | % | |||||||||||||||||
Average daily rate | $ | 82.75 | $ | 80.60 | $ | 80.30 | $ | 78.78 | |||||||||||||||||
RevPAR | $ | 58.70 | $ | 57.85 | $ | 50.08 | $ | 50.60 | |||||||||||||||||
Southeast Region | |||||||||||||||||||||||||
Number of properties | - continuing | 5,536 | 26 | 26 | 26 | 26 | |||||||||||||||||||
- discontinued | 1,737 | 8 | 8 | 8 | 8 | ||||||||||||||||||||
Number of rooms | 5,794 | 5,794 | 5,794 | 5,794 | |||||||||||||||||||||
Occupancy | 58.8 | % | 57.5 | % | 58.0 | % | 58.5 | % | |||||||||||||||||
Average daily rate | $ | 66.68 | $ | 67.00 | $ | 67.39 | $ | 68.81 | |||||||||||||||||
RevPAR | $ | 39.20 | $ | 38.53 | $ | 39.08 | $ | 40.22 | |||||||||||||||||
Midwest Region | |||||||||||||||||||||||||
Number of properties | - continuing | 10,340 | 16 | 16 | 16 | 16 | |||||||||||||||||||
- discontinued | 385 | 3 | 3 | 3 | 3 | ||||||||||||||||||||
Number of rooms | 4,141 | 4,141 | 4,141 | 4,141 | |||||||||||||||||||||
Occupancy | 56.3 | % | 56.9 | % | 53.6 | % | 57.1 | % | |||||||||||||||||
Average daily rate | $ | 67.82 | $ | 71.23 | $ | 68.90 | $ | 71.37 | |||||||||||||||||
RevPAR | $ | 38.15 | $ | 40.51 | $ | 36.96 | $ | 40.76 | |||||||||||||||||
West Region | |||||||||||||||||||||||||
Number of properties | - continuing | 4,180 | 7 | 7 | 7 | 7 | |||||||||||||||||||
Number of rooms | 1,319 | 1,319 | 1,319 | 1,319 | |||||||||||||||||||||
Occupancy | 62.4 | % | 62.8 | % | 63.2 | % | 66.5 | % | |||||||||||||||||
Average daily rate | $ | 69.66 | $ | 72.23 | $ | 78.25 | $ | 80.28 | |||||||||||||||||
RevPAR | $ | 43.47 | $ | 45.33 | $ | 49.45 | $ | 53.36 | |||||||||||||||||
All Hotels | |||||||||||||||||||||||||
Number of properties | - continuing | 25,819 | 78 | 78 | 78 | 78 | |||||||||||||||||||
- discontinued | 2,314 | 18 | 18 | 18 | 18 | ||||||||||||||||||||
Number of rooms | 18,025 | 18,025 | 18,025 | 18,025 | |||||||||||||||||||||
Occupancy | 63.0 | % | 63.1 | % | 59.0 | % | 60.9 | % | |||||||||||||||||
Average daily rate | $ | 73.92 | $ | 74.07 | $ | 73.68 | $ | 74.23 | |||||||||||||||||
RevPAR | $ | 46.59 | $ | 46.74 | $ | 43.49 | $ | 45.20 |
Northeast: Canada, Connecticut, Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania, Vermont, West Virginia | ||
Southeast: Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee | ||
Midwest: Arkansas, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Oklahoma, Texas | ||
West: Arizona, California, Colorado, New Mexico |
In addition to categorizing its hotels by categories and by regions, management also classifies its hotels as “stabilized” and “non-stabilized.” Management defines stabilized hotels as those hotels included in the Company’s portfolio on September 30, 2003 which:
• | were not held for sale (as of September 30, 2003); |
• | were not undergoing major renovation during 2002 or 2003 (major renovation is defined as a renovation which in the aggregate exceeded $5,000 per room); or |
• | were not subject to flag changes during 2002 or 2003. |
Room data for the stabilized hotels were as follows:
Capital expenditure | Three months ended | Nine months ended | ||||||||||||||||||||
Nine months ended | ||||||||||||||||||||||
September 30, 2003 | September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | ||||||||||||||||||
(in thousands $) | Successor | Predecessor | Successor | Predecessor | ||||||||||||||||||
Number of properties | $ | 5,156 | 59 | 59 | 59 | 59 | ||||||||||||||||
Number of rooms | 10,723 | 10,723 | 10,723 | 10,723 | ||||||||||||||||||
Occupancy | 68.2 | % | 68.6 | % | 64.8 | % | 66.4 | % | ||||||||||||||
Average daily rate | $ | 75.95 | $ | 76.76 | $ | 75.91 | $ | 76.94 | ||||||||||||||
RevPAR | $ | 51.81 | $ | 52.67 | $ | 49.15 | $ | 51.07 |
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Revenues. Revenues are comprised of room, food and beverage and other revenues. Room revenues are derived from guest room rentals, whereas food and beverage revenues primarily include sales from hotel restaurants, room service, hotel catering and meeting room rentals. Other revenues include charges for guests’ long-distance telephone service, laundry and parking. Approximately 75% of total revenues are derived from guest room rentals. Transient demand generally accounts for approximately 70% of guest room rentals, group demand makes up approximately 23% while contract demand accounts for the remaining 7%.
Operating Expenses. Operating expenses are comprised of direct expenses; general, administrative and other expenses; and depreciation and amortization. Direct expenses, including rooms, food and beverage and other operations, reflect expenses directly related to hotel operations. These expenses are variable with available rooms and occupancy, but contain fixed components. General, administrative and other expenses primarily represent property level expenses related to general operations such as marketing, utilities, repairs and maintenance and other property administrative costs. General, administrative and other expenses also include corporate overhead (such as accounting services, legal and professional fees, information technology and executive management) which are generally fixed. Also included in general, administrative and other expenses for the three and nine months ended September 30, 2003 are expenses relating to post-emergence Chapter 11 activities.
Results of Operations
The discussion of results of operations, income taxes, liquidity and capital resources that follows is derived from the Company’s unaudited Condensed Consolidated Financial Statements set forth in “Item I. Financial Statements” included in this Form 10-Q (“the Consolidated Financial Statements”) and should be read in conjunction with such financial statements and notes thereto.
At September 30, 2003, the Company managed a portfolio of 97 hotels. Of the 97 hotels, 92 were wholly-owned, four were owned in joint venture partnerships in which the Company had a controlling financial interest and exercised control and one was owned in a joint venture partnership in which the Company had a minority equity interest.
At September 30, 2002, the Company managed a portfolio of 106 hotels. Of the 106 hotels, 101 were wholly-owned, four were owned in joint venture partnerships in which the Company had a 50% or greater financial interest and one was owned in a joint venture partnership in which the Company had a minority equity interest.
Except for the hotel in which the Company had a minority equity interest (which is accounted for using the equity method of accounting), the assets, liabilities and results of operations of all the hotels are included in the Condensed Consolidated Financial Statements, included I “Item 1. Financial Statements.”
Reported in Continuing Operations for the three and nine months ended September 30, 2003, are 78 of the 97 hotels; 18 hotels are included in Discontinued Operations along with 3 land parcels and one office building; one hotel is not consolidated.
Reported in Continuing Operations for the three and nine months ended September 30, 2002, are 78 of the 106 hotels; 27 hotels are included in Discontinued Operations along with 3 land parcels and one office building; one hotel is not consolidated. The reduction in hotels from 106 to 97 is a result of the return of eight hotels to the lender and one hotel to the lessor of a capital lease in January 2003.
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Three Months Ended September 30, 2003 (“Third Quarter 2003”) Compared to the Three Months Ended September 30, 2002 (“Third Quarter 2002”) and Nine Months Ended September 30, 2003 (“2003 Period”) Compared to the Nine Months Ended September 30, 2002 (“2002 Period”)
Continuing Operations -
Revenues
Third Quarter 2003 compared to Third Quarter 2002
Revenues for the 78 hotels reported in Continuing Operations were $82.6 million for the Third Quarter 2003, a 2.2% decrease from revenues of $84.5 million for the Third Quarter 2002. RevPAR for these hotels was $48.51 and $49.36 for the Third Quarter 2003 and the Third Quarter 2002, respectively, a decline of 1.7%. This decrease was due to declines in both occupancy (declined by 0.9%) and ADR (declined by 0.8%). Though there was some rebound in the economy in the Third Quarter 2003, full recovery to previous travel patterns was still not realized. Also, the Company’s revenues suffered from the large scale renovations which were being performed at some of its hotels, particularly three of the four hotels in the upper upscale category. Stabilized RevPar for the Third Quarter 2003 was $51.81 compared with Stabilized RevPar for the Third Quarter 2002 of $52.67, a decline of 1.6%. Stabilized RevPar represents RevPar for the group of hotels which were not under renovation in 2002 or 2003, were not subject to flag changes in 2002 or 2003 and were not held for sale at September 30, 2003.
2003 Period compared to 2002 Period
The factors described above also affected revenues for the 78 hotels reported in Continuing Operations for the 2003 Period. Revenues for these hotels for the 2003 Period were $239.6 million, a 4.7% decrease from revenues of $251.3 million for the 2002 Period. RevPAR for these hotels was $46.23 and $48.27 for the 2003 Period and the 2002 Period, respectively, a decline of 4.3%. This decrease was due to declines in both occupancy (declined by 3.1%) and ADR (declined by 1.2%). Stabilized RevPar (defined above) for the 2003 Period was $49.15 compared with Stabilized RevPar for the 2002 Period of $51.07, a decline of 3.8%.
Direct Operating Expenses
Third Quarter 2003 compared to Third Quarter 2002
Direct operating expenses for the 78 hotels reported in Continuing Operations were $32.1 million (38.9% of direct revenues) for the Third Quarter 2003 and $32.5 million (38.5% of direct revenues) for the Third Quarter 2002. The 1.2% decrease was primarily driven by the reduction in variable expenses related to the reduction in revenues. Direct operating expenses as a percentage of revenues were higher in the Third Quarter 2003 than they were in the Third Quarter 2002 as result of lower margins in the rooms and telephone departments where expenses could not be reduced proportionately with revenues, due to fixed expenses or the need to maintain a minimum level of service. In the Third Quarter 2003, rooms expenses represented 28.3% of room revenues compared with 27.4% in the Third Quarter 2002. Telephone expenses represented 91.9% of telephone revenues in the Third Quarter 2003 whereas in the Third Quarter 2002, they represented 74.5%.
2003 Period compared to 2002 Period
Also primarily driven by the reduction in revenues, direct operating expenses for the 2003 Period for the 78 hotels reported in Continuing Operations decreased by $3.4 million (3.5%), from $96.1 million (38.2% of direct revenues) in the 2002 Period to $92.7 million (38.7% of direct revenues) in the 2003 Period. As in the Third Quarter 2003, direct operating expenses as a percentage of revenues were higher in the 2003 Period than they were in the 2002 Period as result of lower margins in the rooms and telephone departments where expenses could not be reduced proportionately with revenues, due to fixed expenses or the need to maintain a minimum level of service. In the 2003 Period, rooms expenses represented 28.2% of room revenues compared with 27.0% in the 2002 Period. Telephone expenses represented 86.7% of telephone revenues in the 2003 Period whereas in the 2002 Period, they represented 70.9%.
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General, administrative and other expenses
Third Quarter 2003 compared to Third Quarter 2002
General, administrative and other expenses were $34.2 million for the Third Quarter 2003 and $32.5 million for the Third Quarter 2002. Contributing to this increase of $1.7 million were insurance ($0.5 million), utilities ($0.4 million), and repairs and maintenance ($0.3 million). Post-emergence expenses of $0.3 million related to the Chapter 11 filing for the 78 hotels that emerged from Chapter 11 in November 2002 and the nine properties that were disposed of in early January 2003 also contributed to the increase in general, administrative and other expenses. Post-emergence expenses include legal and professional fees related to the claims reconciliation process as well as fees payable to the United States Trustee of the Department of Justice, which are required as part of the reorganization process. These expenses were reported as reorganization items for the Third Quarter 2002.
2003 Period compared to 2002 Period
General, administrative and other expenses were $104.7 million for the 2003 Period, an increase of $6.2 million over the 2002 Period ($98.5 million). Insurance, utilities, ground rent, property and other taxes and severance payments accounted for increases of $1.9 million, $1.4 million, $0.4 million, $0.1 million and $0.8 million, respectively. In addition, post-emergence expenses of $3.6 million contributed to the increase in general, administrative and other expenses. These increases were partially offset by reduced property level general and administrative expenses, franchise fees and equipment rentals which decreased $1.3 million in aggregate, primarily as a result of the decline in revenues. The remaining decrease is primarily due to a decrease in corporate overhead which are related to efforts made to reduce legal and professional fees, rental of office space and other corporate overhead.
Depreciation and amortization expense
As a result of the write-down of fixed assets recorded on the implementation of fresh start reporting on November 22, 2002, depreciation for both the Third Quarter 2003 and the 2003 Period were lower than the equivalent periods in 2002.
Third Quarter 2003 compared to Third Quarter 2002 — Depreciation and amortization expense was $7.7 million in the Third Quarter 2003 and $12.1 million in the Third Quarter 2002.
2003 Period compared to 2002 Period —Depreciation and amortization expense was $22.8 million in the 2003 Period and $34.6 million in the 2002 Period.
Preferred stock dividends
Preferred dividends represent the dividends due on November 21, 2003 on the Company’s Mandatorily Redeemable 12.25% Cumulative Preferred Stock (“Preferred Stock”). The Preferred Stock was issued upon the Company’s emergence from Chapter 11. Pursuant to SFAS No. 150, the dividends accrued from the date of adoption (July 1, 2003 for the Company) are reported in interest expense while the dividends accrued for the pre-adoption period (January 1, 2003 to June 30, 2003) are reflected as deductions from retained earnings. Dividends accrued for the Third Quarter 2003 were $4.0 million; dividends accrued for the period January 1, 2003 to June 30, 2003 were $7.6 million.
Interest expense (excluding preferred stock dividends)
The table below shows the composition of interest expense (continuing and discontinued operations):
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Three months ended | Nine months ended | |||||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | |||||||||||||||
(Unaudited in thousands) | ||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||
Continuing operations: | ||||||||||||||||||
Interest expense, reported | $ | 7,692 | $ | 8,386 | $ | 20,962 | $ | 24,214 | ||||||||||
Less amortization of loan fees | (1,217 | ) | — | (2,588 | ) | — | ||||||||||||
6,475 | 8,386 | 18,374 | 24,214 | |||||||||||||||
Discontinued operations: | ||||||||||||||||||
Interest expense, reported | 1,293 | 121 | 2,521 | 370 | ||||||||||||||
Less amortization of loan fees | (394 | ) | — | (617 | ) | — | ||||||||||||
899 | 121 | 1,904 | 370 | |||||||||||||||
Total interest expense, net of capitalized interest, without amortization of loan fees | $ | 7,374 | $ | 8,507 | $ | 20,278 | $ | 24,584 | ||||||||||
Third Quarter 2003 compared to Third Quarter 2002 —Interest expense (continuing and discontinued operations) was $7.4 million in the Third Quarter 2003 compared to $8.5 million for the Third Quarter 2002. Amortization of financing fees was nil for the Third Quarter 2002 since there were no deferred loan fees in the Third Quarter 2002. The reduction in interest expense was primarily attributable to a reduction in the cost of debt offset by interest costs in relation to the Lehman Financing. Average LIBOR was 1.125% and 1.79% for the Third Quarter 2003 and Third Quarter 2002, respectively, and the interest spread on the Company’s variable rate debt was approximately 2% less than it was during 2002. The reduction in interest expense due to reductions in interest rates was offset by an increase of approximately $1.8 million of interest expense related to the Lehman Financing which replaced debt on which the Company paid no interest between December 20, 2001 and May 22, 2003. With Bankruptcy Court approval, the Company had ceased paying interest on certain of its debts while it was in Chapter 11. Increases in capitalized interest costs ($0.3 million) also contributed to the reduction in interest expense. The increase in capitalized interest costs is a result of higher renovation activity.
2003 Period compared to 2002 Period —Interest expense (continuing and discontinued operations) was $20.3 million in the 2003 Period and $24.6 million in the 2002 Period. Amortization of financing fees was $2.6 million in the 2003 Period (nil for the 2002 Period). The reduction in interest expense was primarily attributable to a reduction in the cost of debt offset by interest costs in relation to the Lehman Financing. Average LIBOR was 1.42% and 2.05% for the 2003 Period and the 2002 Period, respectively. Also, the interest spread on the Company’s variable rate debt was approximately 2% less than it was during the 2002 Period. In addition, capitalized interest costs for the 2003 Period increased $0.5 million over the 2002 Period. The reduction in interest expense due to reductions in interest rates and increases in capitalized interest costs were offset by an increase of approximately $2.2 million of interest expense related to the Lehman Financing which replaced debt on which the Company paid no interest between December 20, 2001 and May 22, 2003. With Bankruptcy Court approval, the Company ceased paying interest on certain of its debts while it was in Chapter 11.
Interest income and other
Interest income and other for the 2002 Period consisted primarily of gain on extinguishment of debt of $4.4 million. This gain related to a discharge of indebtedness (principal plus accrued interest) in respect of Macon Hotel Associates (a subsidiary of the Company) as a result of a Satisfaction and Release Agreement between Macon Hotel Associates and one of its lenders. The remaining portion of interest income and other for the 2002 Period consists of interest income of $0.5 million which was higher in the 2002 Period than the interest for the 2003 Period as a result of interest on excess cash accumulated while the Company was in Chapter 11. Interest income for the 2003 Period was $0.2 million.
Reorganization items
For the 2003 Period, reorganization items included only those Chapter 11 legal and professional costs directly attributable to the Impac Debtors, prior to their emergence from Chapter 11 on May 22, 2003, as well as extension fees paid to the secured lender of the Impac Debtors pursuant to the settlement agreement. For the Third Quarter 2002 and the 2002 Period, the Company recorded all costs incurred as a result of the Chapter 11 filing (mainly legal and professional fees) as reorganization items.
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Third Quarter 2003 compared to Third Quarter 2002 —Reorganization items were $3.4 million for the Third Quarter 2002 (nil for the Third quarter 2003 since all entities emerged from Chapter 11 prior to the Third quarter 2003).
2003 Period compared to 2002 Period —Reorganization items were $2.0 million for the 2003 Period compared to $11.2 million for the 2002 Period.
Minority interests
Minority interests relate to the minority share of income or loss of certain joint venture partnerships and are related to the operating results of the respective hotels.
Third Quarter 2003 compared to Third Quarter 2002 —The portion of losses attributable to the minority partners was $99,000 and $1.3 million for the Third Quarter 2003 and the Third Quarter 2002, respectively.
2003 Period compared to 2002 Period —The portion of income attributable to the minority partners was $118,000 for the 2003 Period and the portion of losses attributable to the minority partners for the 2002 Period was $17,000.
Discontinued Operations
As discussed above, reported in Discontinued Operations for the three and nine months ended September 30, 2003, are 18 hotels, 3 land parcels and one office building and reported in Discontinued Operations for the three and nine months ended September 30, 2002, are 27 hotels along with 3 land parcels and one office building. The reduction in the hotels reported in this category, from 27 to 18, is a result of the return of eight hotels to the lender and one hotel to the lessor of a capital lease in January 2003. The loss from Discontinued Operations for the Third Quarter 2003 was $0.6 million and the loss for the Third Quarter 2002 was $1.6 million. For the 2003 Period and 2002 Period, the loss was $7.4 million and $6.8 million, respectively. The Condensed Combined Statement of Operations for the properties classified in Discontinued Operations is presented below along with a discussion of the changes between the periods.
Three months ended | Nine months ended | ||||||||||||||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | ||||||||||||||||||||||||
(Unaudited in thousands) | |||||||||||||||||||||||||||
Successor | Predecessor | Successor | Predecessor | ||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||
Rooms | $ | 14,012 | $ | 17,923 | $ | 35,170 | $ | 49,216 | |||||||||||||||||||
Food and beverage | 2,789 | 4,144 | 8,094 | 12,500 | |||||||||||||||||||||||
Other | 519 | 777 | 1,552 | 2,411 | |||||||||||||||||||||||
(1 | ) | 17,320 | 22,844 | 44,816 | 64,127 | ||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||
Direct: | |||||||||||||||||||||||||||
Rooms | 3,872 | 5,491 | 10,388 | 15,397 | |||||||||||||||||||||||
Food and beverage | 2,264 | 3,447 | 6,411 | 10,134 | |||||||||||||||||||||||
Other | 379 | 570 | 1,126 | 1,735 | |||||||||||||||||||||||
(2 | ) | 6,515 | 9,508 | 17,925 | 27,266 | ||||||||||||||||||||||
10,805 | 13,336 | 26,891 | 36,861 | ||||||||||||||||||||||||
General, administrative and other | (3 | ) | 8,165 | 10,442 | 23,515 | 30,547 | |||||||||||||||||||||
Depreciation and amortization | (4 | ) | 274 | 3,385 | 3,160 | 9,819 | |||||||||||||||||||||
Impairment of long-lived assets | (5 | ) | 1,680 | — | 5,128 | — | |||||||||||||||||||||
Other operating expenses | 10,119 | 13,827 | 31,803 | 40,366 | |||||||||||||||||||||||
686 | (491 | ) | (4,912 | ) | (3,505 | ) | |||||||||||||||||||||
Interest expense | (6 | ) | (1,293 | ) | (121 | ) | (2,521 | ) | (370 | ) | |||||||||||||||||
Loss before income taxes and reorganization items | (607 | ) | (612 | ) | (7,433 | ) | (3,875 | ) | |||||||||||||||||||
Reorganization items | (7 | ) | — | (1,025 | ) | — | (2,970 | ) | |||||||||||||||||||
Loss before income taxes | (607 | ) | (1,637 | ) | (7,433 | ) | (6,845 | ) | |||||||||||||||||||
Provision for income taxes | — | — | — | — | |||||||||||||||||||||||
Net loss | $ | (607 | ) | $ | (1,637 | ) | $ | (7,433 | ) | $ | (6,845 | ) | |||||||||||||||
(1) | The reduction in revenues was due primarily to the return of 8 properties to the lenders and one property to the lessor of a capital lease in January 2003. Total revenues for these 9 properties were $6.0 million for the Third Quarter 2002 and $17.5 million for the 2002 Period (revenues for these properties were immaterial during 2003). The remaining group of 18 properties benefited |
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from the slight rebound in the industry in the Third Quarter 2003 and recorded a 3.0% increase in revenues for the quarter but a 3.9% reduction in revenues for the 2003 Period. This reduction in revenues was due to the same factors discussed above with respect to revenues from Continuing Operations. | ||
(2) | The reduction in direct operating expenses was primarily related to the reduction in revenues but was also impacted by higher margins in the rooms and food and beverage departments. | |
(3) | General, administrative and other expenses for the Third Quarter 2003 were $2.3 million lower than the Third Quarter 2002. The elimination of the 9 properties from the portfolio caused a reduction of $2.9 million which was offset by higher property level expenses (franchise fees, utilities, insurance and advertising and promotion contributed an aggregate $0.5 million to the increase). General, administrative and other expenses for the 2003 Period were $7.0 million lower than the 2002 Period. The elimination of the 9 properties from the portfolio caused a reduction of $8.5 million which was offset by higher property level expenses (franchise fees, utilities, insurance and advertising and promotion contributed an aggregate $1.2 million to the increase). | |
(4) | Depreciation and amortization for the Third Quarter 2003 decreased $3.1 million compared to the Third Quarter 2002. For the 2003 Period, depreciation and amortization decreased $6.7 million compared with the 2002 Period. Of these reductions, the elimination of the 9 properties from the portfolio accounted for $1.1 million and $2.7 million, respectively. The remaining reductions were due to the reduction in the carrying values of fixed assets which occurred upon the implementation of fresh start accounting on November 22, 2002. | |
(5) | The impairment of long-lived assets ($1.7 million and $5.1 million recorded during the Third Quarter 2003 and the 2003 Period, respectively) was recorded to reduce the carrying values of six hotels and two land parcels to their estimated selling prices less estimated costs to sell. In accordance with SFAS No. 144, where the estimated selling prices exceeded the carrying values, no gains were recorded. | |
(6) | Interest expense for the Third Quarter 2003 increased $1.2 million compared to the Third Quarter 2002. For the 2003 Period, interest expense increased by $2.2 million compared with the 2002 Period (refer to the discussion in continuing operations above). | |
(7) | Reorganization expenses were $1.0 million and $3.0 million for the Third Quarter 2002 and the 2002 Period. For the Third Quarter 2002 and the 2002 Period, the Company recorded all costs incurred as a result of the Chapter 11 filing (mainly legal and professional fees) as reorganization items. |
Earnings before interest, taxes, depreciation and amortization (EBITDA)
In accordance with generally accepted accounting principles (GAAP), property, plant and equipment are depreciated over their estimated useful lives and deferred loan and franchise fees are amortized over the lives of the applicable loan and franchise period, respectively. Depreciation and amortization (which are non-cash items) represent significant expenses for the Company as a result of the high proportion of the Company’s assets which are represented by long-lived assets (property, plant and equipment represent approximately 78.3% of total assets while deferred financing and franchise fees represent approximately 2.3% of total assets). Management, therefore, believes that EBITDA provides pertinent information to investors as an additional indicator of the Company’s performance, its capacity to incur and service debt, and its capacity to fund capital expenditures and expansion. EBITDA is also a widely regarded industry measure of lodging performance used in the assessment of hotel property values. EBITDA is a non-GAAP measure and should not be used as a substitute for measures such as net income (loss), cash flows from operating activities, or other measures computed in accordance with GAAP.
The following table presents EBITDA (a non-GAAP measurement) for the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002 and provides a reconciliation with net loss (a GAAP measure).
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(Unaudited in thousands) | |||||||||||||||||||
Three months ended | Nine months ended | ||||||||||||||||||
September 30, 2003 | September 30, 2002 | September 30, 2003 | September 30, 2002 | ||||||||||||||||
Successor | Predecessor | Successor | Predecessor | ||||||||||||||||
Continuing: | |||||||||||||||||||
Loss — continuing operations | $ | (3,039 | ) | $ | (2,920 | ) | $ | (7,737 | ) | $ | (8,679 | ) | |||||||
Depreciation and amortization | 7,707 | 12,084 | 22,765 | 34,633 | |||||||||||||||
Interest income and other | (113 | ) | (176 | ) | (321 | ) | (4,865 | ) | |||||||||||
Interest expense | 7,692 | 8,386 | 20,962 | 24,214 | |||||||||||||||
Preferred stock dividends | 4,027 | — | 4,027 | — | |||||||||||||||
Minority interests | (99 | ) | (1,348 | ) | 118 | (17 | ) | ||||||||||||
Provision for income taxes — continuing operations | 76 | 76 | 227 | 227 | |||||||||||||||
EBITDA | $ | 16,251 | $ | 16,102 | $ | 40,041 | $ | 45,513 | |||||||||||
All (continuing & discontinued): | |||||||||||||||||||
Net loss | $ | (3,646 | ) | $ | (4,557 | ) | $ | (15,170 | ) | $ | (15,524 | ) | |||||||
Depreciation, amortization and impairment of long-lived assets | 9,661 | 15,469 | 31,053 | 44,452 | |||||||||||||||
Interest income and other | (113 | ) | (176 | ) | (321 | ) | (4,865 | ) | |||||||||||
Interest expense | 6,399 | 8,386 | 20,962 | 24,214 | |||||||||||||||
Preferred stock dividends | 4,027 | — | 4,027 | — | |||||||||||||||
Minority interests | (99 | ) | (1,348 | ) | 118 | (17 | ) | ||||||||||||
Provision for income taxes — continuing operations | 76 | 76 | 227 | 227 | |||||||||||||||
EBITDA | $ | 16,305 | $ | 17,850 | $ | 40,896 | $ | 48,487 | |||||||||||
EBITDA, as presented above, is after the deduction of expenses relating to the Chapter 11 proceedings (incurred during and after the proceedings). For the Third Quarter 2003 and 2002, these expenses were, respectively, $0.3 million (reported in general, administrative and other) and $3.4 million (reported in reorganization items). For the 2003 Period and the 2002 Period, these expenses approximated $5.6 million and $11.2 million, respectively. Of the $5.6 million for the 2003 Period, $2.0 million was incurred during the Chapter 11 proceedings (reported in reorganization items) and $3.6 million was incurred after the Chapter 11 proceedings (included in general, administrative and other).
Liquidity and Capital Resources
As more fully discussed above, the Bankruptcy Court confirmed the Company’s Joint Plan of Reorganization on November 5, 2002 and on November 25, 2002, the Company and entities owning 78 hotels officially emerged from Chapter 11.
Pursuant to the terms of the Joint Plan of Reorganization, eight wholly-owned hotels were returned to the lender in January 2003 in satisfaction of outstanding debt obligations and one wholly-owned hotel was returned to the lessor of a capital lease. As a result of the surrender of these nine hotels, long-term debt approximating $15.9 million was extinguished. The results of operations for these nine hotels have been included in Discontinued Operations in the Condensed Consolidated Statements of Operations.
Eighteen hotels, previously owned by two subsidiaries (Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C.), were not part of the Joint Plan of Reorganization. On April 24, 2003, the Bankruptcy Court confirmed the Impac Plan of Reorganization which related to these eighteen hotels. These eighteen hotels remained in Chapter 11 until May 22, 2003, the date on which the Company, through eighteen newly-formed subsidiaries (one for each hotel), finalized an $80 million financing with Lehman Brothers Holdings, Inc. (the “Lehman Financing”). The Lehman Financing was primarily used to settle the remaining amount due to the secured lender of these hotels. The Impac Plan of Reorganization also provided for a pool of funds (approximately $0.3 million) to be paid to the general unsecured creditors of the eighteen hotels.
Debt, contractual obligations and licenses:
Set forth below, by debt pool, is a summary of the Company’s long-term debt along with the applicable interest rates and the related carrying values of the property, plant and equipment which collateralize the long-term debt.
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September 30, 2003 | |||||||||||||||
Number | Property, plant | Long-term | Interest | ||||||||||||
of Hotels | and equipment, net | obligations | Rates | ||||||||||||
Exit financing: | |||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Senior | $ | 216,684 | LIBOR plus 2.36% | ||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Mezzanine | 83,524 | LIBOR plus 8.2546% | |||||||||||||
(through November 30, 2003) | |||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Total | 56 | 411,215 | 300,208 | ||||||||||||
Computer Share Trust Company of Canada | 1 | 13,617 | 7,245 | 7.88% | |||||||||||
Lehman financing: | |||||||||||||||
Lehman Brothers Holdings, Inc. — May 22, 2003 | 18 | 74,808 | 79,746 | Higher of LIBOR plus 5.25% or 7.25% | |||||||||||
Working capital loan: | |||||||||||||||
OCM Real Estate Opportunities Fund II — Revolver | — | 4,320 | 2,000 | 10.00% | |||||||||||
Other financing: | |||||||||||||||
Column Financial, Inc. — January 1, 1995 | 9 | 62,132 | 27,824 | 10.59% | |||||||||||
Lehman Brothers Holdings, Inc. — June 30, 1997 | 5 | 38,504 | 23,517 | $16,576 at 9.40%; $6,941 at 8.90% | |||||||||||
JP Morgan Chase Bank | 2 | 9,174 | 10,771 | 7.25% | |||||||||||
DDL Kinser | 1 | 3,228 | 2,408 | 8.25% | |||||||||||
First Union Bank | 1 | 4,343 | 3,371 | 9.38% | |||||||||||
Column Financial, Inc. — June 6, 1995 | 1 | 5,577 | 9,037 | 9.45% | |||||||||||
Column Financial, Inc. — January 1, 1995 | 1 | 6,186 | 3,238 | 10.74% | |||||||||||
Robb Evans, Trustee | 1 | 11,433 | 7,105 | Prime plus 0.25% | |||||||||||
21 | 140,577 | 87,271 | |||||||||||||
96 | 644,537 | 476,470 | 6.33% | ||||||||||||
Long-term debt — other: | |||||||||||||||
Deferred credits | 5,481 | ||||||||||||||
Deferred rent on a long-term ground lease | 2,465 | ||||||||||||||
Unsecured notes | — | — | 770 | ||||||||||||
Other | 214 | ||||||||||||||
— | — | 8,930 | |||||||||||||
Property, plant and equipment — other | — | 5,887 | — | ||||||||||||
96 | 650,424 | 485,400 | |||||||||||||
Held for sale | (18 | ) | (70,532 | ) | (55,284 | ) | |||||||||
78 | $ | 579,892 | $ | 430,116 | |||||||||||
Substantially all of the Company’s property and equipment are pledged as collateral for long-term obligations. Certain of the mortgage notes are subject to a prepayment penalty if repaid prior to their maturity.
The table below provides an indication of the effect that these obligations will have on short-term and long-term liquidity:
Long-term | Maturities (1) | |||||||||||||||||||||||||||
obligations | ||||||||||||||||||||||||||||
September 30, 2003 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter | ||||||||||||||||||||||
Exit financing: | ||||||||||||||||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Senior | $ | 216,684 | $ | 3,068 | $ | 213,616 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Mezzanine | 83,524 | 1,182 | 82,342 | — | — | — | — | |||||||||||||||||||||
Merrill Lynch Mortgage Lending, Inc. — Total | 300,208 | 4,250 | 295,958 | — | — | — | — | |||||||||||||||||||||
Computer Share Trust Company of Canada | 7,245 | 208 | 227 | 245 | 265 | 6,300 | — | |||||||||||||||||||||
Lehman financing: | ||||||||||||||||||||||||||||
Lehman Brothers Holdings, Inc. — May 22, 2003 | 79,746 | 1,104 | 78,642 | — | — | — | — | |||||||||||||||||||||
Working capital loan: | ||||||||||||||||||||||||||||
OCM Real Estate Opportunities Fund II — Revolver | 2,000 | 2,000 | — | — | — | — | — | |||||||||||||||||||||
Other financing: | ||||||||||||||||||||||||||||
Column Financial, Inc. — January 1, 1995 | 27,824 | 2,184 | 2,426 | 2,696 | 2,996 | 3,329 | 14,193 | |||||||||||||||||||||
Lehman Brothers Holdings, Inc. — June 30, 1997 | 23,517 | 468 | 513 | 562 | 21,974 | |||||||||||||||||||||||
JP Morgan Chase Bank | 10,771 | 520 | 560 | 603 | 652 | 705 | 7,731 | |||||||||||||||||||||
DDL Kinser | 2,408 | 96 | 2,312 | — | — | — | — | |||||||||||||||||||||
First Union Bank | 3,371 | 48 | 53 | 59 | 3,211 | — | — | |||||||||||||||||||||
Column Financial, Inc. — June 6, 1995 | 9,037 | 389 | 427 | 469 | 516 | 566 | 6,670 | |||||||||||||||||||||
Column Financial, Inc. — January 1, 1995 | 3,238 | 133 | 149 | 165 | 184 | 205 | 2,402 | |||||||||||||||||||||
Robb Evans, Trustee | 7,105 | 7,105 | — | — | — | — | — | |||||||||||||||||||||
87,271 | 10,943 | 6,440 | 4,554 | 29,533 | 4,805 | 30,996 | ||||||||||||||||||||||
476,470 | 18,505 | 381,267 | 4,799 | 29,798 | 11,105 | 30,996 | ||||||||||||||||||||||
Long-term debt — other | 8,930 | 392 | 4,729 | 302 | 261 | 227 | 3,019 | |||||||||||||||||||||
485,400 | 18,897 | 385,996 | 5,101 | 30,059 | 11,332 | 34,015 | ||||||||||||||||||||||
Held for sale | (55,284 | ) | (774 | ) | (54,510 | ) | — | — | — | — | ||||||||||||||||||
$ | 430,116 | $ | 18,123 | $ | 331,486 | $ | 5,101 | $ | 30,059 | $ | 11,332 | $ | 34,015 | |||||||||||||||
(2 | ) |
(1) | Years 1 to 5 are for periods commencing on October 1 and ending on September 30. | |
(2) | As more fully discussed below this table, optional extensions are available on 97% of the debt due in year 2. |
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Exit financing:
On emergence from Chapter 11 on November 25, 2002, the Company received exit financing of $309.0 million comprised of three separate components as follows:
• | Senior debt of $224.0 million from Merrill Lynch Mortgage Lending, Inc. (“Merrill”), accruing interest at the rate of LIBOR plus 2.2442%, secured by, among other things, first mortgage liens on the fee simple or leasehold interests in 55 of the Company’s hotels; |
• | Mezzanine debt of $78.7 million from Merrill, accruing interest at the rate of LIBOR plus 9.00%, secured by the equity interest in the subsidiaries of 56 hotels (the 55 which secure the Senior Debt and one additional hotel); and |
• | Debt provided through Computershare Trust Company of Canada, a Canadian lender, of $10.0 million Canadian dollars (equated to approximately $6.3 million U.S. dollars at inception) maturing in December 2007, accruing interest at the rate of 7.879% secured by a mortgage on the Windsor property. |
In March 2003, as permitted by the terms of the Senior and Mezzanine debt agreements, Merrill exercised the right to “resize” the Senior and Mezzanine debt amounts, prior to the securitization of the mortgage loan. As a result, the principal amount of the Senior Debt was decreased from $223.5 million (initially $224.0 less $0.5 million of principal payments) to $218.1 million, and the initial principal amount of the Mezzanine Debt was increased from $78.7 million to $84.1 million. Though the blended interest rate on the Merrill debt remained at LIBOR plus 4% at the date of the resizing, the interest rate on the Senior debt was modified to LIBOR plus 2.36% and the interest rate on the Mezzanine debt was modified to LIBOR plus 8.2546%. The interest rate on the Mezzanine debt will, however, increase to 8.7937% after November 30, 2003.
The Senior and Mezzanine debt mature in November 2004. There are, however, three one-year options to renew which could extend the facility for an additional three years. The first option to extend the maturity date of the Senior and Mezzanine debt by up to one year (i.e. to November 2005) is available as long as no events of default occur in respect of the payment of principal, interest and other required payments. The second and third extension terms are available only if no events of default (as defined by the agreement) exist and are subject to minimum Debt Service Coverage Ratio and Debt Yield requirements (as defined). Payments of principal and interest on all three portions of the facility are due monthly; however, the principal payments on the Senior and Mezzanine debt may be deferred during the first twelve months of the agreement.
The Senior and Mezzanine debt agreements provide that when either the Debt Yield (as defined) for the trailing 12-month period is below 12.75% during the first year of the loan ending November 2003 (13.25% and 13.5% during the second and third years, respectively) or the Debt Service Coverage Ratio (as defined) is below 1.20, excess cash flows (after payment of operating expenses, management fees, required reserves, principal and interest) produced by the 56 properties must be deposited in a special deposit account. These funds cannot be transferred to the parent company, but can be used for capital expenditures on these properties with lender’s approval, or for principal and interest payments. Funds placed into the special deposit account are released to the borrowers when the Debt Yield and the Debt Service Coverage Ratio are sustained above the minimum requirements for three consecutive months. At March 31, 2003, the Debt Yield for the 56 properties fell below the 12.75% threshold and, therefore, the excess cash produced by the 56 properties was retained in the special deposit account. As of September 30, 2003, $0.3 million was being retained in the special deposit account (subsequently utilized for capital expenditure). As of September 30, 2003, the Debt Yield remained below the minimum requirements.
Lehman financing:
As previously discussed, on May 22, 2003, the Company completed an $80 million financing underwritten by Lehman Brothers Holdings, Inc. which was primarily utilized to settle debts secured by the eighteen hotels previously owned by Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C. (both Lodgian subsidiaries). The Lehman Financing, provided to eighteen newly-formed subsidiaries (one for each hotel), is a two-year term loan with an optional one-year extension and bears interest at the higher of 7.25% or LIBOR plus 5.25%. The one-year extension is only available if, at the time of electing to extend and at the initial maturity date, there are no events of default. If the Company opts for the one-year extension, an extension fee of $3.0 million is payable. Pursuant to the terms of the agreement, additional interest of $4.4 million is also payable prior to the maturity date (May 22, 2005 or the new maturity date, if the Company
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opts for the extension). If, however, the Company makes one or more prepayments totaling at least $20 million in aggregate on or before March 1, 2004, the additional interest payable will be reduced to $3.6 million. Payments of principal and interest on the Lehman Facility are due monthly. If an event of default occurs, default interest, which equates to an additional 3.25%, is payable for the period of the default.
Working capital/related party loan:
On September 18, 2003, the Company drew down the full availability of $2.0 million under the revolver issued by OCM Real Estate Opportunities Fund II, L.P. (the “OCM Fund”). The loan is secured by two land parcels located in California and New Jersey, bears interest at the rate of 10% per annum and matures on May 1, 2004.
Oaktree Capital Management, LLC (“Oaktree”) is the beneficial owner of 1,664,752 shares of the Company’s common stock including 1,578,611 shares owned by the OCM Fund. Oaktree is the general partner of the OCM Fund; accordingly, Oaktree may be deemed to beneficially own the shares owned by the OCM Fund.
Russel S. Bernard, a Principal of Oaktree, and Sean F. Armstrong, a Managing Director of Oaktree, are also directors of Lodgian.
Other financing:
On November 25, 2002, the effective date of the Joint Plan of Reorganization, loans approximating $83.5 million, secured by 20 hotel properties, were substantially reinstated on their original terms, except for the extension of certain maturities. The terms of one loan, in the amount of $2.5 million and secured by one hotel, were amended to provide for a new interest rate as well as a new maturity date.
The Company through its wholly owned subsidiaries owes approximately $10.9 million under Industrial Revenue Bonds (“IRB’s”) issued on the Holiday Inn Lawrence, Kansas and Holiday Inn Manhattan, Kansas properties. The IRB’s require a minimum debt service coverage ratio (“DSCR”) (as defined), calculated as of the end of each calendar year. For the year ended December 31, 2002, the cash flows of the two properties were insufficient to meet the minimum DSCR requirements due in part to renovations that were being performed at the properties during 2002. The trustee of the IRB’s may give notice of default, at which time the Company could remedy the default by depositing with the trustee an amount currently estimated at less than $1 million. In the event a default is declared and not cured, the properties could be subject to foreclosure and the Company would be obligated pursuant to a partial guaranty of not more than $1.0 million. Total revenues for these two hotels approximated $2.1 million and $1.8 million for the three months ended September 30, 2003 and 2002, respectively, and $6.0 million and $5.3 million for the nine months ended September 30, 2003 and 2002, respectively.
On September 30, 2003, first mortgage debt of approximately $7.1 million of Macon Hotel Associates, L.L.C. (“MHA”) became due. The Company owns 60% of MHA, and MHA’s sole asset is the Crowne Plaza Hotel in Macon, Georgia. The lender has agreed to extend the term of the debt to December 31, 2003, while the Company explores alternative financing opportunities. However, there can be no assurance that the Company will complete a refinancing on or before the due date or that the lender will grant further extensions. If the Company is not able to refinance the debt and the lender does not grant further extensions, the property could be subject to foreclosure. Total revenues for the Crowne Plaza Hotel in Macon, Georgia were approximately $1.4 million and $1.3 million for the three months ended September 30, 2003 and 2002, respectively, and $4.3 million and $4.5 million for the nine months ended September 30, 2003 and 2002, respectively. The debt of approximately $7.1 million is included in the current portion of long-term debt in the Condensed Consolidated Balance Sheet, included elsewhere in this Form 10-Q.
12.25% Cumulative preferred shares subject to mandatory redemption
On July 1, 2003, pursuant to the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, the Company reclassified its Mandatorily Redeemable 12.25% Cumulative Preferred Stock (“Preferred Stock”) to the liability section of its Condensed Consolidated Balance Sheet and began presenting the related dividends in interest expense ($4.0 million for the three months ended September 30, 2003). Prior to the adoption of SFAS No. 150, the Company had presented the Preferred Stock between liabilities and equity in its Consolidated Balance Sheet (“mezzanine” section) and had reported the Preferred Stock dividend as a deduction from retained earnings. In accordance with SFAS No. 150, the prior periods have not been restated.
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The preferred stock consists of 5,000,000 shares with a par value of $0.01 (issued at $25.00 per share). The new preferred stock accumulates dividends at the rate of 12.25%, is cumulative and is compounded annually. The first dividend is payable on November 21, 2003 and is payable via the issuance of additional shares of preferred stock (fractional shares will be paid in cash). The number of shares to be issued, as dividends, on November 21, 2003 approximates 612,500 shares less the fractional shares (which will be paid in cash). Changes in the fair value of Lodgian’s common stock would not affect the settlement amounts. The board of directors will determine whether the dividends due November 21, 2004 and 2005 will be paid in cash or in kind via the issuance of additional shares of preferred stock. The preferred stock is subject to redemption at any time, at the Company’s option (including a premium during the first five years) and to mandatory redemption on November 21, 2012. If the preferred stock is redeemed during the first five years, the initial premium payable is 5%. This premium is reduced by 1% each succeeding year through 2007. This premium percentage would be applied against the preferred stock plus any dividends accrued but not paid. If the Company were to redeem the preferred stock on September 30, 2003, the amount payable would be $145.0 million (including the premium payable).
Letters of credit:
As of September 30, 2003, the Company had issued three irrevocable letters of credit totaling $4.9 million as guarantees to Zurich American Insurance Company, Donlen Fleet Management Services and U.S. Food Services. The Zurich letter of credit has since been reduced by $0.8 million and the U.S Food Services letter of credit has since been cancelled. As of November 11, 2003, the remaining two letters of credit totaled $3.6 million. These letters of credit will expire in November 2004 but may require renewal beyond that date. All letters of credit are backed by the Company’s cash (classified as restricted cash in the Condensed Consolidated Balance Sheet, included elsewhere in this Form 10-Q).
Self-insurance:
The Company is self insured up to certain limits (deductibles) with respect to employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers’ compensation and auto liability. The Company establishes liabilities for these self-insured obligations annually, based on actuarial valuations and the Company’s history of claims. Should unanticipated events cause these claims to escalate beyond normal expectations, the Company’s financial condition and results of operations could be adversely affected. As of September 30, 2003, the Company had approximately $9.6 million accrued for such liabilities.
Licenses:
The Company’s franchise, occupancy and liquor licenses are material to its business operations.
Franchise licenses — The Company is subject to certain property maintenance and quality standard compliance requirements under its franchise agreements. The Company periodically receives notifications from its franchisors of events of non-compliance with such agreements. In the past, management has cured most cases of non-compliance within the applicable cure periods and the events of non-compliance did not result in events of default under the respective loan agreements. However, in selected situations and based on economic evaluations, management may elect to not comply with the franchisor requirements. In such situations, the Company will either select an alternative franchisor or operate the property independent of any franchisor. Franchise licenses are generally granted for periods of between 10 to 20 years and are renewable at the expiration dates, subject to the achievement of certain quality and guest satisfaction standards. As of November 11, 2003, the Company had received termination notices from franchisors with respect to two properties (this does not include two hotels for which the Company has met all of the requirements to “cure” but has not received the cure letter from the franchisor). Though not in default, the Company was not in strict compliance with the terms of four other franchise agreements. In addition, default notices were received from a franchisor with respect to five hotels. For the default to be rescinded by the franchisor, these five hotels must continuously achieve certain minimum quality scores at each inspection (carried out every six months) over a two-year period. The Company met the requirements for the first two of these inspections. Notices from the franchisors primarily resulted from physical conditions being below brand standards. The Company is working with the franchisors to cure the default conditions and has a capital improvement program to address the capital improvements required by the franchisors, the re-branding of several hotels and general renovation projects intended to ultimately improve the operations of the hotels. Subject to availability of funds, the Company expects to spend approximately
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$74.7 million in aggregate on all 97 hotels, during the two years ending December 2004. As of September 30, 2003, the Company had deposited approximately $16.1 million in escrow for such improvements.
While it is the Company’s belief that it will cure all defaults under the franchise agreements before the applicable termination dates, there can be no assurance that it will be able to do so or be able to obtain additional time in which to cure the defaults. The license agreements are subject to cancellation in the event of a default, including the failure to operate the hotel in accordance with the quality standards and specification of the licensors. In the event of a franchise termination, management may seek to license the hotel with another nationally-recognized brand. The Company believes that the loss of a license for any individual hotel would not have a material adverse effect on the Company’s financial condition and results of operations, since the Company would either select an alternative franchisor or operate the hotel independent of a franchisor.
As part of the Impac Plan of Reorganization, the Company elected to reject its license agreement relating to its hotel in Cincinnati, Ohio and ceased operating this hotel as a Holiday Inn on May 23, 2003; the hotel is currently being operated as an independent hotel. In addition, the Company made the following franchise changes during 2003:
• | The previously independent hotel in Pensacola, Florida was converted to a Holiday Inn Express on April 4, 2003; |
• | The previously independent hotel in Dothan, Alabama was converted to a Holiday Inn Express on May 23, 2003; |
• | The former Holiday Inn — Dothan in Alabama was converted to a Quality Inn on May 23, 2003; and |
• | The former independent hotel in Louisville, Kentucky was converted to a Clarion Hotel on June 2, 2003. |
Occupancy licenses — these are obtained prior to the opening of a hotel and may require renewal if there has been a major renovation. The loss of the occupancy license for an individual hotel could have a material adverse effect on the Company’s financial condition and results of operations if this relates to one of the larger hotels.
Liquor licenses — these licenses are required for the hotels to be able to serve alcoholic beverages and are generally renewable annually. The loss of a liquor license for an individual hotel would not have a material adverse effect on the Company’s financial condition and results of operations.
Liquidity:
Operating activities:
Operating activities (continuing operations only) generated $21.8 million for the 2003 Period compared to $34.3 million for the 2002 Period. This reduction is related to the elimination of significant current liabilities including accounts payable as a result of the settlement of liabilities subsequent to the Company’s emergence from Chapter 11.
Investing activities:
Investing activities (continuing operations) accounted for cash outlay of approximately $19.4 million for the 2003 Period compared with $18.6 million for the 2002 Period. Due primarily to large scale renovations performed at the Company’s hotels during 2003, expenditure on capital improvements totaled $26.1 million, $9.5 million higher than the $16.7 million spent in the 2002 Period. The capital expenditure outlay in the 2003 Period was partially funded by withdrawals of $7.0 million from lender-controlled capital expenditure escrows, while in the 2002 Period, these escrow balances were increased by $1.2 million. Other investing activities consisted primarily of other deposits and payments of franchise application fees net of refunds ($0.3 million and $0.8 million for the 2003 Period and the 2002 Period, respectively).
Financing activities:
Cash flows used in financing activities were $2.6 million for the 2003 Period and $1.6 million for the 2002 Period. Financing activities for the 2003 Period consisted primarily of proceeds of long-term obligations of $80.0 million relating to the Lehman Financing, proceeds from the working capital revolver ($2.0 million), offset by repayment of long-term obligations of $81.5 million (primarily relating to the debt
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repayment to the secured lender of the eighteen hotels which emerged from Chapter 11 on May 22, 2003). The other financing activities for the 2003 Period also relates to the Lehman Financing. For the 2002 Period, financing activities consisted of payments of long-term debt of $1.1 million and payments of deferred loan fees of $0.5 million.
Working capital:
Lodgian utilizes its cash flows for operating expenses, capital expenditures and debt service. Currently, the Company’s principal sources of liquidity consist of existing cash balances, the working capital revolver and cash flow from operations. Cash flow from operations could, however, suffer from a reduction in demand for lodging as well as large scale renovations being performed at the Company’s hotels. To the extent that significant amounts of the Company’s receivables are due from airline companies, a downturn in the airline industry could materially impact liquidity. At September 30, 2003, airline receivables represented approximately 19.0% of receivables, net of allowances. A downturn in the airline industry could also affect the demand for travel which could also impact revenues. The Company has identified 19 hotels for sale (18 as of September 30, 2003), 3 land parcels and an office building. Though there can be no assurances and the timing of these sales depends on market conditions, management plans to dispose of these assets within the next year and expects that the aggregate sale of these assets will provide additional cash to pay down the Lehman and Merrill debts and to fund a portion of its capital expenditures.
The Company’s ability to make scheduled principal payments, to pay interest, or to refinance its indebtedness depends on its future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the hotel and vacation industry and to the general economic, political, financial, competitive, legislative and regulatory environment. These factors, including the severity and duration of the macroeconomic downturns, are beyond the Company’s control.
The Company intends to continue to use its cash for ongoing operations, debt service and capital expenditures and, therefore, does not anticipate paying dividends on the new common stock in the near future. As previously discussed, the dividends on the preferred stock due November 21, 2003 will be paid via the issuance of additional shares of preferred stock (with fractional shares being paid in cash). For the Third Quarter 2003 and the 2003 Period, the Company accrued $4.0 million and $11.6 million, respectively, of the total preferred stock dividends due November 21, 2003. Also, until the claims distribution process is complete and the remaining entities exit Chapter 11, the Company will continue to make payments in respect of cash claims, bankruptcy court fees and professional fees relating to the distribution of shares.
At September 30, 2003, after classifying assets held for sale as current assets and liabilities related to the assets held for sale as current liabilities, the Company had a working capital surplus (current assets less current liabilities) of $0.8 million compared with a working capital deficit of $9.1 million at December 31, 2002.
Though there was some rebound in the hotel industry during the Third quarter of 2003, the sluggish economy continues to negatively impact hotel demand.
It is difficult to predict just how long it will take for the industry to fully rebound. Hotel renovation continues to be a focus both as a means of increasing the Company’s competitive advantage in the market and also to comply with franchisor requirements. At the same time, management continues to seek ways to operate the Company’s business at the optimum level of costs.
There can be no assurance that the Company will have sufficient liquidity to be able to meet its capital expenditure or other requirements, and the Company could lose the right to operate certain hotels under nationally recognized brand names. Furthermore, the termination of one or more franchise agreements could trigger a default under certain loan agreements as well as obligations to pay liquidated damages under the franchise agreements.
However, management believes that the combination of its current cash position, cash flows from operations, capital expenditure escrows, funds available under the working capital revolver and asset sales will be sufficient to meet its liquidity needs in the short-term. The Company’s ability to meet its long-term obligations and to make payments of preferred dividends in future years is dependent on the recovery of the economy, improved operating results and the Company’s ability to obtain financing. In the short-term, the
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Company continues to monitor its costs and has already reduced certain corporate overhead including costs for office space (management negotiated reduced costs for office space at the corporate office, effective July 1, 2003). Any projections of future financial needs and sources of working capital are, however, subject to uncertainty. See “Results of Operations” and “Forward-Looking Statements” for further discussion of conditions that could adversely affect management’s estimates of future financial needs and sources of working capital.
Corporate governance and senior executive management changes
On May 23, 2003, David E. Hawthorne, the Company’s former President and Chief Executive Officer, resigned. In accordance with his employment agreement, Mr. Hawthorne was paid severance of $0.8 million (included in general, administrative and other in the Condensed Consolidated Statement of Operations, included elsewhere in this report).
Concurrently with Mr. Hawthorne’s resignation, the board of directors named W. Thomas Parrington as the Company’s Interim President and Chief Executive Officer. On July 15, 2003, Mr. Parrington was appointed President and Chief Executive Officer. Mr. Parrington has been involved in the hospitality industry for over 30 years. He was President and Chief Executive Officer of Interstate Hotels Company (“Interstate”) until he retired in December 1998. Interstate was a publicly traded company until it merged with Wyndam Hotels in June 1998. During his 17-year tenure with Interstate, Mr. Parrington also served as Chief Financial Officer and Chief Operating Officer. Upon leaving Interstate, Mr. Parrington focused on real estate investments (primarily hotels) and consultancy as well as the management of his personal investments. The Board of Directors has granted Mr. Parrington incentive stock options to acquire 100,000 shares of the Company’s common stock and 200,000 shares of restricted stock. Both the options and the restricted stock will vest in three equal portions over 3 years beginning July 15, 2004.
Mr. Parrington was appointed to the Lodgian Board of Directors on the Company’s emergence from Chapter 11 on November 25, 2002. While on the Board, Mr. Parrington served as a member of the executive committee and the compensation committee, and was the Chairman of the audit committee. Upon his appointment as Chief Executive Officer, he resigned from the audit and compensation committees and continues to serve as director and member of the executive committee.
The Board of Directors has named Stephen Grathwohl as the new Chairman of the audit committee, effective June 5, 2003. Mr. Grathwohl has been a director since the Company’s emergence from Chapter 11 on November 25, 2002. He is a member of the executive committee of the Board of Directors and has been a Principal at Burr Street Equities, LLC (a boutique real estate advisory company) since 1997. Mr. Grathwohl is also director of Shorebank, a commercial bank chartered by the State of Illinois, headquartered in Chicago, Illinois, Shorebank Development Corporation, a Chicago real estate development and management company, and Shorebank Advisory Services, an international financial research and consulting company.
On October 13, 2003, Richard Cartoon, the former Chief Financial Officer, left the Company to return to his private consulting practice. Concurrently with Mr. Cartoon’s resignation, Manuel Artime was named Executive Vice President and Chief Financial Officer. Mr. Artime previously served as the Company’s Chief Accounting Officer, a position he held since March 1, 2002. His tenure with the Company commenced on December 27, 2001 as Vice President and Controller. On his appointment in October 2003, Mr. Artime received incentive stock options to purchase 21,500 shares of the Company’s common stock, one-third of which vested on the date of the award, one-third of which will vest on October 13, 2004 and the remaining one-third will vest on October 13, 2005. On September 5, 2003, Mr. Artime was also awarded incentive stock options to purchase 8,500 shares of the Company’s common stock.
Inflation
The Company cannot determine the precise impact of inflation. However, the Company believes that the rate of inflation has not had a material effect on its revenues or expenses in recent years. It is difficult to predict whether inflation will have a material effect on the Company’s results in the long-term.
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Changes in Accounting Standards
In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) which elaborates on the disclosures to be made by a guarantor in its financial statements. It also requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee at the inception of a guarantee. The disclosure requirements of FIN 45 were effective for the Company as of December 31, 2002. The recognition provisions of FIN 45 will be applied on a prospective basis to guarantees issued after December 31, 2002. The requirements of FIN 45 did not have a material impact on the Company’s financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN 46 is effective immediately for certain disclosure requirements for variable interest entities created after January 31, 2003. In October 2003, the FASB deferred the implementation date of FIN 46, for variable interest entities which existed prior to February 1, 2003, until the first period ending after December 15, 2003. At September 30, 2003, the Company had no variable interest entities and therefore FIN 46 is not expected to impact the Company’s financial position and results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative as discussed in SFAS No. 133. In addition, SFAS No. 149 clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 amends certain other existing pronouncements, resulting in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company adopted SFAS No. 149 on July 1, 2003. The adoption did not have a material impact on its financial position and results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which aims to eliminate diversity in practice by requiring that certain types of freestanding instruments be reported as liabilities by their issuers including mandatorily redeemable instruments issued in the form of shares which unconditionally obligate the issuer to redeem the shares for cash or by transferring other assets. These instruments were previously presented in various ways, as part of liabilities, as part of equity, or between the liabilities and equity sections (sometimes referred to as “mezzanine” reporting). The provisions of SFAS No. 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003. For pre-existing instruments, SFAS No. 150 was effective as of the beginning of the first interim period which commenced after June 15, 2003 (July 1, 2003 for the Company). As disclosed in Note 9, of the Condensed Consolidated Financial Statements, included elsewhere in this Form 10-Q (“Note 9”), the Company adopted SFAS No. 150 in the Third quarter of 2003. The adoption impacted the treatment of the Company’s Mandatorily Redeemable 12.25% Cumulative Preferred Stock (“Preferred Stock”), previously presented between total liabilities and stockholders’ equity. As a result of the adoption of SFAS No. 150, the Company’s Preferred Stock has been included as part of long-term debt in the Condensed Consolidated Financial Statements, included elsewhere in this Form 10-Q, and the Preferred Stock dividends ($4.0 million for the three months ended September 30, 2003), was included in interest expense. The preferred stock dividends for the period January 1, 2003 to June 30, 2003 ($7.6 million) continues to be shown as a deduction from retained earnings. On October 29, 2003, the FASB decided to defer the effective date of SFAS No. 150 related to non-controlling interests. As a result, until the FASB establishes further guidance, Lodgian will not have to measure its mandatorily redeemable minority interests at fair value.
Critical Accounting Policies
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The accounting policies followed for quarterly
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reporting are the same as those disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2002. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from these estimates. The Company believes the following to be its critical accounting policies:
Capitalization and depreciable lives of assets
Capital improvements are capitalized when they extend the useful lives of the related asset. Management estimates the depreciable lives of the Company’s fixed assets. All items considered to be repair and maintenance items are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (buildings and improvements 10-40 years; furnishings and equipment 3-10 years). Property under capital leases is amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term.
Revenue recognition
Revenues are recognized when the services are rendered. Revenues are comprised of rooms, food and beverage and other revenues. Room revenues are derived from guest room rentals, whereas food and beverage revenues primarily include sales from hotel restaurants, room service, hotel catering and meeting room rentals. Other revenues include charges for guests’ long-distance telephone service, laundry and parking.
Asset impairment evaluation
Under GAAP, real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. As required by GAAP, the Company periodically evaluates its real estate assets to determine if there has been any impairment in carrying value and records impairment losses if there are indicators of impairment and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In connection with the Company’s emergence from Chapter 11, and the application of fresh start reporting, the Company recorded a net write-down of $222.1 million.
Self insured obligations
The Company is self insured up to certain limits (deductibles) with respect to employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers’ compensation and auto liability. The Company establishes liabilities for these self-insured obligations annually, based on actuarial valuations and the Company’s history of claims. Should unanticipated events cause these claims to escalate beyond normal expectations, the Company’s financial condition and results of operations could be adversely affected. As of September 30, 2003, the Company had approximately $9.6 million accrued for such liabilities.
Income taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards (“SFAS”) 109 “Accounting for Income Taxes,” which requires the use of the liability method of accounting for deferred income taxes. As a result of the Company’s history of losses, the Company has provided a full valuation allowance against its deferred tax asset as it is more likely than not that the deferred tax asset will not be realized.
The list of critical accounting policies above is not intended to be a comprehensive list of all of the Company’s accounting policies. In many cases, the treatment of a particular transaction is specifically determined by generally accepted accounting principles with no need for management’s judgment in selecting from alternatives which would provide different results.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risks on its variable rate debt. At September 30, 2003 and December 31, 2002, the Company had outstanding variable rate debt of approximately $387.1 million and $310.2, respectively.
In order to manage its exposure to fluctuations in interest rates with the U.S. portion of the exit financing ($300.2 million and $302.7 million at September 30, 2003 and December 31, 2002, respectively), the Company entered into two interest rate cap agreements, which allowed it to obtain exit financing at floating rates and effectively cap them at LIBOR of 6.4375% plus the spread (See the Liquidity and Capital Resources section). When LIBOR exceeds 6.4375%, the contracts require settlement of net interest receivable at specified intervals, which generally coincide with the dates on which interest is payable on the underlying debt. When LIBOR is below 6.4375%, there is no settlement from the interest rate caps. The Company is exposed to interest rate risks on the exit financing debt for increases in LIBOR up to 6.4375%. The one-month LIBOR as of September 30, 2003 was 1.12%. The notional principal amount of the interest rate caps outstanding was $302.2 million and $302.8 million at September 30, 2003 and at December 31, 2002, respectively.
On May 22, 2003, the Company finalized an $80 million financing with Lehman Brothers Holdings, Inc. (the “Lehman Financing”). The Lehman Financing is a two-year term loan with an optional one-year extension and bears interest at the higher of 7.25% or LIBOR plus 5.25%. In order to manage its exposure to fluctuations in interest rates with the Lehman Financing, the Company entered into an interest rate cap agreement, which allowed it to obtain this financing at a partial floating rate and effectively caps the interest rate at LIBOR of 5.00% plus 5.25%. When LIBOR exceeds 5%, the contracts require settlement of net interest receivable at specified intervals, which generally coincide with the dates on which interest is payable on the underlying debt. When LIBOR is below 5.00%, there is no settlement from the interest rate cap. The Company is exposed to interest rate risks on the Lehman Financing for LIBOR of between 2% and 5%. The notional principal amount of the interest rate cap outstanding was $78.7 million at September 30, 2003.
With respect to the fair market value of the three interest rate caps, (the two related to the exit financing and the one related to the Lehman Financing), the Company believes that its interest rate risk at September 30, 2003 and December 31, 2002 was minimal. The impact on annual results of operations of a hypothetical one-point interest rate reduction on the interest rate caps as of September 30, 2003 would be a reduction in net income of approximately $26,500. These derivative financial instruments are viewed as risk management tools and are entered into for hedging purposes only. The Company does not use derivative financial instruments for trading or speculative purposes. However, the Company has not elected the hedging requirements of SFAS No. 133.
The fair value of the three interest rate caps as of September 30, 2003 and the two interest rate caps at December 31, 2002 were approximately $28,300 and $0.1 million, respectively. The fair values of the interest rate caps were recognized on the balance sheet in other assets. Adjustments to the carrying values of the interest rate caps are reflected in interest expense.
The nature of Lodgian’s fixed rate obligations does not expose the Company to fluctuations in interest payments. The impact on the fair value of Lodgian’s fixed rate obligations of a hypothetical one-point interest rate increase on the outstanding fixed-rate debt as of September 30, 2003 and December 31, 2002 would be approximately $2.6 million and $3.1 million, respectively.
ITEM 4. CONTROLS AND PROCEDURES
a) | Based on an evaluation of the Company’s disclosure controls and procedures carried out as of September 30, 2003, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective since they would cause material information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. |
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b) | During the quarter ended September 30, 2003, there were no changes in the Company’s internal controls over financial reporting which materially affected, or are likely to materially affect, the Company’s internal control over financial reporting. |
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously indicated in the Company’s Form 10-K for the year ended December 31, 2002, the Company and substantially all of its subsidiaries which owned hotel properties filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code on December 20, 2001 in the Southern District of New York. The Bankruptcy Court confirmed the Company’s First Amended Joint Plan of Reorganization (the “Joint Plan of Reorganization”) on November 5, 2002, and on November 25, 2002, the Company and entities owning 78 hotels officially emerged from Chapter 11. Pursuant to the terms of the Joint Plan of Reorganization, eight wholly-owned hotels were returned to the lender in January 2003 in satisfaction of outstanding debt obligations and one wholly-owned hotel was returned to the lessor of a capital lease.
Of the Company’s 97 hotel portfolio, eighteen hotels, previously owned by two subsidiaries (Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C.), were not part of the Joint Plan of Reorganization. On April 24, 2003, the Bankruptcy Court confirmed the plan of reorganization relating to these eighteen hotels (the “Impac Plan of Reorganization”). These eighteen hotels remained in Chapter 11 until May 22, 2003, the date on which the Company, through eighteen newly-formed subsidiaries (one for each hotel), finalized an $80 million financing with Lehman Brothers Holdings, Inc. (the “Lehman Financing”). The Lehman Financing was used, primarily, to settle the remaining amount due to the secured lender of these hotels. The Impac Plan of Reorganization also provided for a pool of funds of approximately $0.3 million to be paid to the general unsecured creditors of the eighteen hotels.
The Company was a party in litigation with Hospitality Restoration and Builders, Inc. (“HRB”), a general contractor hired to perform work on six of the Company’s hotels. The litigation involved hotels in Texas (filed in the District Court of Harris County in October 1999), Illinois (in the United States District Court, Northern District of Illinois, Eastern Division in February 2000) and New York (filed in the Supreme Court, New York County in July 1999). In general, HRB claimed that the Company breached contracts to renovate the hotels by not paying for work performed. The Company contended that it was over-billed by HRB and that a significant portion of the completed work was defective. In July 2001, the parties agreed to settle the litigation pending in Texas and Illinois. In exchange for mutual dismissals and full releases, the Company paid HRB $750,000. With respect to the matter pending in the state of New York, HRB claimed that it was owed $10.7 million. The Company asserted a counterclaim of $7 million. In February 2003, the Company and HRB agreed to settle the litigation pending in the state of New York. In exchange for mutual dismissals and full releases, the Company paid HRB $625,000. The Company provided fully for this liability in its Consolidated Financial Statements for the year ended December 31, 2002.
The Company is party to other legal proceedings arising in the ordinary course of business, the impact of which would not, either individually or in the aggregate, in management’s opinion, have a material adverse effect on its financial position or results of operations. Certain of these claims are limited to the amounts available under the Company’s disputed claims reserve.
ITEM 2. CHANGES IN SECURITIES
The Company intends to use its cash for ongoing operations, debt service and capital expenditures and does not anticipate paying dividends on the new common stock in the near future. The dividends on the preferred stock due November 21, 2003 will be paid via the issuance of additional shares of preferred stock (fractional shares will be paid in cash). The number of shares to be issued on November 21, 2003 approximates 612,500 less the fractional shares (which will be paid in cash).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) | Exhibits |
A list of the exhibits required to be filed as part of this Report on Form 10-Q, is set forth in the “Exhibit Index” which immediately precedes such exhibits, and is incorporated herein by reference.
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(b) | Reports on Form 8-K |
No Form 8-Ks were filed during the quarter ended September 30, 2003.
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SIGNATURES
Pursuant to the requirements 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.
LODGIAN, INC. | ||||
Date: November 14, 2003 | By: | /s/ W. THOMAS PARRINGTON W. THOMAS PARRINGTON President and Chief Executive Officer | ||
Date: November 14, 2003 | By: | /s/ MANUEL ARTIME MANUEL ARTIME Executive Vice President and Chief Financial Officer |
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INDEX TO EXHIBITS
EXHIBIT | ||||
NO. | DESCRIPTION | |||
31.1 | — | Sarbanes-Oxley Section 302 certification by the CEO | ||
31.2 | — | Sarbanes-Oxley Section 302 certification by the CFO | ||
32 | — | Sarbanes-Oxley Section 906 certification by the CEO and CFO |
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