1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-14537
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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 [ ]
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 MAY 2, 2001
- ----------------------------- -----------------------------
Common 28,139,481
2
LODGIAN, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000.................................. 1
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2001 and 2000 (unaudited)............. 2
Condensed Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 2001 (unaudited) and for the
Year Ended December 31, 2000....................................... 3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 (unaudited)............. 4
Notes to Consolidated Financial Statements (unaudited)............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 24
Item 2. Changes in Securities.............................................. 25
Item 6. Exhibits and Reports on Form 8-K................................... 25
Signatures ................................................................... 26
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 9,325 $ 21,002
Cash, restricted ............................................................. 2,803 2,237
Accounts receivable, net of allowances ....................................... 21,885 20,624
Inventories .................................................................. 7,742 7,805
Prepaid expenses and other current assets .................................... 9,505 9,261
----------- -----------
Total current assets ..................................................... 51,260 60,929
Property and equipment, net .................................................... 1,018,762 1,059,048
Deposits for capital expenditures .............................................. 12,582 14,005
Other assets, net .............................................................. 27,017 29,965
----------- -----------
$ 1,109,621 $ 1,163,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 19,166 $ 25,088
Accrued interest ............................................................. 10,189 16,795
Other accrued liabilities .................................................... 33,267 37,203
Advance deposits ............................................................. 3,199 1,854
Current portion of long-term obligations ..................................... 61,789 79,843
----------- -----------
Total current liabilities ................................................ 127,610 160,783
Long-term obligations, less current portion .................................... 650,792 674,038
Deferred income taxes .......................................................... 3,603 3,603
Minority interests:
Preferred redeemable securities (including related accrued interest) ......... 187,575 184,349
Other ........................................................................ 5,520 4,294
----------- -----------
Total liabilities ........................................................ 975,100 1,027,067
Commitments and contingencies .................................................. -- --
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares authorized; 28,415,849 and
28,290,424 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively ............................................ 284 282
Additional paid-in capital ................................................... 264,402 263,320
Deferred stock compensation .................................................. (901) --
Accumulated deficit .......................................................... (127,398) (125,542)
Accumulated other comprehensive loss ......................................... (1,866) (1,180)
----------- -----------
Total stockholders' equity ............................................... 134,521 136,880
----------- -----------
$ 1,109,621 $ 1,163,947
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
----------------------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Revenues:
Rooms .......................................... $ 84,018 $ 100,117
Food and beverage .............................. 25,202 31,504
Other .......................................... 5,553 6,736
--------- ---------
114,773 138,357
Operating expenses:
Direct:
Rooms ........................................ 24,108 28,601
Food and beverage ............................ 18,663 23,218
Other ........................................ 3,204 4,310
General, administrative and other ................ 51,480 55,145
Depreciation and amortization .................... 15,657 16,032
Impairment of long-lived assets .................. 565 9,613
Severance expense ................................ 750 --
--------- ---------
Total operating expenses ................... 114,427 136,919
--------- ---------
346 1,438
Other income (expenses):
Interest income and other ...................... 266 305
Interest expense ............................... (20,765) (23,987)
Gain on asset dispositions ..................... 24,369 95
Minority interests:
Preferred redeemable securities ................ (3,226) (3,063)
Other .......................................... (146) (307)
--------- ---------
Income (loss) before income taxes ................ 844 (25,519)
Provision (benefit) for income taxes ............. 2,700 (8,677)
--------- ---------
Net loss ......................................... $ (1,856) $ (16,842)
========= =========
Loss per common share - basic and diluted ........ $ (0.07) $ (0.60)
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER TOTAL
------------------ PAID-IN STOCK ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS EQUITY
---------- ------ -------- ------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 1999 ..... 28,130,325 $281 $262,760 $ -- $ (37,587) $ (912) $ 224,542
401(k) Plan contribution ......... 144,131 1 504 -- -- 505
Director compensation ............ 15,968 56 -- -- 56
Net loss ......................... -- -- -- (87,955) -- (87,955)
Currency translation
adjustments .................... -- -- -- -- (268) (268)
---------
Comprehensive loss ............... -- -- -- -- -- (88,223)
---------- ---- -------- -------- --------- -------- ---------
Balance at December 31, 2000 ..... 28,290,424 282 263,320 -- (125,542) (1,180) 136,880
401(k) Plan contribution ......... 125,425 2 142 144
Deferred stock compensation ...... -- -- 940 (940) -- --
Amortization of deferred stock
compensation .................... -- -- -- 39 -- -- 39
Net loss ......................... -- -- -- -- (1,856) -- (1,856)
Currency translation
adjustments .................... -- -- -- -- -- (686) (686)
---------
Comprehensive loss ............... (2,542)
---------- ---- -------- -------- --------- -------- ---------
Balance at March 31, 2001 ........ 28,415,849 $284 $264,402 $ (901) $(127,398) $ (1,866) $ 134,521
========== ==== ======== ======== ========= ======== =========
The data for the three months ended March 31, 2001 is unaudited.
The comprehensive loss for the three months ended March 31, 2000 was $16,842.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
Operating activities:
Net loss ................................................. $ (1,856) $(16,842)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................... 15,657 16,032
Gain on sale of assets ................................. (24,369) (95)
Deferred income tax benefit ............................ -- (8,677)
Minority interests ..................................... 3,372 308
Impairment of long-lived assets ........................ 565 9,613
401(k) plan contributions .............................. 144 --
Amortization of non-cash stock compensation ............ 39 --
Other .................................................. 970 1,006
Changes in operating assets and liabilities:
Accounts receivable .................................. (1,261) (934)
Inventories .......................................... 63 182
Other assets ......................................... (810) (1,513)
Accounts payable ..................................... (6,584) (14,561)
Accrued liabilities and advance deposits ............. (9,197) (3,324)
-------- --------
Net cash used in operating activities ...................... (23,267) (18,805)
Investing activities:
Capital improvements, net ................................ (7,324) (23,994)
Proceeds from sale of assets, net ........................ 58,826 19,400
Net withdrawals (deposits) for capital expenditures ...... 1,423 (1,978)
-------- --------
Net cash provided by (used in) investing activities ........ 52,925 (6,572)
Financing activities:
Proceeds from borrowings on working capital revolver ..... 16,000 30,000
Proceeds from issuance of long-term obligations .......... -- 2,085
Principal payments on long-term obligations .............. (42,335) (2,115)
Principal payments on working capital revolver ........... (15,000) (5,000)
Distributions to minority interests ...................... -- (93)
-------- --------
Net cash (used in) provided by financing activities ....... (41,335) 24,877
-------- --------
Net decrease in cash and cash equivalents .................. (11,677) (500)
Cash and cash equivalents at beginning of period ........... 21,002 14,644
-------- --------
Cash and cash equivalents at end of period ................. $ 9,325 $ 14,144
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized ...................... $ 26,057 $ 28,088
======== ========
Income taxes, net of refunds ............................. $ 2,700 $ 111
======== ========
Supplemental disclosure of non-cash investing
and financing activities:
Net non-cash debt increase ............................... $ 35 $ --
======== ========
Deferred stock compensation .............................. $ 940 $ --
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements include the accounts of
Lodgian, Inc., its wholly-owned subsidiaries and five partnerships in which
Lodgian exercises control (collectively "Lodgian" or the "Company"). Lodgian
believes it has control of partnerships when the Company manages and has control
of the partnerships' assets and operations, has the ability and authority to
enter into financing arrangements on behalf of the entity or to sell the assets
of the entity within reasonable business guidelines. One unconsolidated entity
(owning 1 hotel) is accounted for on the equity method. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The accounting policies followed for quarterly financial reporting are
the same as those disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
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 March 31, 2001, and the results of its operations
for the three months ended March 31, 2001 and 2000 and its cash flows for the
three months ended March 31, 2001 and 2000. The results for interim periods are
not necessarily indicative of the results for the entire year. While management
believes that the disclosures presented are adequate to make the information not
misleading, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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 reclassifications have been made to prior period amounts in the
financial statements in order to conform to the current period presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
-------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Numerator:
Net loss $ (1,856) $ (16,842)
======== =========
Denominator:
Denominator for basic and diluted earnings
per share-weighted-average shares 28,290 28,029
======== =========
Basic and diluted earnings per share:
Net loss $ (0.07) $ (0.60)
======== =========
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The computation of diluted earnings per share did not include shares
associated with the assumed conversion of the Convertible Redeemable Equity
Structure Trust Securities (CRESTS) or stock options because their inclusion
would have been antidilutive.
3. ASSET DISPOSITIONS AND DEBT REDUCTIONS
As discussed in Item 2. Management's Discussions and Analysis of
Financial Condition and Results of Operations and Note 4 to the financial
statements, at the end of 1999, the Company's Board of Directors adopted a
strategic plan to reduce the size of the Company's non-core hotel portfolio and
in 2000 adopted a strategic plan to reduce the level of overall debt of the
Company. With regard to these strategic plans, the Company sold twenty-two hotel
properties and four other assets between January 1, 2000 and May 15, 2001. Gross
sales price of these twenty-six properties was $275.6 million while the
reduction of debt was $207.4 million. The balance was used primarily to support
capital expenditures related to major renovation projects and the construction
of one new hotel, which was sold prior to completion. A breakdown of the
property sales by period is as follows:
Properties Gross Sales Debt
Period Sold Price Reduction
- ------------------------------- --------- ----------- ---------
January 1, to December 31, 2000 23 $ 208.8 $ 151.1
January 1, to March 31, 2001 2 66.2 55.8
April 1, 2001 to May 15, 2001 1 0.6 0.5
--------- ----------- ---------
26 $ 275.6 $ 207.4
========= =========== =========
Included in the twenty-three properties sold in 2000 was a group of ten
hotels, located in the western United States, which were sold to a single
unaffiliated third party purchaser on August 31, 2000. The gross sales price was
$132 million and the net proceeds of $118 million, after deducting closing costs
and prorations, were used to pay down debt.
The following unaudited proforma information is presented as if the
Company had completed the sale of the ten hotels, located in the western United
States, as of January 1, 2000. This proforma information is not necessarily
indicative of what the actual results would have been for the three months ended
March 31, 2000, nor does it purport to represent the results for future periods
and does not represent the effect of the sales of the remaining sixteen
properties.
Three Months Ended
MARCH 31, 2000
--------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Total revenues $126,958
Net loss $(13,403)
Net loss per common share, basic and diluted $ (0.48)
The Company's total outstanding debt as of May 15, 2001 (excluding
CRESTS) was approximately $711.5 million. Of this amount, $59.8 million is due
in 2001. As of May 15, 2001, the Company's held for sale properties have an
estimated fair value of approximately $23.6 million.
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The Company may continue to explore potential property sale
transactions in addition to those discussed above. Certain of these transactions
may include hotels other than those identified for sale currently. The
discussions with potential purchasers are in various stages, including the
execution of preliminary agreements in a few situations. Those transactions
where preliminary agreements have been reached are subject to, among other
things, buyer due diligence and financing and the cooperation of the Company's
existing lenders. Accordingly, the Company is unable to predict whether any of
the transactions being considered will result in an actual sale. The majority of
the net proceeds from any completed sales will be used to reduce debt.
In 2001, the Company may need to sell assets to meet its remaining
$59.8 million amortization payment requirements in 2001 and its capital
improvement program, as discussed in the Liquidity and Capital Resources section
following. Therefore, the Company may continue to identify properties to be
classified as held for sale. Although the Company anticipates being able to sell
sufficient assets to meet its obligations in 2001, if the Company is unable to
complete a refinancing as discussed in Note 5, there can be no assurance that
the sales will occur or generate sufficient net proceeds to meet these
obligations.
4. ASSETS HELD FOR SALE
As discussed in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 3 to the financial
statements, the Company has adopted strategic plans to reduce the size of the
Company's non-core hotel portfolio and reduce the level of overall debt of the
Company. In this regard, the Company has identified and may continue to evaluate
throughout 2001 properties which may be classified as held for sale to meet
these objectives.
Impairment charges for the three months ended March 31, 2001 and March
31, 2000, were $0.6 million and $9.6 million, respectively. The Company's first
quarter 2001 charge comprises $4.3 million related to revised estimates of fair
value for properties held for sale and held for investment at March 31, 2001,
net of a recapture of $3.7 million of impairment charges as one hotel previously
considered held for sale is no longer being actively marketed for sale as of
March 31, 2001. The first quarter 2000 charge related to revised estimates of
fair value for properties held for sale as of March 31, 2000. The Company may
incur additional impairment charges in subsequent quarters if it identifies
properties to be considered held for sale to meet the objectives described.
Summary results of operations included in the Statement of Operations
with respect to the properties identified as held for sale at March 31, 2001 are
as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
---------- ----------
Revenues $ 2,760 $ 3,046
======= =======
Loss before income taxes $ 645(1) $ 3,456(1)
======= =======
(1) Includes impairment charge of $0.6 million and $4.0 million,
respectively.
Included in property and equipment is $19.5 million (7 properties) and
$39.8 million (10 properties) related to properties identified as held for sale
at March 31, 2001 and December 31, 2000, respectively.
7
10
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
5. DEBT AMENDMENTS AND COVENANTS
Due to, among other factors, weakness in the Company's first quarter
2001 operating results, the Company would have been in violation of certain
financial covenant ratios related to its Senior Secured loan credit facility
when it completed its financial statements for the period ended March 31, 2001.
On May 15, 2001, the Company reached an oral agreement to amend its Senior
Secured loan credit facility. The Company expects to execute the amendment
within the next few days. The interest rate spread, currently LIBOR plus 4.25%,
will increase 25 basis points in each month from August 2001 to February 2002 up
to a maximum of LIBOR plus 6.00% and then remain in effect until maturity. If
the Company's debt is downgraded by a rating agency subsequent to the amendment
date the interest rate spread will increase a one time additional 25 basis
points up to a maximum of LIBOR plus 6.00%. The interest rate spread will
decrease 50 basis points for each aggregate $60.0 million of principal
reductions made subsequent to the amendment date as long as the Company is in
compliance with certain coverage ratios. Additional amortization payment
requirements for tranche B term loans of $7.5 million are required on
April 30, 2002, June 30, 2002, September 30, 2002 and December 31, 2002,
respectively. The amendment modifies various covenants and coverage ratios,
which the Company is now in compliance with as of March 31, 2001. The Company
will pay an amendment fee of $565,000 on the date of the amendment and is
obligated to pay an additional 75 basis point fee on January 2, 2002 based on
any outstanding borrowings and commitments on that date. In addition, on the
amendment date, $25.0 million of the outstanding balance on the working
capital revolver will be converted to the tranche B term loan, thereby
reducing the commitment on the working capital revolver to $25.0 million.
As of May 15, 2001, the Company has $22.3 million of unused availability on
the working capital revolver portion of its Senior Secured loan credit facility
of which $1.0 million is available for borrowings through June 30, 2001 and,
subject to continued compliance, the full amount of the unused availability
is available for borrowings starting July 1, 2001. The Company anticipates
paying the remaining $6.7 million amortization due on June 30, 2001
on its Senior Secured loan credit facility from its existing cash and cash flow
from operating activities through June 30, 2001. At May 15, 2001, the Company
had $202.0 million outstanding on its Senior Secured loan credit facility. The
Company is considering a variety of refinancing opportunities to completely pay
off these obligations prior to January 2, 2002. However, there can be no
assurances that the Company can complete a refinancing on more favorable terms.
On May 20, 2001, promissory notes of approximately $3.9 million secured
by the pledge of 100% of the ownership interests of Macon Hotel Associates,
L.L.C. ("MHA") are due. The Company owns a 60% controlling interest in MHA.
MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA and
the Company do not intend to make this payment on May 20, 2001. MHA and the
Company are cooperating with the note holders in marketing the hotel for sale.
As of March 31, 2001, the Company has recorded an impairment charge of $2.2
million to reduce the carrying value of the hotel to the outstanding debt
balance, which includes the promissory notes discussed above and a $7.8 million
first mortgage. Based on the estimated sales price of the property, there will
not be any remaining net proceeds available for MHA or the Company.
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
noncompliance with such agreements. In most cases, management has the intention
and believes they have the ability to cure such instances of noncompliance
within the applicable cure periods and that these events of noncompliance will
not result in events of default under the respective loan agreements during
2001. However, in selected situations, as warranted 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. Management has
not been notified of nor does it believe it is in noncompliance with any of its
loan agreements as a result of noncompliance with its franchise agreements as of
March 31, 2001.
6. DEFERRED STOCK COMPENSATION
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, on February 9, 2001, the Company named a new
President and Chief Executive Officer. As part of the employment agreement, the
Company granted the executive options to acquire 2,000,000 shares of common
stock, which vest equally over four years. As the exercise price of the options
was less than the fair market value of the stock on the measurement date, the
Company recognized deferred stock compensation expense of $940,000 which will be
amortized over the vesting period. The options were granted outside of the
Lodgian, Inc. 1998 Stock Incentive Plan.
8
11
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
7. SEVERANCE EXPENSES
On February 9, 2001, the Company's former Chief Executive Officer and
President and Lodgian entered into a Separation Agreement. On this date, the
former Chief Executive Officer and President, with the Company's consent,
resigned his position and continued as a non-officer employee through March 2,
2001. The former Chief Executive Officer and President received a severance
payment of $750,000 in full settlement of all amounts due by reason of the
termination of his employment agreement. The Company and the former Chief
Executive Officer and President released one another from all claims rising out
of his employment with the Company. In addition, any future contingent
development fee obligations arising from the Company acquiring or developing any
hotels or properties identified in the Merger Agreement as Impac's acquisition
land development pipeline also ceased.
8. INCOME TAXES
The Company recognized an income tax provision of $2.7 million for the
first quarter 2001. This related, primarily, to a provision for state income
taxes on the gain on sale of one hotel. There were no operating losses to offset
this gain.
9. COMMITMENTS AND CONTINGENCIES
In July 1999, a contractor hired by Servico to perform work on hotels
in New York, Illinois and Texas filed a complaint against the Company in the
Supreme Court of the State of New York, claiming breach of contract, quantum
meruit, and fraud among other claims. The contractor seeks damages totaling $80
million, including $60 million for punitive damages. The Company answered the
complaint asserting counterclaims aggregating $20 million and successfully filed
a motion to dismiss the claims related to two properties located in Illinois and
Texas. In October 1999, a subcontractor filed a lawsuit in Texas against the
above contractor and the Company. The Company has filed an answer and
cross-claim against the contractor in the amount of $2.8 million. In February
2000, the contractor filed a lawsuit in Texas claiming an undisclosed amount of
actual damages and punitive damages. The Company answered the complaint and
asserted a counterclaim. The Company has also filed a lawsuit against the
contractor in Federal District Court in Illinois, seeking $2 million. The
contractor has filed an answer and counterclaim aggregating $2.8 million in
actual damages and $10 million in punitive damages. On March 1, 2001, a New York
Court dismissed all of the contractor's claims based upon fraud, effectively
reducing the plaintiff's outstanding claims by $40 million. The contractor
subsequently agreed to withdraw its claims for punitive damages in the Illinois
action. The Company believes that it has valid defenses and counterclaims to the
contractor's remaining claims and that the outcome will not have a material
adverse effect on its financial position or results of operations.
On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an
arbitration claim against the Company claiming breach of contract relating to a
January 4, 1992 agreement. WH claims entitlement to profit participation
relating to the sale of certain hotel properties by an affiliate and predecessor
of the Company. Although the Demand for Arbitration did not make a specific
damages demand, WH claimed in its pre-hearing statement an amount of $764,500.
Management believes it has meritorious defenses to this matter and is defending
it vigorously.
The Company and individual Company officers and directors are parties
to various class action lawsuits filed by Company shareholders. The complaints
claim, among other things, that the defendants breached certain fiduciary duties
in connection with various offers to acquire the Company and in effecting
certain changes to the size and composition of the Company's Board of Directors.
Although the ultimate outcome of these class action lawsuits cannot be predicted
with certainty, it is the opinion of management that the resolution of these
class action lawsuits will not have a material adverse effect on its financial
position or results of operations.
9
12
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The Company is a 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.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts, and derivatives used for hedging purposes. SFAS No. 133 requires that
entities recognize all derivative financial instruments as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 as amended by SFAS No. 137 and 138, was adopted by
the Company in the current fiscal quarter. The adoption did not have any impact
on the Company's financial statements.
11. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the Company's sale of $200 million of 12 1/4% Senior
Subordinated Notes (the "Notes") in July 1999, certain of the Company's
subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's
obligations to pay principal and interest with respect to the Notes. Each
Subsidiary Guarantor is wholly-owned and management has determined that separate
financial statements for the Subsidiary Guarantors are not material to
investors. The subsidiaries of the Company that are not Subsidiary Guarantors
are referred to in the note as the "Non-Guarantor Subsidiaries".
The following supplemental condensed consolidating financial statements
present balance sheets as of March 31, 2001 and December 31, 2000 and statements
of operations and cash flows for the three months ended March 31, 2001 and 2000.
In the condensed consolidating financial statements, Lodgian, Inc. (the
"Parent") accounts for its investments in wholly owned subsidiaries using the
equity method.
10
13
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2001
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 6 $ 12,077 $ (2,758) $ -- $ 9,325
Cash, restricted ................................. -- -- 2,803 -- 2,803
Accounts receivable, net of allowances ........... -- 9,652 12,233 -- 21,885
Inventories ...................................... -- 3,539 4,203 -- 7,742
Prepaid expenses and other current assets ........ 3,603 98 5,804 -- 9,505
--------- --------- --------- -------- ----------
Total current assets ...................... 3,609 25,366 22,285 -- 51,260
Property and equipment, net ........................... -- 550,219 468,543 -- 1,018,762
Deposits for capital expenditures ..................... -- 515 12,067 -- 12,582
Investment in consolidated entities ................... (304,655) -- -- 304,655 --
Due from (to) affiliates .............................. 445,081 (263,259) (181,822) -- --
Other assets, net ..................................... -- 15,664 11,353 -- 27,017
--------- --------- --------- -------- ----------
$ 144,035 $ 328,505 $ 332,426 $304,655 $1,109,621
========= ========= ========= ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ -- $ 8,001 $ 11,165 $ -- $ 19,166
Accrued interest ................................ -- 8,419 1,770 -- 10,189
Other accrued liabilities ....................... -- 8,602 24,665 -- 33,267
Advance deposits ................................ -- 1,426 1,773 -- 3,199
Current portion of long-term obligations ........ -- 49,037 12,752 -- 61,789
--------- --------- --------- -------- ----------
Total current liabilities ................. -- 75,485 52,125 -- 127,610
Long-term obligations, less current portion ........... 4,045 353,591 293,156 -- 650,792
Deferred income taxes ................................. 3,603 -- -- -- 3,603
Minority interests:
Preferred redeemable securities (including
related accrued interest) ...................... -- -- 187,575 -- 187,575
Other ........................................... -- -- 5,520 -- 5,520
--------- --------- --------- -------- ----------
Total liabilities .......................... 7,648 429,076 538,376 -- 975,100
--------- --------- --------- -------- ----------
Commitments and contingencies ......................... -- -- -- -- --
Stockholders' equity:
Common stock ................................... 284 33 443 (476) 284
Additional paid-in capital ..................... 264,402 22,619 (40,255) 17,636 264,402
Deferred stock compensation .................... (901) -- -- -- (901)
Accumulated deficit ............................ (127,398) (121,357) (166,138) 287,495 (127,398)
Accumulated other comprehensive loss ........... -- (1,866) -- -- (1,866)
--------- --------- --------- -------- ----------
Total stockholders' equity (deficit) ..... 136,387 (100,571) (205,950) 304,655 134,521
--------- --------- --------- -------- ----------
$ 144,035 $ 328,505 $ 332,426 $304,655 $1,109,621
========= ========= ========= ======== ==========
11
14
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 6 $ 20,653 $ 343 $ -- $ 21,002
Cash, restricted ................................. -- -- 2,237 -- 2,237
Accounts receivable, net of allowances ........... -- 8,031 12,593 -- 20,624
Inventories ...................................... -- 3,609 4,196 -- 7,805
Prepaid expenses and other current assets ........ 3,603 110 5,548 -- 9,261
--------- --------- --------- -------- ----------
Total current assets ...................... 3,609 32,403 24,917 -- 60,929
Property and equipment, net ........................... -- 553,941 505,107 -- 1,059,048
Deposits for capital expenditures ..................... -- 917 13,088 -- 14,005
Investment in consolidated entities ................... (295,521) -- -- 295,521 --
Due from (to) affiliates .............................. 437,585 (233,776) (203,809) -- --
Other assets, net ..................................... -- 16,501 13,464 -- 29,965
--------- --------- --------- -------- ----------
$ 145,673 $ 369,986 $ 352,767 $295,521 $1,163,947
========= ========= ========= ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ -- $ 9,107 $ 15,981 $ -- $ 25,088
Accrued interest ................................ -- 15,200 1,595 -- 16,795
Other accrued liabilities ....................... -- 9,095 28,108 -- 37,203
Advance deposits ................................ -- 855 999 -- 1,854
Current portion of long-term obligations ........ -- 67,190 12,653 -- 79,843
--------- --------- --------- -------- ----------
Total current liabilities ................. -- 101,447 59,336 -- 160,783
Long-term obligations, less current portion ........... 4,010 353,213 316,815 -- 674,038
Deferred income taxes ................................. 3,603 -- -- -- 3,603
Minority interests:
Preferred redeemable securities (including
related accrued interest) ...................... -- -- 184,349 -- 184,349
Other ........................................... -- -- 4,294 -- 4,294
--------- --------- --------- -------- ----------
Total liabilities ......................... 7,613 454,660 564,794 -- 1,027,067
--------- --------- --------- -------- ----------
Commitments and contingencies ......................... -- -- -- -- --
Stockholders' equity:
Common stock ................................... 282 33 441 (474) 282
Additional paid-in capital ..................... 263,320 22,619 (41,337) 18,718 263,320
Accumulated deficit ............................ (125,542) (106,146) (171,131) 277,277 (125,542)
Accumulated other comprehensive loss ........... -- (1,180) -- -- (1,180)
--------- --------- --------- -------- ----------
Total stockholders' equity (deficit) ..... 138,060 (84,674) (212,027) 295,521 136,880
--------- --------- --------- -------- ----------
$ 145,673 $ 369,986 $ 352,767 $295,521 $1,163,947
========= ========= ========= ======== ==========
12
15
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Rooms ............................................... $ -- $ 40,399 $ 43,619 $ -- $ 84,018
Food and beverage ................................... -- 12,378 12,824 -- 25,202
Other ............................................... -- 2,541 3,012 -- 5,553
--------- --------- --------- -------- ----------
-- 55,318 59,455 -- 114,773
Operating expenses:
Direct:
Rooms ............................................. -- 11,565 12,543 -- 24,108
Food and beverage ................................. -- 9,098 9,565 -- 18,663
Other ............................................. -- 1,487 1,717 -- 3,204
General, administrative and other ..................... -- 22,469 29,011 -- 51,480
Depreciation and amortization ......................... -- 7,269 8,388 -- 15,657
Impairment of long-lived assets ....................... -- (2,735) 3,300 -- 565
Severance expenses .................................... -- -- 750 -- 750
--------- --------- --------- -------- ----------
Total operating expenses .................. -- 49,153 65,274 -- 114,427
--------- --------- --------- -------- ----------
-- 6,165 (5,819) -- 346
Other income (expenses):
Interest income and other ........................... -- -- 266 -- 266
Interest expense .................................... -- (13,034) (7,731) -- (20,765)
Gain on asset dispositions .......................... -- 20 24,349 -- 24,369
Equity in income of consolidated subsidiaries ....... 844 -- -- (844) --
Minority interests:
Preferred redeemable securities ..................... -- -- (3,226) -- (3,226)
Other ............................................... -- -- (146) -- (146)
--------- --------- --------- -------- ----------
Income (loss) before income taxes ..................... 844 (6,849) 7,693 (844) 844
Provision for income taxes ........................... 2,700 -- 2,700 (2,700) 2,700
--------- --------- --------- -------- ----------
Net (loss) income .................... $ (1,856) $ (6,849) $ 4,993 $ 1,856 $ (1,856)
========= ========= ========= ======== ==========
13
16
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Rooms ............................................... $ -- $ 45,301 $ 54,816 $ -- $ 100,117
Food and beverage ................................... -- 13,921 17,583 -- 31,504
Other ............................................... -- 2,788 3,948 -- 6,736
--------- --------- --------- -------- ----------
-- 62,010 76,347 -- 138,357
--------- --------- --------- -------- ----------
Operating expenses:
Direct:
Rooms ............................................. -- 12,992 15,609 -- 28,601
Food and beverage ................................. -- 10,111 13,107 -- 23,218
Other ............................................. -- 1,942 2,368 -- 4,310
General, administrative and other ..................... -- 22,791 32,354 -- 55,145
Depreciation and amortization ......................... -- 5,935 10,097 -- 16,032
Impairment of long-lived assets ....................... -- 8,800 813 9,613
--------- --------- --------- -------- ----------
Total operating expenses .................. -- 62,571 74,348 -- 136,919
--------- --------- --------- -------- ----------
-- (561) 1,999 -- 1,438
Other income (expenses):
Interest income and other ........................... -- -- 305 -- 305
Interest expense .................................... -- (13,429) (10,558) -- (23,987)
Gain on asset dispositions .......................... -- 95 -- -- 95
Equity in loss of consolidated subsidiaries ......... (25,519) -- -- 25,519 --
Minority interests:
Preferred redeemable securities ..................... -- -- (3,063) (3,063)
Other ............................................... -- -- (307) (307)
--------- --------- --------- -------- ----------
Loss before income taxes .............................. (25,519) (13,895) (11,624) 25,519 (25,519)
Benefit for income taxes .............................. (8,677) (4,724) (3,953) 8,677 (8,677)
--------- --------- --------- -------- ----------
Net loss ............................... $ (16,842) $ (9,171) $ (7,671) $ 16,842 $ (16,842)
========= ========= ========= ======== ==========
14
17
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS)
Operating activities:
Net loss .................................................. $ -- $ (6,849) $ 4,993 $ (1,856)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ -- 7,269 8,388 15,657
Gain on sale of assets ................................... -- (20) (24,349) (24,369)
Minority interests ....................................... -- -- 3,372 3,372
Impairment of long-lived assets .......................... -- (2,735) 3,300 565
401(k) plan contributions ................................ 144 -- -- 144
Amortization of non-cash stock compensation .............. 39 -- 39
Other .................................................... 35 773 162 970
Changes in operating assets and liabilities:
Accounts receivable ...................................... -- (1,620) 359 (1,261)
Inventories .............................................. -- 70 (7) 63
Other assets ............................................. -- 12 (822) (810)
Accounts payable ......................................... -- (1,106) (5,478) (6,584)
Accrued liabilities and advance deposits ................. -- (6,703) (2,494) (9,197)
------ --------- --------- ---------
Net cash provided by (used in) operating activities ........ 218 (10,909) (12,576) (23,267)
Investing activities:
Capital improvements, net ................................ -- (4,568) (2,756) (7,324)
Proceeds from sale of assets, net ........................ -- 3,153 55,673 58,826
Net withdrawals for capital expenditures ................. -- 402 1,021 1,423
------ --------- --------- ---------
Net cash provided by (used in) investing activities ...... -- (1,013) 53,938 52,925
Financing activities:
Proceeds from borrowings on working capital revolver ..... -- 16,000 -- 16,000
Proceeds received from (paid to) related parties ......... (218) 21,121 (20,903) --
Principal payments on long-term obligations .............. -- (18,775) (23,560) (42,335)
Principal payments on working capital revolver ........... -- (15,000) -- (15,000)
------ --------- --------- ---------
Net cash (used in) provided by financing activities ...... (218) 3,346 (44,463) (41,335)
------ --------- --------- ---------
Net (decrease) increase in cash and cash equivalents ....... -- (8,576) (3,101) (11,677)
Cash and cash equivalents at beginning of period ........... 6 20,653 343 21,002
------ --------- --------- ---------
Cash and cash equivalents at end of period ................. $ 6 $ 12,077 $ (2,758) $ 9,325
====== ========= ========= =========
15
18
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS)
Operating activities:
Net loss .................................................. $ -- $ (9,171) $ (7,671) $ (16,842)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ............................ -- 5,935 10,097 16,032
Gain on sale of assets ................................... -- (95) -- (95)
Deferred income tax benefit .............................. (8,677) -- -- (8,677)
Minority interests ....................................... -- -- 308 308
Impairment of long-lived assets .......................... -- 8,800 813 9,613
Other .................................................... 475 379 152 1,006
Changes in operating assets and liabilities:
Accounts receivable ...................................... -- (1,423) 489 (934)
Inventories .............................................. -- 193 (11) 182
Other assets ............................................. -- (311) (1,202) (1,513)
Accounts payable ......................................... -- (5,716) (8,845) (14,561)
Accrued liabilities and advance deposits.................. -- (3,450) 126 (3,324)
------- --------- --------- ---------
Net cash used in operating activities ...................... (8,202) (4,859) (5,744) (18,805)
------- --------- --------- ---------
Investing activities:
Capital improvements, net ................................ -- (15,861) (8,133) (23,994)
Proceeds from sale of assets ............................. -- 19,400 -- 19,400
Net deposits for capital expenditures .................... -- -- (1,978) (1,978)
------- --------- --------- ---------
Net cash provided by (used in) investing activities ...... -- 3,539 (10,111) (6,572)
------- --------- --------- ---------
Financing activities:
Proceeds from borrowings on working capital revolver ..... -- 30,000 -- 30,000
Proceeds from issuance of long-term obligations .......... -- -- 2,085 2,085
Proceeds received from (paid to) related parties ......... 8,202 (30,267) 22,065 --
Principal payments on long-term obligations .............. -- (435) (1,680) (2,115)
Principal payments on working capital revolver ........... -- (5,000) -- (5,000)
Distributions to minority interests ...................... -- -- (93) (93)
------- --------- --------- ---------
Net cash provided by (used in) financing activities ...... 8,202 (5,702) 22,377 24,877
------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents ....... -- (7,022) 6,522 (500)
Cash and cash equivalents at beginning of period ........... 59 9,910 4,675 14,644
------- --------- --------- ---------
Cash and cash equivalents at end of period ................. $ 59 $ 2,888 $ 11,197 $ 14,144
======= ========= ========= =========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the
Company's financial statements and related notes thereto included.
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 statements that describe anticipated revenues, capital expenditures and
other financial items, statements that describe the Company's business plans and
objectives, and statements that describe the expected impact of competition,
government regulation, litigation and other factors on the Company's future
financial condition and results of operations. The words "may," "should,"
"expect," "believe," "anticipate," "project," "estimate," 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.
- The impact of pending or threatened litigation and/or
governmental inquiries and investigation involving the
Company.
- The uncertainties relating to the Company's proposed strategic
initiatives, including the willingness of prospective
purchasers to purchase the hotels the Company has identified
as divestiture candidates on terms the Company finds
acceptable, the timing and terms on which such hotels may be
sold, and other factors affecting the ability of prospective
purchasers to consummate such transactions, including the
availability of financing.
- 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 and asset sales to cover its cash needs or
refinance certain existing debt obligations, the Company's
ability to obtain additional capital if needed and the
possible default under credit facilities if cash flows are
lower than expected or capital expenditures are greater than
expected.
- The effectiveness of changes in management and the ability of
the Company to retain qualified individuals to serve in senior
management positions.
- The potential for additional impairment charges against
earnings related to long-lived assets, which may result from
the Company's strategic initiatives to reduce the size of the
hotel portfolio and reduce debt.
STRATEGIC PLANS
At the end of 1999, the Company's Board of Directors adopted a
strategic plan to reduce the size of the company's non-core hotel portfolio and
in 2000 adopted a strategic plan to reduce the level of overall debt of the
Company and retained an investment banker to review its strategic alternatives.
As part of that review, the Company was pursuing a sale of the Company. With
regard to this strategic alternative, on December 26, 2000, the Company entered
into an Exclusivity Agreement with Edgecliff Holdings, LLC ("Edgecliff") in
which the Company granted Edgecliff an exclusive 60-day period during which the
two parties attempted to negotiate a definitive merger agreement. During this
period, the Company gave Edgecliff and its representatives full access to the
Company's books, records, and personnel. The parties had made significant
progress toward negotiating the terms of a definitive merger agreement, and the
Company agreed to extend the exclusivity period. However, on February 28, 2001,
Edgecliff informed the Company that it was unable to obtain the refinancing of
the Company's high-yield bonds on acceptable terms from their holders and would
not proceed with the acquisition. Currently, the Company is not in negotiations
for the sale of the Company with any party. The Company is moving forward as an
independent company and is exploring all avenues for maximization of shareholder
value, including improving operations, capital structure and optimizing the
value of the Company's assets. Also, as
17
20
previously reported in the Company's Form 10-K for the year ended December 31,
2000, on February 9, 2001 the Company named a new President and Chief Executive
Officer.
OVERVIEW
Management believes that results of operations in the hotel industry
are best explained by four key performance measures: occupancy, average daily
rate ("ADR"), revenue per available room ("RevPAR"), and Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") margins. These
measures are influenced by a variety of factors including national, regional and
other local economic conditions, the degree of competition with other hotels in
the area and changes in travel patterns. The demand for accommodations is also
affected by normally recurring seasonal patterns and most of our hotels
experience lower occupancy levels in the fall and winter months (November
through February) which may result in lower revenues, lower net income and less
cash flow during these months.
REVENUES
Revenues are composed of room, food and beverage and other revenues.
Room revenues are derived from guest room rentals, whereas food and beverage
revenues primarily include sales from hotel restaurants, room service and hotel
catering. Other revenues include charges for guests' long-distance telephone
service, laundry service and use of meeting facilities.
OPERATING EXPENSES
Operating expenses are composed of direct, general and administrative,
other hotel operating 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 primarily
variable with available rooms and occupancy rates, but also have a small fixed
component which can be leveraged with increases in revenues. General and
administrative expenses represent corporate salaries and other corporate
operating expenses and are generally fixed. Other expenses include primarily
property level expenses related to general operations such as marketing,
utilities, repairs and maintenance and other property administrative costs.
These expenses are primarily fixed.
RESULTS OF OPERATIONS
The significant number of dispositions in 2001 and 2000 has materially
impacted operating results.
First Quarter 2001
In February 2001, the Company sold two hotels for a gross sale price of
$66.2 million.
Year Ended December 31, 2000
During 2000, the Company sold nineteen hotel properties and four other
assets, including two hotel properties sold during the first quarter 2000. Gross
sales price of these twenty-three properties was $208.8 million.
The discussion of results of operations, income taxes, liquidity and
capital resources that follows is derived from the Company's unaudited
Consolidated Financial Statements set forth in "Item I. Financial Statements"
included in this Form 10-Q and should be read in conjunction with such financial
statements and notes thereto.
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21
HISTORICAL RESULTS OF OPERATIONS
The following table presents for the periods indicated, the
percentage relationship that the various statements of operations line items
bear to operating revenues:
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
Revenues:
Rooms .......................................... 73.2% 72.4%
Food and beverage .............................. 22.0 22.8
Other .......................................... 4.8 4.8
----- -----
100.0 100.0
----- -----
Operating expenses:
Direct:
Rooms ........................................ 21.0 20.7
Food and beverage ............................ 16.3 16.8
Other ........................................ 2.8 3.1
General, administrative and other ................ 44.8 39.9
Depreciation and amortization .................... 13.6 11.6
Impairment of long-lived assets .................. 0.5 6.9
Severance and restructuring expenses ............. 0.7 --
----- -----
Total operating expenses ............. 99.7 99.0
----- -----
0.3 1.0
Other income (expenses):
Interest income and other ...................... 0.2 0.2
Interest expense ............................... (18.1) (17.3)
Gain on asset dispositions ...................... 21.2 0.1
Minority interests: .............................. -- --
Preferred redeemable securities ................ (2.8) (2.2)
Other .......................................... (0.1) (0.2)
----- -----
Income (loss) before income taxes ................ 0.7 (18.4)
Provision (benefit) for income taxes ............. 2.3 (6.3)
----- -----
Net loss ......................................... (1.6)% (12.1)%
===== =====
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22
THREE MONTHS ENDED MARCH 31, 2001 ("FIRST QUARTER 2001") COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2000 (FIRST QUARTER 2000")
REVENUES
At March 31, 2001, the Company owned 109 hotels and had a minority
interest in one hotel compared with 129 hotels owned, a minority interest in one
hotel and one hotel managed for a third party at March 31, 2000.
Total revenue for the first quarter 2001 was $114.8 million, a decrease
of 17.0%. This decrease is primarily due to the disposition of twenty hotels in
the owned portfolio. RevPAR, however, was $45.60 for the first quarter 2001, an
increase of 2.0% over 2000, primarily due to the mix of hotels owned at the end
of the first quarter 2001 as compared to the first quarter 2000. The RevPAR
increase comprised of an increase in average daily rates of 4.7% which was
partially offset by a 2.5% reduction in occupancy levels. RevPAR for hotels
owned during the first quarter 2001 declined by 0.8% compared to the first
quarter 2000, primarily as a result of a decline in occupancy of 4% partially
offset by an increase in average daily rates of 3%.
OPERATING EXPENSES
Direct operating expenses for the Company were $46.0 million (40.1% of
direct revenues) for the first quarter 2001 and $56.1 million (40.6% of direct
revenues) for the first quarter 2000. This $10.1 million decrease was primarily
attributable to the reduction of twenty hotels in the owned portfolio, offset by
improved operating margins in the food and beverage area and in other direct
revenue activities. Other direct revenue comprises revenues from telephone,
laundry services, use of meeting facilities and other miscellaneous activities.
General, administrative and other expenses were $51.5 million (44.8% of
direct revenues) for the first quarter 2001 and $55.1 million (39.9% of direct
revenues) for the first quarter 2000. This $3.6 million decrease was due
primarily to a reduction of twenty hotels in the owned portfolio offset by
certain higher general, administrative and other expenses. The increase in
general, administrative and other expenses as a percentage of revenues is
primarily a result of higher costs related to utilities ($1.4 million), property
insurance ($0.6 million), franchise fees ($0.6 million) and property taxes ($0.4
million). The utility costs increased 21% due to higher usage caused by extreme
winter conditions in certain locations and increased energy rates. These
increased utility costs were somewhat offset by utility surcharges added to room
rates in selected markets. Property insurance costs increased principally due to
premium increases indicative of an overall tightening global property insurance
market. Franchise fees increased as a result of the prior year conversion of
certain hotels to franchise arrangements that have slightly higher fee
structures and certain changes in guest awards by the franchisors. Property
taxes increased due to property tax increases which were not absorbed by higher
levels of revenues. Included in general, administrative and other expenses are
$2.4 million of unusual expenses ($4.0 million for the first quarter 2000). Of
this amount, $1.8 million is related to professional fees principally related to
consultants performing certain financial and accounting management
responsibilities within the Company and $0.5 million related to certain legal
matters.
Depreciation and amortization expense was $15.7 million in the first
quarter 2001 and $16.0 million in the first quarter 2000. The $0.3 million
decrease is primarily a result of a decrease of $1.4 million in depreciation
related to hotels sold, net of additional depreciation expense of $1.1 million
relating to two hotels previously considered held for sale and that are no
longer being actively marketed for sale as of March 31, 2001.
Impairment charges for the first quarter 2001 and 2000 were $0.6
million and $9.6 million, respectively. The Company's first quarter 2001 charge
comprises $4.3 million related to revised estimates of fair value for properties
held for sale and held for investment at March 31, 2001, net of a recapture of
$3.7 million of impairment charges as one hotel previously held for sale is no
longer being actively marketed for sale as of March 31, 2001. The first quarter
2000 charge related to revised estimates of fair value for properties held for
sale as of March 31, 2000.
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OTHER INCOME AND EXPENSES
Interest expense was $20.8 million in the first quarter 2001 and $24.0
million in the first quarter 2000. This decrease is primarily attributable to a
reduction in the level of debt and, to a lesser extent, a decrease in the cost
of debt.
Gain on asset dispositions was $24.4 million for the first quarter
2001. This relates to the two hotels sold in the first quarter 2001 and
represents the excess of the net proceeds of sale over the net book values of
these assets.
Minority interest expense was $3.4 million in the first quarter 2001
and also in the first quarter 2000. This is due to an increase in the CREST
dividend as a result of the interest compounding effect on the dividend deferred
which increase has been offset by a reduction in other minority interest expense
due to lower net income levels for those hotels which the Company co-owns with
its third-party-minority equity partners.
NET INCOME
After a provision for income taxes of $2.7 million in the first quarter
2001 and a benefit for income taxes of $8.7 million in the first quarter 2000,
the Company had a net loss of $1.9 million ($0.07 per share) in first quarter
2001 compared with a net loss of $16.8 million ($0.60 per share) in the first
quarter 2000, for the reasons discussed above.
INCOME TAXES
As of December 31, 2000, Lodgian had net operating loss carryforwards
of approximately $194 million for federal income tax purposes, which expire in
2004 through 2020. The Company's ability to use these net operating loss
carryforwards to offset future income is subject to limitations, and may be
subject to additional limitations in the future. Due to these limitations, a
portion or all of these net operating loss carryforwards could expire unused.
The Company recognized an income tax provision of $2.7 million for the first
quarter 2001. This related, primarily, to a provision for state income taxes on
the gain on sale of one hotel. There were no operating losses to offset this
gain.
LIQUIDITY AND CAPITAL RESOURCES
Lodgian's principal sources of liquidity consist of existing cash
balances, cash flow from operations and financing. Additionally, the Company
expects to generate cash flow from the disposition of hotels it has targeted for
sale and that will be targeted for sale in the future. The majority of net
proceeds from the sale of hotels is expected to be used to reduce long-term
debt.
The Company had earnings from operations before interest, taxes,
depreciation and amortization ("EBITDA"), as adjusted in 2001 of $19.7 million,
a 36.7% decrease from the $31.1 million for the first quarter 2000. This
decrease was due to a reduction of twenty hotels in the owned portfolio offset
by other factors discussed below for EBITDA, as adjusted, on a same unit basis.
EBITDA, as adjusted, on a same unit basis was $19.7 million in the first quarter
of 2001 and $26.8 million in the first quarter 2000, a decrease of 26.5%. This
decrease on a same unit basis was due to a 0.8% decline in RevPar, a 0.7%
increase in direct operating expenses, higher corporate overhead costs as a
percentage of revenues and increased utility costs, property insurance,
franchise fees and property taxes as discussed previously under general,
administrative and other operating expenses. The Company has computed EBITDA
without regard to the unusual items and one-time charges. During the first
quarter 2001, these items consisted of unusual costs (principally professional
and legal fees and severance charges) of $3.1 million and impairment charges of
$0.6 million, compared to $4.0 million and $9.6 million, respectively, for the
first quarter 2000. EBITDA is a widely regarded industry measure of lodging
performance used in the assessment of hotel property values, although EBITDA is
not indicative of and should not be used as an alternative to net income or net
cash provided by operations as specified by generally accepted accounting
principles. Net cash used in operating activities in the first quarter 2001 was
$23.3 million compared to $18.8 million for the first quarter 2000.
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Cash flows provided by investing activities was $52.9 million for the
first quarter 2001 and cash flows used in investing activities was $6.6 million
in the first quarter 2000. The 2001 amount includes capital expenditures of $7.3
million, net proceeds from the sale of assets of $58.8 million and withdrawals
for capital expenditure escrows of $1.4 million. The first quarter 2000 amount
includes capital expenditures of $24.0 million, net proceeds from the sale of
assets of $19.4 million and deposits for capital expenditure escrows of $2.0
million.
Cash flows used in financing activities were $41.3 million for first
quarter 2001 and net cash provided by financing activities were $24.9 million in
first quarter 2000. The 2001 and 2000 amounts consist primarily of borrowings on
the working capital revolver and repayments of long-term obligations and
payments on the working capital revolver.
At March 31, 2001, the Company had a working capital deficit of $76.4
million as compared with a working capital deficit of $99.9 million at December
31, 2000. Excluding the current portion of long-term obligations, the Company
had a working capital deficit of $14.6 million at March 31, 2001 compared with a
working capital deficit of $20.0 million at December 31, 2000.
At March 31, 2001, long-term obligations were $650.8 million. Long-term
obligations were $674.0 million at December 31, 2000. Both periods exclude the
CRESTS.
The Company has a capital improvement program to address the capital
improvements required at the hotels related to product improvement plans
specified by license agreements with franchisors, re-branding of several hotels
and general renovation projects intended to ultimately improve the operations of
the hotels. The Company originally anticipated capital expenditures of
approximately $40 million under its 2001 capital improvement program. Effective
March 31, 2001, the Company decreased its anticipated 2001 capital expenditures
to $35 million, of which $7.3 million was incurred in the first quarter 2001.
As discussed previously, the Company has adopted strategic plans to
reduce the size of the Company's non-core hotel portfolio and reduce the overall
level of debt. With regard to these strategic plans, the Company sold twenty-two
hotel properties and four other assets between January 1, 2000 and May 15, 2001.
Gross sales price of these twenty-six properties was $275.6 million while the
reduction of debt was $207.4 million. The balance was used primarily to support
capital expenditures related to major renovation projects and the construction
of one new hotel, which was sold prior to completion. A breakdown of the
property sales by period is as follows:
Properties Gross Sales Debt
Period Sold Price Reduction
- ------------------------------- ---------- ----------- ---------
January 1, to December 31, 2000 23 $208.8 $151.1
January 1, to March 31, 2001 2 66.2 55.8
April 1, 2001 to May 15, 2001 1 0.6 0.5
-- ------ ------
26 $275.6 $207.4
== ====== ======
The Company's total outstanding debt as of May 15, 2001 (excluding
CRESTS) was approximately $711.5 million. Of this amount, $59.8 million is due
in 2001. As of May 15, 2001, the Company's held for sale properties have an
estimated fair value of approximately $23.6 million.
The Company may continue to explore potential property sale
transactions in addition to those discussed above. Certain of these transactions
may include hotels other than those identified for sale currently. The
discussions with potential purchasers are in various stages, including the
execution of preliminary agreements in a few situations. Those transactions
where preliminary agreements have been reached are subject to, among other
things, buyer due diligence and financing and the cooperation of the Company's
existing lenders. Accordingly, the Company is unable to predict whether any of
the transactions being considered will result in an actual sale. The majority of
the net proceeds from any completed sales will be used to reduce debt.
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In 2001, the Company may need to sell assets to meet its remaining
$59.8 million amortization payment requirements in 2001 and its capital
improvement program. Therefore, the Company may continue to identify properties
to be classified as held for sale. Although the Company anticipates being able
to sell sufficient assets to meet its obligations in 2001, if the Company is
unable to complete a refinancing as discussed following, there can be no
assurance that the sales will occur or generate sufficient net proceeds to meet
these obligations.
Due to, among other factors, weakness in the Company's first quarter
2001 operating results, the Company would have been in violation of certain
financial covenant ratios related to its Senior Secured loan credit facility
when it completed its financial statements for the period ended March 31, 2001.
On May 15, 2001, the Company reached an oral agreement to amend its Senior
Secured loan credit facility. The Company expects to execute the amendment
within the next few days. The interest rate spread, currently LIBOR plus 4.25%,
will increase 25 basis points in each month from August 2001 to February 2002 up
to a maximum of LIBOR plus 6.00% and then remain in effect until maturity. If
the Company's debt is downgraded by a rating agency subsequent to the amendment
date the interest rate spread will increase a one time additional 25 basis
points up to a maximum of LIBOR plus 6.00%. The interest rate spread will
decrease 50 basis points for each aggregate $60.0 million of principal
reductions made subsequent to the amendment date as long as the Company is in
compliance with certain coverage ratios. Additional amortization payment
requirements for tranche B term loans of $7.5 million are required on
April 30, 2002, June 30, 2002, September 30, 2002 and December 31, 2002,
respectively. The amendment modifies various covenants and coverage ratios,
which the Company is now in compliance with as of March 31, 2001. The Company
will pay an amendment fee of $565,000 on the date of the amendment and is
obligated to pay an additional 75 basis point fee on January 2, 2002 based on
any outstanding borrowings and commitment on that date. In addition, on the
amendment date, $25.0 million of the outstanding balance on the working capital
revolver will be converted to the tranche B term loan, thereby reducing the
commitment on the working capital revolver to $25.0 million. As of May 15,
2001, the Company has $22.3 million of unused availability on the working
capital revolver portion of its Senior Secured loan credit facility of which
$1.0 million is available for borrowings through June 30, 2001 and, subject to
continued compliance, the full amount of the unused availability is available
for borrowings starting July 1, 2001. The Company anticipates paying the
remaining $6.7 million amortization due on June 30, 2001 on its Senior Secured
loan credit facility from its existing cash and cash flow from operating
activities through June 30, 2001. At May 15, 2001, the Company had $202.0
million outstanding on its Senior Secured loan credit facility. The Company is
considering a variety of refinancing opportunities to completely pay off these
obligations prior to January 2, 2002. However, there can be no assurances that
the Company can complete a refinancing on more favorable terms.
On May 20, 2001, promissory notes of approximately $3.9 million secured
by the pledge of 100% of the ownership interests of Macon Hotel Associates,
L.L.C. ("MHA") are due. The Company owns a 60% controlling interest in MHA.
MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA and
the Company do not intend to make this payment on May 20, 2001. MHA and the
Company are cooperating with the note holders in marketing the hotel for sale.
As of March 31, 2001, the Company has recorded an impairment charge of $2.2
million to reduce the carrying value of the hotel to the outstanding debt
balance, which includes the promissory notes discussed above and a $7.8 million
first mortgage. Based on the estimated sales price of the property, there will
not be any remaining net proceeds available for MHA or the Company.
The Company believes that the combination of its current cash position,
cash flows from operations, availability on the revolving credit facility and
net proceeds from property sales (both properties identified and to be
identified) will provide sufficient liquidity to fund the Company's operating,
capital expenditure and debt service obligations through December 31, 2001.
INFLATION
The rate of inflation has not had a material effect on the Company's
revenues or costs and expenses in recent years and it is not anticipated that
inflation will have a material effect on the Company in the near term.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1999, a contractor hired by Servico to perform work on hotels
in New York, Illinois and Texas filed a complaint against the Company in the
Supreme Court of the State of New York, claiming breach of contract, quantum
meruit and fraud, among other claims. The contractor seeks damages totaling $80
million, including $60 million for punitive damages. The Company answered the
complaint asserting counterclaims aggregating $20 million and successfully filed
a motion to dismiss the claims related to two properties located in Illinois and
Texas. In October 1999, a subcontractor filed a lawsuit in Texas against the
above contractor and the Company. The Company has filed an answer and
cross-claim against the contractor in the amount of $2.8 million. In February
2000, the contractor filed a lawsuit in Texas claiming an undisclosed amount of
actual damages and punitive damages. The Company answered the complaint and
asserted a counterclaim. The Company has also filed a lawsuit against the
contractor in Federal District Court in Illinois, seeking $2 million. The
contractor has filed an answer and counterclaim aggregating $2.8 million in
actual damages and $10 million in punitive damages. On March 1, 2001, a New York
court dismissed all of the contractor's claims based upon fraud, effectively
reducing the plaintiff's outstanding claims by $40 million. The contractor
subsequently agreed to withdraw its claims for punitive damages in the Illinois
action. The Company believes that it has valid defenses and counterclaims to the
contractor's remaining claims and that the outcome will not have a material
adverse effect on its financial position or results of operations.
On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an
arbitration claim against the Company claiming breach of contract relating to a
January 4, 1992 contract. WH claims entitlement to profit participation relating
to the sale of certain hotel properties by an affiliate and predecessor of the
Company. Although the Demand for Arbitration does not make a specific damages
demand WH claimed in its preliminary statement it is owed $754,500. Management
believes it has meritorious defenses to this matter and is defending it
vigorously.
In 1999 and 2000, a total of six class actions were filed in the
Delaware Court of Chancery on behalf of all security holders of the Company.
Named as defendants in each of the actions were the Company and six of the
Company's directors and/or officers. The complaints alleged, among other things:
(1) that the individual defendants breached their fiduciary duties in connection
with an offer by Casuarina Cayman Holdings Ltd. ("Casuarina") to acquire all of
the Company's outstanding common stock; (2) that the director defendants
breached their fiduciary duties in connection with effecting certain changes to
the size and composition of the Company's Board of Directors in connection with
certain agreements entered into by the Company regarding a potential sale of the
Company to Whitehall Street Real Estate Limited Partnership XIII and Whitehall
Parallel Real Estate Limited Partnership XIII ("Whitehall") and (3) that the
individual defendants breached their fiduciary obligations in connection with
their consideration of certain conditional offers received by the Company
regarding a potential sale of the Company. The complaints sought injunctive
relief and compensatory damages in unspecified amounts. The Delaware court
created one consolidated class action in November 2000 (the "Consolidated
Action").
The defendants to the Consolidated Action are not obligated to respond
to the complaint in the Consolidated Action until three weeks after the
plaintiffs have requested such a response. As of this date, the plaintiffs have
not requested a response from the defendants.
In October 2000, a class action was filed in the Superior Court of the
State of Georgia, Fulton County. Named as defendants are the Company, six of the
Company's directors and/or officers, and Whitehall. The complaint alleges, among
other things, that the individual defendants breached their fiduciary duties in
connection with certain agreements entered into with Whitehall regarding a
potential sale of the Company to those entities. The complaint also alleges that
Whitehall aided and abetted the alleged breach of fiduciary duty by the
individual defendants.
Although the ultimate outcome of these class action litigations cannot
be predicted with certainty, it is the opinion of management that the resolution
of these class actions will not have a material adverse effect on the Company's
financial position or results of operations.
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In 2000, several actions were filed in Delaware Court of Chancery by
Casuarina and Edgecliff Holdings, LLC ("Edgecliff"). Named as defendants were
the Company and five of its directors and/or officers. The complaints alleged,
among other things: (1) that the defendant directors breached their fiduciary
duties in connection with effecting certain changes to the size and composition
of the Company's Board of Directors and sought declaratory and injunctive
relief; and (2) that the Company had not timely scheduled its annual meeting of
shareholders in accordance with Section 211 of the Delaware General Corporation
Law. The complaints also challenged the Company's decision to postpone its
annual meeting from October 12 to October 20, 2000 in response to the offer
received by the Company from Whitehall. The court granted plaintiff's motion for
summary judgment to the limited extent that the court required the Company to
hold the annual meeting on October 20, 2000, the rescheduled date on which the
Company had planned to hold the meeting, All of these actions were dismissed on
April 13, 2001.
The Company is a 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.
ITEM 2. CHANGES IN SECURITIES
The Company has not paid any cash dividends since the Merger and has no
current plans to initiate the payment of dividends. The Company currently
anticipates that it will retain any future earnings for use in its business. The
Board of Directors of the Company will determine future dividend policies based
on the Company's financial condition, profitability, cash flow, capital
requirements and business outlook, among other factors. The Company's ability to
pay dividends is restricted by the Indenture governing the Company's 12 1/4%
Senior Subordinated Notes Due 2009 (the "Notes"), the Company's credit agreement
dated as of July 23, 1999 among the Company, Lodgian Financing Corp., certain
other of the Company's subsidiaries and the banks named therein, and the
Indenture governing the Company's Convertible Redeemable Equity Structure Trust
Securities ("CRESTS"). On June 30, 2000, the Company exercised its rights to
begin the deferral of dividend payments on the CRESTS, effective with the
interest payment due June 30, 2000. Pursuant to the terms of the instrument, the
Company has the right to defer payment for up to twenty quarters (the "Extension
Period"), during which Extension Period no interest shall be due and payable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No exhibits are required to be filed as part of this Report on Form
10-Q.
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 28, 2001 relating to proforma
financial statements on the sale of ten hotels.
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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: May 15, 2001 By: /s/ THOMAS ARASI
-------------------------------------
THOMAS ARASI
President and Chief Executive Officer
Date: May 15, 2001 By: /s/ THOMAS R. EPPICH
-------------------------------------
THOMAS R. EPPICH
Chief Financial Officer
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