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 JUNE 30, 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
LODGIAN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2093696
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 AUGUST 8, 2001
- ----------------------------- ---------------------------------------
Common 28,139,481
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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 June 30, 2001 (unaudited)
and December 31, 2000.................................................... 1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2001 and 2000 (unaudited)............ 2
Condensed Consolidated Statements of Stockholders' Equity
for the Six Months Ended June 30, 2001 (unaudited) and for the
Year Ended December 31, 2000............................................. 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 (unaudited)...................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 28
Item 2. Changes in Securities.................................................... 29
Item 6. Exhibits and Reports on Form 8-K......................................... 29
Signatures ......................................................................... 30
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------ ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 19,518 $ 21,002
Cash, restricted .......................................................... 2,944 2,237
Accounts receivable, net of allowances .................................... 20,692 20,624
Inventories ............................................................... 7,571 7,805
Prepaid expenses and other current assets ................................. 9,471 9,261
------------ ------------
Total current assets ............................................... 60,196 60,929
Property and equipment, net .................................................... 1,003,667 1,059,048
Deposits for capital expenditures .............................................. 12,481 14,005
Other assets, net .............................................................. 25,874 29,965
------------ ------------
$ 1,102,218 $ 1,163,947
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 20,800 $ 25,088
Accrued interest ......................................................... 15,563 16,795
Other accrued liabilities ................................................ 36,632 37,203
Advance deposits ......................................................... 2,125 1,854
Current portion of long-term obligations ................................. 73,603 79,843
------------ ------------
Total current liabilities .......................................... 148,723 160,783
Long-term obligations, less current portion .................................... 630,120 674,038
Deferred income taxes .......................................................... 3,603 3,603
Minority interests:
Preferred redeemable securities (including related accrued interest) ..... 190,858 184,349
Other .................................................................... 5,485 4,294
------------ ------------
Total liabilities .................................................. 978,789 1,027,067
Commitments and contingencies .................................................. -- --
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares authorized and 28,139,481
shares issued at June 30, 2001 and December 31, 2000; 28,685,407 and
28,290,424 shares outstanding at June 30, 2001 and December 31, 2000,
respectively ............................................................... 286 282
Additional paid-in capital .................................................. 264,513 263,320
Deferred stock compensation ................................................. (842) --
Accumulated deficit ......................................................... (139,200) (125,542)
Accumulated other comprehensive loss ........................................ (1,328) (1,180)
------------ ------------
Total stockholders' equity ........................................... 123,429 136,880
------------ ------------
$ 1,102,218 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Revenues:
Rooms ..................................... $ 91,937 $ 117,101 $ 175,955 $ 217,218
Food and beverage ......................... 27,799 36,445 53,001 67,949
Other ..................................... 6,161 7,519 11,714 14,255
---------- ---------- ---------- ----------
125,897 161,065 240,670 299,422
---------- ---------- ---------- ----------
Operating expenses:
Direct:
Rooms ................................... 24,269 31,898 48,377 60,499
Food and beverage ....................... 19,492 25,465 38,155 48,683
Other ................................... 3,145 4,607 6,349 8,917
General, administrative and other ........... 49,682 56,644 101,162 111,789
Depreciation and amortization ............... 14,491 16,408 30,148 32,440
Impairment of long-lived assets ............. 4,000 56,549 4,565 66,162
Severance and restructuring expenses ........ 717 1,502 1,467 1,502
---------- ---------- ---------- ----------
Total operating expenses .............. 115,796 193,073 230,223 329,992
---------- ---------- ---------- ----------
10,101 (32,008) 10,447 (30,570)
Other income (expenses):
Interest income and other ................. 214 358 480 663
Interest expense .......................... (18,604) (25,843) (39,369) (49,830)
(Loss) gain on asset dispositions .......... (260) (98) 24,109 (3)
Minority interests:
Preferred redeemable securities ........... (3,283) (3,064) (6,509) (6,127)
Other ..................................... 30 (236) (116) (543)
---------- ---------- ---------- ----------
Loss before income taxes .................... (11,802) (60,891) (10,958) (86,410)
Benefit (provision) for income taxes ....... -- 20,703 (2,700) 29,380
---------- ---------- ---------- ----------
Net loss .................................... $ (11,802) $ (40,188) $ (13,658) $ (57,030)
========== ========== ========== ==========
Loss per common share - basic and diluted ... $ (0.42) $ (1.43) $ (0.48) $ (2.04)
========== ========== ========== ==========
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 .......... 394,983 4 253 257
Deferred stock compensation ....... -- -- 940 (940) -- --
Amortization of deferred stock
compensation ..................... -- -- -- 98 -- -- 98
Net loss .......................... -- -- -- -- (13,658) -- (13,658)
Currency translation
adjustments .................... -- -- -- -- -- (148) (148)
----------
Comprehensive loss ................ (13,806)
----------- ---- ---------- ------ ---------- ---------- ----------
Balance at June 30, 2001 .......... 28,685,407 $286 $ 264,513 $ (842) $ (139,200) $ (1,328) $ 123,429
=========== ==== ========== ====== ========== ========== ==========
The comprehensive loss for the three months ended June 30, 2001 was $11,264 and
for the three and six months ended June 30, 2000 was $40,188 and $57,030 ,
respectively.
The data for the three and six months ended June 30, 2001 and 2000 is unaudited.
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
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
(UNAUDITED)
Operating activities:
Net loss ................................................................ $(13,658) $(57,030)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ......................................... 30,148 32,440
(Gain) loss on sale of assets ......................................... (24,109) 3
Deferred income tax provision (benefit) ............................... 2,700 (29,380)
Minority interests .................................................... 6,625 3,607
Impairment of long-lived assets ....................................... 4,565 66,162
401 (k) plan contributions ............................................ 257 419
Amortization of deferred stock compensation ........................... 98 27
Amortization of deferred loan fees .................................... 2,802 2,332
Other ................................................................. (835) (948)
Changes in operating assets and liabilities:
Accounts receivable ............................................... (68) (182)
Inventories ....................................................... 234 308
Prepaid expenses and other assets ................................. (917) (2,169)
Accounts payable .................................................. (4,995) (5,070)
Accrued liabilities ............................................... (4,504) 10,784
Advance deposits .................................................. 271 717
-------- --------
Net cash (used in) provided by operating activities ....................... (1,386) 22,020
Investing activities:
Capital improvements, net ............................................... (15,944) (51,365)
Proceeds from sale of assets, net ....................................... 64,590 33,734
Net withdrawals (deposits) for capital expenditures ..................... 1,524 (6,250)
-------- --------
Net cash provided by (used in) investing activities ....................... 50,170 (23,881)
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 ............................. (51,268) (9,795)
Principal payments on working capital revolver .......................... (15,000) (5,000)
Distributions to minority interests ..................................... -- (186)
-------- --------
Net cash (used in) provided by financing activities ....................... (50,268) 17,104
-------- --------
Net (decrease) increase in cash and cash equivalents ...................... (1,484) 15,243
Cash and cash equivalents at beginning of period .......................... 21,002 14,644
-------- --------
Cash and cash equivalents at end of period ................................ $ 19,518 $ 29,887
======== ========
Supplemental cash flow information: Cash paid during the period for:
Interest, net of amount capitalized ..................................... $ 37,799 $ 40,837
======== ========
Income taxes, net of refunds ............................................ $ -- $ 427
======== ========
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 June 30, 2001, and the results of its operations
for the three and six months ended June 30, 2001 and 2000 and its cash flows for
the six months ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net loss $ (11,802) $ (40,188) $ (13,658) $ (57,030)
========== ========== ========== ==========
Denominator:
Denominator for basic and diluted earnings
per share-weighted-average shares 28,416 28,192 28,353 27,956
========== ========== ========== ==========
Basic and diluted earnings per share:
Net loss $ (0.42) $ (1.43) $ (0.48) $ (2.04)
========== ========== ========== ==========
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The computation of diluted earnings per share does 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. Pursuant to these strategic plans, the Company sold twenty-four hotel
properties as well as four other assets between January 1, 2000 and June 30,
2001. Gross sales price of these twenty-eight properties was $281.0 million
while the reduction of debt was $212.6 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 June 30, 2001 3 6.0 5.7
-- ------- -------
28 $ 281.0 $ 212.6
== ======= =======
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 and six
months ended June 30, 2000, nor does it purport to represent the results for
future periods and does not represent the effect of the sales of the remaining
eighteen properties.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues $ 146,012 $ 272,968
Net loss $ (3,821) $ (19,256)
Net loss per common share, basic and diluted $ (0.14) $ (0.69)
The Company's total outstanding debt as of August 14, 2001 (excluding
CRESTS) was approximately $703.3 million. Of this amount, $47.9 million is due
in 2001. As of August 14, 2001, the Company's held for sale properties have an
estimated fair value of approximately $20.8 million.
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The Company is exploring 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, in some cases, 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 will likely sell assets to meet its remaining
$47.9 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. The Company will need 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 six month period ended June 30, 2001 were
$4.6 million. This consisted of charges of $0.6 million and $4.0 million in the
first and second quarters, respectively. The Company's first quarter charge of
$0.6 million was comprised of $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 was no longer being actively marketed for
sale. The second quarter charge of $4.0 million related to one property which
was identified as held for sale and also sold in the second quarter of 2001.
Impairment charges for the six month period ended June 30, 2000 were $66.2
million. This consisted of a first quarter charge of $9.6 million related to
revised estimates of fair value for properties held for sale at December 31,
1999 and a second quarter charge of $56.6 million related to the ten hotels sold
to Sunstone Investors, LLC on August 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 Consolidated Statements
of Operations with respect to the properties identified as held for sale at June
30, 2001 are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues $ 2,907 $ 3,504 $ 5,444 $ 6,301
======== ======== ======== ========
Income (loss) before income taxes $ 645 $ 1,073 $ (20)(1) $ (1,127)(1)
======== ======== ======== ========
(1) Includes impairment charges of $1.0 million and $2.8 million, for the
six months ended June 30, 2001 and 2000, respectively. (There were no
applicable impairment charges for the three months ended June 30, 2001
and 2000).
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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Included in property and equipment is $18.4 million (4 properties) and
$39.8 million (10 properties) related to properties identified as held for sale
at June 30, 2001 and December 31, 2000, respectively.
5. DEBT AMENDMENTS AND COVENANTS
On May 15, 2001, the Company and the lenders of its Senior Secured loan
credit facility reached an agreement to amend that facility. Prior to the
amendment, the Company would have been in violation of two financial covenant
ratios based on its first quarter 2001 operating results. The amendment
increased the interest rate spread (which was then LIBOR plus 4.25%) by 25 basis
points in each month from August 2001 to February 2002 up to a maximum of LIBOR
plus 6.00% until maturity. The amendment also provided that the interest rate
spread would increase an additional 25 basis points up to a maximum of LIBOR
plus 6.00% if the company's debt was downgraded by a rating agency subsequent to
the amendment date (the downgrade occurred in May 2001). In addition, 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 financial coverage ratios. The
amendment also required additional amortization payments on the tranche B term
loans of $7.5 million on April 30, 2002, June 30, 2002, September 30, 2002 and
December 31, 2002, respectively. The amendment also modified various covenants
and financial coverage ratios, with which the Company is in compliance as of
June 30, 2001. The Company paid 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 was converted to the tranche B term loan, thereby
reducing the commitment on the working capital revolver to $25.0 million. As of
August 14, 2001, the Company has $19.1 million of unused availability on the
working capital revolver portion of its Senior Secured loan credit facility and
the full amount of the unused availability is currently available for
borrowings. At August 14, 2001, the Company had $195.2 million outstanding on
its Senior Secured loan credit facility having fully satisfied the remaining
$6.7 million obligation which was due June 30, 2001 on this facility. Currently
the Company is exploring the possibility of refinancing opportunities to
completely pay off these obligations prior to January 2, 2002 and is in
discussions with certain potential leaders who have expressed an interest in
participating in such a transaction. However, there can be no assurances that
the Company can complete a refinancing nor can there be any assurances that, if
completed, the refinancing will be 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") were 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 did not make this payment on May 20, 2001. MHA and the Company are
cooperating with the note holders in marketing the hotel for sale and entered
into a Forbearance Agreement related to the debt. During the first quarter of
2001, the Company 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 aware of a potential violation of certain financial
covenants related to its Senior Secured loan credit facility based on its
projected third quarter 2001 operating results. In the event that this violation
occurs, the Company will commence negotiations with the lenders of this facility
with respect to the third quarter's requirements. If the violation occurs, and
the Company is not able to negotiate a satisfactory amendment or a waiver with
the lenders of this facility, the entire amount owing under this facility
(currently $195.2 million) and any related components will convert to a short
term facility.
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
8
11
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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 June 30, 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.
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 arising 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
six months ended June 30, 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. SUBSEQUENT EVENTS
On July 12, 2001, one of the Company's directors, Lewis N. Wolff
resigned from his position on the Board of Directors. The resignation took
effect on July 12, 2001 and was as a result of the time commitment needed to
serve on the board.
The Company has been notified by the New York Stock Exchange that it is
not in compliance with the Exchange's continuing listing requirements because
the average closing price of Lodgian stock was less than the $1.00 per share
limit over a consecutive thirty trading day period. The Company is considering
actions that may be taken in order to bring itself into compliance with the
Exchange's requirements. The Company believes that it has until its annual
shareholders' meeting in 2002 to remedy this lack of compliance.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party in litigation with Hospitality Restoration and
Builders, Inc. ("HRB"), a general contractor hired to perform work on six (6) of
the Company's hotels. The litigation is pending in Texas, Illinois, and New
York. In general, HRB claims that the Company breached contracts to renovate the
hotels by not paying for work performed. The Company contends that it was
over-billed by HRB and that a significant portion of the completed work was
defective. In July 2001, the parties agreed, in principle, to settle the
litigation pending in Texas and Illinois. In exchange for mutual dismissals and
full releases, the Company has agreed to pay HRB $750,000. With respect to the
matter pending in the state of New
9
12
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
York, HRB claims that it is owed $10.7 million. The Company asserted a
counterclaim of $7 million and 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 Company's acquisition of AMI Operating Partners, LP. WH seeks
damages totaling $764,500. The Company believes it has meritorious defenses to
this matter and is defending it vigorously.
The Company and individual directors are parties to a class action
lawsuit alleging that the defendants breached certain fiduciary duties in
connection with various offers to acquire the Company. Although the ultimate
outcome of this class action lawsuit cannot be predicted with certainty, it is
the opinion of management that the resolution of this matter will not have a
material adverse effect on its financial position or results of operations.
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.
11. 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 first quarter of 2001. The adoption had no impact on the
Company's financial statements.
In June 2001, SFAS No. 141, "Business Combinations" (effective July 31,
2001) and SFAS 142 "Goodwill and other Intangible Assets" (effective January 1,
2002) were issued. SFAS No. 141 prohibits pooling-of interests accounting for
acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets
will no longer be amortized but instead will be subject to periodic impairment
testing. The Company believes that the adoption of SFAS No. 141 and SFAS No. 142
will not have a significant impact on the Company's financial statements.
12. 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 June 30, 2001 and December 31, 2000, statements of
operations for the three and six months ended June 30, 2001 and 2000 and cash
flows for the six months ended June 30, 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
JUNE 30, 2001
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
(UNAUDITED IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 6 $ 15,589 $ 3,923 $ -- $ 19,518
Cash, restricted ............................... -- -- 2,944 -- 2,944
Accounts receivable, net of allowances ......... -- 8,830 11,862 -- 20,692
Inventories .................................... -- 3,402 4,169 -- 7,571
Prepaid expenses and other current assets ...... 3,603 97 5,771 -- 9,471
---------- ---------- ---------- ------------ ------------
Total current assets .................... 3,609 27,918 28,669 -- 60,196
Property and equipment, net ......................... -- 540,095 463,572 -- 1,003,667
Deposits for capital expenditures ................... -- 87 12,394 -- 12,481
Investment in consolidated entities ................. (316,343) -- -- 316,343 --
Due from (to) affiliates ............................ 445,249 (260,641) (184,608) -- --
Other assets, net ................................... -- 15,203 10,671 -- 25,874
---------- ---------- ---------- ------------ ------------
$ 132,515 $ 322,662 $ 330,698 $ 316,343 $ 1,102,218
========== ========== ========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ -- $ 9,372 $ 11,428 $ -- $ 20,800
Accrued interest .............................. -- 13,979 1,584 -- 15,563
Other accrued liabilities ..................... -- 9,269 27,363 -- 36,632
Advance deposits .............................. -- 1,084 1,041 -- 2,125
Current portion of long-term obligations ...... -- 57,400 16,203 -- 73,603
---------- ---------- ---------- ------------ ------------
Total current liabilities ............... -- 91,104 57,619 -- 148,723
Long-term obligations, less current portion ......... 4,155 337,957 288,008 -- 630,120
Deferred income taxes ............................... 3,603 -- -- -- 3,603
Minority interests:
Preferred redeemable securities (including
related accrued interest) .................... -- -- 190,858 -- 190,858
Other ......................................... -- -- 5,485 -- 5,485
---------- ---------- ---------- ------------ ------------
Total liabilities ........................ 7,758 429,061 541,970 -- 978,789
---------- ---------- ---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock ................................. 286 33 445 (478) 286
Additional paid-in capital ................... 264,513 22,619 (40,144) 17,525 264,513
Deferred stock compensation .................. (842) -- -- -- (842)
Accumulated deficit .......................... (139,200) (127,723) (171,573) 299,296 (139,200)
Accumulated other comprehensive loss ......... -- (1,328) -- -- (1,328)
---------- ---------- ---------- ------------ ------------
Total stockholders' equity (deficit) ... 124,757 (106,399) (211,272) 316,343 123,429
---------- ---------- ---------- ------------ ------------
$ 132,515 $ 322,662 $ 330,698 $ 316,343 $ 1,102,218
========== ========== ========== ============ ============
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
---------- ---------- ------------- ------------ ------------
(UNAUDITED 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 STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms ............................................. $ -- $ 45,087 $ 46,850 $ -- $ 91,937
Food and beverage ................................. -- 13,723 14,076 -- 27,799
Other ............................................. -- 2,890 3,271 -- 6,161
---------- ---------- ---------- ---------- ----------
-- 61,700 64,197 -- 125,897
---------- ---------- ---------- ---------- ----------
Operating expenses:
Direct:
Rooms ........................................... -- 11,972 12,297 -- 24,269
Food and beverage ............................... -- 9,711 9,781 -- 19,492
Other ........................................... -- 1,537 1,608 -- 3,145
General, administrative and other ................... -- 22,228 27,454 -- 49,682
Depreciation and amortization ....................... -- 6,702 7,789 -- 14,491
Impairment of long-lived assets ..................... -- 4,000 0 -- 4,000
Severance and restructuring expenses ............... -- -- 717 -- 717
---------- ---------- ---------- ---------- ----------
Total operating expenses ................ -- 56,150 59,646 -- 115,796
---------- ---------- ---------- ---------- ----------
-- 5,550 4,551 -- 10,101
Other income (expenses):
Interest income and other ......................... -- -- 214 -- 214
Interest expense .................................. -- (11,657) (6,947) -- (18,604)
Loss on asset dispositions ........................ -- (260) -- -- (260)
Equity in losses of consolidated subsidiaries ..... (11,802) -- -- 11,802 --
Minority interests:
Preferred redeemable securities ................... -- -- (3,283) -- (3,283)
Other ............................................. -- -- 30 -- 30
---------- ---------- ---------- ---------- ----------
Loss before income taxes ........................... (11,802) (6,367) (5,435) 11,802 (11,802)
Benefit for income taxes ........................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss ........................... $ (11,802) $ (6,367) $ (5,435) $ 11,802 $ (11,802)
========== ========== ========== ========== ==========
13
16
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms ........................................... $ -- $ 51,233 $ 65,868 $ -- $ 117,101
Food and beverage ............................... -- 15,265 21,180 -- 36,445
Other ........................................... -- 3,063 4,456 -- 7,519
---------- --------- ---------- ---------- ----------
-- 69,561 91,504 -- 161,065
---------- --------- ---------- ---------- ----------
Operating expenses:
Direct:
Rooms ......................................... -- 14,195 17,703 -- 31,898
Food and beverage ............................. -- 10,628 14,837 -- 25,465
Other ......................................... -- 2,045 2,562 -- 4,607
General, administrative and other ................. -- 23,416 33,228 -- 56,644
Depreciation and amortization ..................... -- 6,328 10,080 -- 16,408
Impairment of long-lived assets ................... -- -- 56,549 -- 56,549
Severance and restructuring expenses .............. -- -- 1,502 -- 1,502
---------- --------- ---------- ---------- ----------
Total operating expenses .............. -- 56,612 136,461 -- 193,073
---------- --------- ---------- ---------- ----------
-- 12,949 (44,957) -- (32,008)
Other income (expenses):
Interest income and other ....................... -- -- 358 -- 358
Interest expense ................................ -- (14,144) (11,699) (25,843)
Loss on asset dispositions ...................... -- (98) -- -- (98)
Equity in losses of consolidated subsidiaries ... (60,890) -- -- 60,890 --
Minority interests:
Preferred redeemable securities ................. -- -- (3,064) -- (3,064)
Other ........................................... -- -- (236) -- (236)
---------- --------- ---------- ---------- ----------
Loss before income taxes .......................... (60,890) (1,293) (59,598) 60,890 (60,891)
Benefit for income taxes .......................... 20,703 440 20,263 (20,703) 20,703
---------- --------- ---------- ---------- ----------
Net loss ......................... $ (40,187) $ (853) $ (39,335) $ 40,187 $ (40,188)
========== ========= ========== ========== ==========
14
17
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms ............................................. $ -- $ 85,486 $ 90,469 $ -- $ 175,955
Food and beverage ................................. -- 26,101 26,900 -- 53,001
Other ............................................. -- 5,431 6,283 -- 11,714
---------- ---------- --------- --------- ----------
-- 117,018 123,652 -- 240,670
---------- ---------- --------- --------- ----------
Operating expenses:
Direct:
Rooms ........................................... -- 23,537 24,840 -- 48,377
Food and beverage ............................... -- 18,809 19,346 -- 38,155
Other ........................................... -- 3,024 3,325 -- 6,349
General, administrative and other ................... -- 44,697 56,465 -- 101,162
Depreciation and amortization ....................... -- 13,971 16,177 -- 30,148
Impairment of long-lived assets ..................... -- 1,265 3,300 -- 4,565
Severance and restructuring expenses ................ -- -- 1,467 -- 1,467
---------- ---------- --------- --------- ----------
Total operating expenses ................ -- 105,303 124,920 -- 230,223
---------- ---------- --------- --------- ----------
-- 11,715 (1,268) -- 10,447
Other income (expenses):
Interest income and other ......................... -- -- 480 -- 480
Interest expense .................................. -- (24,691) (14,678) -- (39,369)
Gain on asset dispositions ........................ -- (240) 24,349 -- 24,109
Equity in losses of consolidated subsidiaries ..... (10,958) -- -- 10,958 --
Minority interests:
Preferred redeemable securities ................... -- -- (6,509) -- (6,509)
Other ............................................. -- -- (116) -- (116)
---------- ---------- --------- --------- ----------
(Loss) income before income taxes ................... (10,958) (13,216) 2,258 10,958 (10,958)
Provision for income taxes .......................... (2,700) -- (2,700) 2,700 (2,700)
---------- ---------- --------- --------- ----------
Net loss ........................... $ (13,658) $ (13,216) $ (442) $ 13,658 $ (13,658)
========== ========== ========= ========= ==========
15
18
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms .......................................... $ -- $ 96,534 $ 120,685 $ -- $ 217,218
Food and beverage .............................. -- 29,186 38,763 -- 67,949
Other .......................................... -- 5,851 8,404 -- 14,255
---------- ---------- ---------- ---------- ----------
-- 131,571 167,851 -- 299,422
---------- ---------- ---------- ---------- ----------
Operating expenses:
Direct:
Rooms ........................................ -- 27,187 33,312 -- 60,499
Food and beverage ............................ -- 20,739 27,944 -- 48,683
Other ........................................ -- 3,987 4,930 -- 8,917
General, administrative and other ................ -- 46,207 65,582 -- 111,789
Depreciation and amortization .................... -- 12,263 20,177 -- 32,440
Impairment of long-lived assets .................. -- 8,800 57,362 -- 66,162
Severance and restructuring expenses ............. -- -- 1,502 -- 1,502
---------- ---------- ---------- ---------- ----------
Total operating expenses ............. -- 119,183 210,809 -- 329,992
---------- ---------- ---------- ---------- ----------
-- 12,388 (42,958) -- (30,570)
Other income (expenses):
Interest income and other ...................... -- -- 663 -- 663
Interest expense ............................... -- (27,573) (22,257) -- (49,830)
Loss on asset dispositions ..................... -- (3) -- -- (3)
Equity in losses of consolidated subsidiaries .. (86,410) -- -- 86,410 --
Minority interests:
Preferred redeemable securities ................ -- -- (6,127) -- (6,127)
Other .......................................... -- -- (543) -- (543)
---------- ---------- ---------- ---------- ----------
Loss before income taxes ......................... (86,410) (15,188) (71,222) 86,410 (86,410)
Benefit for income taxes ......................... 29,380 5,164 24,216 (29,380) 29,380
---------- ---------- ---------- ---------- ----------
Net loss ........................ $ (57,030) $ (10,024) $ (47,006) $ 57,030 $ (57,030)
========== ========== ========== ========== ==========
16
19
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED IN THOUSANDS)
Operating activities:
Net loss ............................................... $ -- $ (13,216) $ (442) $ (13,658)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................... -- 13,971 16,177 30,148
Gain on sale of assets ................................ -- 240 (24,349) (24,109)
Deferred income tax provision ......................... 2,700 -- -- 2,700
Minority interests .................................... -- -- 6,625 6,625
Impairment of long-lived assets ....................... -- 1,265 3,300 4,565
401 (k) plan contributions ............................ 257 -- -- 257
Amortization of deferred stock compensation ........... 98 -- -- 98
Amortization of deferred loan fees .................... -- 1,746 1,056 2,802
Other ................................................. 145 (637) (343) (835)
Changes in operating assets and liabilities:
Accounts receivable ................................... -- (798) 730 (68)
Inventories ........................................... -- 207 27 234
Prepaid expenses and other assets ..................... -- 13 (930) (917)
Accounts payable ...................................... -- 265 (5,260) (4,995)
Accrued liabilities ................................... -- (1,047) (3,457) (4,504)
Advance deposits ...................................... -- 229 42 271
--------- ---------- ---------- ----------
Net cash provided by (used in) operating activities ..... 3,200 2,238 (6,824) (1,386)
--------- ---------- ---------- ----------
Investing activities:
Capital improvements, net ............................. -- (10,452) (5,492) (15,944)
Proceeds from sale of assets, net ..................... -- 8,862 55,728 64,590
Net withdrawals for capital expenditures .............. -- 830 694 1,524
--------- ---------- ---------- ----------
Net cash provided by (used in) investing activities ... -- (760) 50,930 50,170
--------- ---------- ---------- ----------
Financing activities:
Proceeds from borrowings on working capital revolver .. -- 16,000 -- 16,000
Proceeds received from (paid to) related parties ...... (3,200) 18,504 (15,304) --
Principal payments on long-term obligations ........... -- (26,046) (25,222) (51,268)
Principal payments on working capital revolver ........ -- (15,000) -- (15,000)
--------- ---------- ---------- ----------
Net cash used in financing activities ............... (3,200) (6,542) (40,526) (50,268)
--------- ---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents .... -- (5,064) 3,580 (1,484)
Cash and cash equivalents at beginning of period ........ 6 20,653 343 21,002
--------- ---------- ---------- ----------
Cash and cash equivalents at end of period .............. $ 6 $ 15,589 $ 3,923 $ 19,518
========= ========== ========== ==========
17
20
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED IN THOUSANDS)
Operating activities:
Net loss ............................................... $ -- $ (10,024) (47,006) $ (57,030)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ......................... -- 12,263 20,177 32,440
Loss on sale of assets ................................ -- 3 -- 3
Deferred income tax benefits .......................... (29,380) -- -- (29,380)
Minority interests .................................... 3,607 3,607
Impairment of long-lived assets ....................... -- 8,800 57,362 66,162
401 (k) plan contributions ............................ -- -- 419 419
Amortization of deferred stock compensation ........... -- -- 27 27
Amortization of deferred loan fees .................... -- 1,141 1,191 2,332
Other ................................................. 475 (271) (1,152) (948)
Changes in operating assets and liabilities:
Accounts receivable ................................... -- (3,165) 2,983 (182)
Inventories ........................................... -- 404 (96) 308
Prepaid expenses and other assets ..................... -- (429) (1,740) (2,169)
Accounts payable ...................................... -- (514) (4,556) (5,070)
Accrued liabilities ................................... -- 11,471 (687) 10,784
Advance deposits ...................................... -- 359 358 717
--------- --------- --------- ---------
Net cash (used in) provided by operating activities ..... (28,905) 20,038 30,887 22,020
--------- --------- --------- ---------
Investing activities:
Capital expenditures, net ............................. -- (31,055) (20,310) (51,365)
Proceeds from sale of assets .......................... -- 33,734 -- 33,734
Net (withdrawals) deposits for capital expenditures ... -- -- (6,250) (6,250)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities ... -- 2,679 (26,560) (23,881)
--------- --------- --------- ---------
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 ...... 28,905 (28,130) (775) --
Principal payments on long-term obligations ........... -- (7,171) (2,624) (9,795)
Principal payments on working capital revolver ........ -- (5,000) -- (5,000)
Distributions to minority interests ................... -- -- (186) (186)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities ..... 28,905 (10,301) (1,500) 17,104
--------- --------- --------- ---------
Net increase in cash and cash equivalents ............... -- 12,416 2,827 15,243
Cash and cash equivalents at beginning of period ........ 59 9,910 4,675 14,644
--------- --------- --------- ---------
Cash and cash equivalents at end of period .............. $ 59 $ 22,326 $ 7,502 $ 29,887
========= ========= ========= =========
18
21
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.
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 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. In addition, in its pursuit of its overall strategic
plan to enhance shareholder value, the Company continues to review its existing
structure and, in the second quarter of 2001, made several personnel and
management changes including the appointment of several key executives.
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OVERVIEW
Management believes that the 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, depreciation and amortization, asset impairment
charges and severance and restructuring expenses. 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.
Six months ended June 30, 2001
In the first six months of 2001, the Company sold five hotels for a
gross sale price of $72.2 million.
Year Ended December 31, 2000
During 2000, the Company sold nineteen hotel properties and four other
assets, including five hotel properties sold in the first six months of 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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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 SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Rooms ....................................................... 73.0% 72.7% 73.1% 72.5%
Food and beverage ........................................... 22.1 22.6 22.0 22.7
Other ....................................................... 4.9 4.7 4.9 4.8
------ ------ ------ ------
100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Direct:
Rooms ..................................................... 19.3 19.8 20.1 20.2
Food and beverage ......................................... 15.5 15.8 15.9 16.3
Other ..................................................... 2.5 2.9 2.6 3.0
General, administrative and other ............................. 39.5 35.2 42.0 37.3
Depreciation and amortization ................................. 11.5 10.2 12.5 10.8
Impairment of long-lived assets ............................... 3.2 35.1 1.9 22.1
Severance and restructuring expenses .......................... 0.6 0.9 0.6 0.5
------ ------ ------ ------
Total operating expenses .......................... 92.1 119.9 95.6 110.2
------ ------ ------ ------
7.9 (19.9) 4.4 (10.2)
Other income (expenses):
Interest income and other ................................... 0.2 0.2 0.2 0.2
Interest expense ............................................ (14.8) (16.0) (16.4) (16.6)
(Loss) gain on asset dispositions ............................ (0.2) (0.1) 10.0 (0.0)
Minority interests:
Preferred redeemable securities ............................. (2.6) (1.9) (2.7) (2.0)
Other ....................................................... 0.0 (0.1) (0.0) (0.2)
------ ------ ------ ------
Loss before income taxes ...................................... (9.5) (37.8) (4.5) (28.8)
Benefit (provision) for income taxes .......................... -- 12.9 (1.1) 9.8
------ ------ ------ ------
Net loss ...................................................... (9.5)% (24.9)% (5.6)% (19.0)%
====== ====== ====== ======
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THREE MONTHS ENDED JUNE 30, 2001 ("SECOND QUARTER 2001") COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 2000 ("SECOND QUARTER 2000")
REVENUES
At June 30, 2001, the Company owned 106 hotels and had a minority
interest in one hotel compared with 126 hotels owned, a minority interest in one
hotel and one hotel managed for a third party at June 30, 2000.
Total revenues for the Company were $125.9 million for the second
quarter 2001 and $161.1 million for the second quarter 2000. Of this $35.2
million or a 21.9% decrease, $30.2 million is due to the disposition of twenty
hotels in the owned portfolio. Revenues for hotels owned at the end of the
second quarter 2001 were $124.7 million for the second quarter 2001 and $129.7
million for the second quarter 2000 (a decline of 3.9%). RevPAR for hotels owned
at the end of the second quarter 2001 declined by 4.0% compared to the second
quarter 2000, primarily as a result of a decline in occupancy of 5.9% partially
offset by an increase in average daily rates of 2.0%. Revenues and RevPar on the
same unit basis for the second quarter 2001 was impacted by a general decline in
the industry and in particular by a weakening in certain of the Company's
markets.
OPERATING EXPENSES
Direct operating expenses for the Company were $46.9 million (37.3% of
direct revenues) for the second quarter 2001 and $62.0 million (38.5% of direct
revenues) for the second quarter 2000. This $15.1 million decrease was primarily
attributable to the reduction of twenty hotels in the owned portfolio, as well
as lower direct costs as a percentage of revenues. The lower percentage in
direct costs was primarily due to cost reductions in the rooms department and to
a lesser extent to other direct activities. Other direct revenue comprises
revenues from telephone, laundry services, use of meeting facilities and other
miscellaneous activities.
General, administrative and other expenses were $49.7 million (39.5% of
direct revenues) for the second quarter 2001 and $56.6 million (35.2% of direct
revenues) for the second quarter 2000. This $6.9 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 ($0.8 million), property
insurance ($0.6 million), franchise fees ($0.6 million) and property taxes ($0.7
million). These increased utility costs were somewhat offset by utility
surcharges added to room rates in selected markets. Property insurance costs
increased due to premium increases in the global property insurance market and
increases in certain small claims. 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 assessments in certain
markets. Included in general, administrative and other expenses are $2.4 million
of unusual expenses ($3.6 million for the second quarter 2000). Of this amount,
$1.4 million is related to professional fees principally related to consultants
performing certain financial and accounting management responsibilities within
the Company and $0.3 million is related to certain legal matters.
Depreciation and amortization expense was $14.5 million in the second
quarter 2001 and $16.4 million in the second quarter 2000. The $1.9 million
decrease is primarily as a result of the reduction of twenty hotels in the owned
portfolio.
Impairment charges for the second quarter 2001 and 2000 were $4.0
million and $56.5 million, respectively. The Company's second quarter 2001
charge related to one property which was identified as held for sale and also
sold in the second quarter of 2001. The second quarter 2000 charge related to
impairment charges in respect of the ten hotels sold to Sunstone Investors, LLC
on August 31, 2000.
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OTHER INCOME AND EXPENSES
Interest expense was $18.6 million in the second quarter 2001 and $25.8
million in the second 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.
Loss on asset dispositions was $0.3 million for the second quarter
2001. This relates to the three hotels sold in the second quarter 2001 and
represents the excess of the net proceeds of sale over the net book values of
these assets.
Minority interest expense was $3.3 million in the second quarter 2001
and also in the second quarter 2000. This is due to an increase in the CREST
dividend as a result of interest compounding which increase has been offset by
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
The Company provided no benefit for income taxes in the second quarter
2001 and a benefit for income taxes of $20.7 million in the second quarter 2000.
The net loss was $11.8 million ($0.42 loss per share) in second quarter 2001
compared with a net loss of $40.2 million ($1.43 loss per share) in the second
quarter 2000.
SIX MONTHS ENDED JUNE 30, 2001 ("THE 2001 PERIOD") COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 2000 ("THE 2000 PERIOD")
REVENUES
Total revenues for the Company were $240.7 million, for the 2001 period
and $299.4 million for the 2000 period. Of this $58.7 million or a 19.6%
decrease, $52.6 million is due to the disposition of twenty hotels in the owned
portfolio. Revenues for hotels owned at the end of the second quarter 2001 were
$235.3 million for the 2001 period and $241.4 million for the 2000 period (a
decline of 2.5%). RevPAR for hotels owned at the end of the 2001 period declined
by 1.8% compared to the 2000 period, primarily as a result of a decline in
occupancy of 4.7% partially offset by an increase in average daily rates of
3.0%. Revenues and RevPar on the same unit basis for the 2001 period was
impacted by a general decline in the industry and in particular by a weakening
in certain of the Company's markets.
OPERATING EXPENSES
Direct operating expenses for the Company were $92.9 million (38.6% of
direct revenues) for the 2001 period and $118.1 million (39.4%) of direct
revenues) for the 2000 period. This $25.2 million decrease was due primarily to
a reduction of twenty hotels in the owned portfolio as well as lower direct
costs as a percentage of revenues. The lower percentage in direct costs was
primarily due to cost reductions in the rooms department 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 $101.2 million (42.0% of
direct revenues) for the 2001 period and $111.8 million (37.3%) of direct
revenue) for the 2000 period. This $10.6 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 ($2.5 million), property insurance
($1.8 million), franchise fees ($1.2 million) and property taxes ($0.9 million).
The utility costs increased 21% in the first quarter 2001 due to higher usages
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 due
to premium increases in the global property insurance market and increases in
certain small claims. 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 franchisors. Property
taxes increased due to property tax assessments in certain markets. Included in
general, administrative and other expenses are $5.6 million of unusual expenses
($7.6 million for the 2000 period). Of this amount, $3.2 million is
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related to professional fees principally related to consultants performing
certain financial and accounting management responsibilities within the Company
and $0.7 million related to certain legal matters.
Depreciation and amortization expense was $30.1 million in the 2001
period and $32.4 million in the 2000 period. The $2.3 million decrease is
primarily a result of a decrease of $3.6 million in depreciation related to
hotels sold, net of additional depreciation expense of $1.3 million relating to
two hotels previously considered held for sale and that are no longer being
actively marketed for sale.
Impairment charges for the 2001 and 2000 periods were $4.6 million and
$66.2 million, respectively. The charge for the 2001 period consists of $0.6
million and $4.0 million relating to the first and second quarters,
respectively. The first quarter charge comprised $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 was no longer being actively marketed for sale as
of March 31, 2001. The second quarter charge related to one hotel which was
identified as held for sale and also sold in the second quarter 2001. The charge
in the 2000 period, consisted of $9.6 million and $56.6 million in the first and
second quarters, respectively. The first quarter charge related to revised
estimates of fair value for properties held for sale at December 31, 1999 and
second quarter charge related to the ten hotels sold to Sunstone Investors, LLC
on August 31, 2000.
OTHER INCOME AND EXPENSES
Interest expense was $39.4 million in the 2001 period and $49.8 million
in the 2000 period. 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 $24.1 million for the 2001 period. This
relates primarily to the sale of one hotel in the first quarter 2001 and
represents the excess of the net proceeds of sale over the net book values of
assets sold.
Minority interest expense was $6.6 million in the 2001 period and $6.7
million in the 2000 period. This is due to an increase in the CREST dividend as
a result of the interest compounding which increase has been offset by 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 2001 period
and a benefit for income taxes of $29.4 million in the 2000 period, the Company
had a net loss of $13.7 million ($0.48 loss per share) in the 2001 period
compared with a net loss of 57.0 million ($2.04 loss per share) in the 2000
period.
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 six
months of 2001.
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 $50.7 million,
a 33.0% decrease from the $75.7 million for the 2000 period. This decrease was
primarily due to a reduction of twenty hotels in the owned portfolio and other
factors discussed below. EBITDA, as adjusted, on a same unit basis was $50.6
million for the 2001 period
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and $60.8 million for the 2000 period, a decrease of 16.8%. This decrease on a
same unit basis was due primarily to a 1.8% decline in RevPar, higher
administrative and 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. These contributory factors were offset by a 0.5% decrease in direct
operating expenses as a percentage of revenue. The Company has computed EBITDA
without regard to the unusual items and one-time charges. For the 2001 period,
these items consisted of unusual costs (principally professional and legal fees
and severance charges) of $5.6 million and impairment charges of $4.6 million,
compared to $7.6 million and $66.2 million, respectively, for the 2000 period.
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 for the 2001 period was $1.4 million compared to
net cash provided by operations of $22.0 million for the 2000 period.
Cash flows provided by investing activities was $50.2 million for the
2001 period and cash flows used in investing activities was $23.9 million for
the 2000 period. The 2001 amount includes capital expenditures of $15.9 million,
net proceeds from the sale of assets of $64.6 million and withdrawals for
capital expenditure escrows of $1.5 million. The 2000 period includes capital
expenditures of $51.4 million, net proceeds from the sale of assets of $33.7
million and deposits for capital expenditure escrows of $6.3 million.
Cash flows used in financing activities were $50.3 million for the 2001
period and net cash provided by financing activities were $17.1 million for the
2000 period. 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 June 30, 2001, the Company had a working capital deficit of $88.5
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 $14.9 million at June 30, 2001 compared with a
working capital deficit of $20.0 million at December 31, 2000.
At June 30, 2001, long-term obligations were $630.1 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
June 30, 2001, the Company decreased its anticipated 2001 capital expenditures
to $32 million, of which an aggregate $16.7 million was incurred in the first
and second quarters of 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-four hotel properties and four other assets between January 1, 2000 and
June 30, 2001. Gross sales price of these twenty-eight properties was $281.0
million while the reduction of debt was $212.6 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 June 30, 2001 3 6.0 5.7
----- -------- --------
28 $ 281.0 $ 212.6
===== ======== ========
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The Company's total outstanding debt as of August 14, 2001 (excluding
CRESTS) was approximately $703.3 million. Of this amount, $47.9 million is due
in 2001. As of August 14, 2001, the Company's held for sale properties have an
estimated fair value of approximately $20.8 million.
The Company is exploring 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, in some cases, 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 will likely sell assets to meet its remaining
$47.9 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. The Company will need 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.
On May 15, 2001, the Company and the lenders of its Senior Secured loan
credit facility reached an agreement to amend that facility. Prior to the
amendment, the Company would have been in violation of two financial covenant
ratios based on its first quarter 2001 operating results. The amendment
increased the interest rate spread (which was then LIBOR plus 4.25%) by 25 basis
points in each month from August 2001 to February 2002 up to a maximum of LIBOR
plus 6.00% until maturity. The amendment also provided that the interest rate
spread would increase an additional 25 basis points up to a maximum of LIBOR
plus 6.00% if the company's debt was downgraded by a rating agency subsequent to
the amendment date (the downgrade occurred in May 2001). In addition, 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 financial coverage ratios. The
amendment also required additional amortization payments on tranche B term loans
of $7.5 million on April 30, 2002, June 30, 2002, September 30, 2002 and
December 31, 2002, respectively. The amendment also modified various covenants
and financial coverage ratios, with which the Company is in compliance as of
June 30, 2001. The Company paid 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 was converted to the tranche B term loan, thereby
reducing the commitment on the working capital revolver to $25.0 million. As of
August 14, 2001, the Company has $19.1 million of unused availability on the
working capital revolver portion of its Senior Secured loan credit facility and
the full amount of the unused availability is currently available for
borrowings. At August 14, 2001, the Company had $195.2 million outstanding on
its Senior Secured loan credit facility having fully satisfied the remaining
$6.7 million obligation which was due June 30, 2001 on this facility. Currently
the Company is exploring the possibility of refinancing opportunities to
completely pay off these obligations prior to January 2, 2002 and is in
discussions with certain potential lenders who have expressed an interest in
participating in such a transaction. However, there can be no assurances that
the Company can complete a refinancing nor can there be any assurances, that, if
completed, the refinancing will be 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") were 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 did not make this payment on May 20, 2001. MHA and the Company are
cooperating with the note holders in marketing the hotel for sale and entered
into a Forbearance Agreement related to the debt. During the first quarter of
2001, the Company 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.
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The Company is aware of a potential violation of certain financial
covenants related to its Senior Secured loan credit facility based on its
projected third quarter 2001 operating results. In the event that this violation
occurs, the Company will commence negotiations with the lenders of this facility
with respect to the third quarter's requirements. If the violation occurs, and
the Company is not able to negotiate a satisfactory amendment or a waiver with
the lenders of this facility, the entire amount owing under this facility
(currently $195.2 million) and any related components will convert to a short
term facility.
Despite the very challenging economic environment, 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.
The Company has been notified by the New York Stock Exchange that it is
not in compliance with the Exchange's continuing listing requirements because
the average closing price of Lodgian stock was less than the $1.00 per share
limit over a consecutive thirty trading day period. The Company is considering
actions that may be taken in order to bring itself into compliance with the
Exchange's requirements. The Company believes that it has until its annual
shareholders' meeting in 2002 to remedy this lack of compliance.
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
The Company is a party in litigation with Hospitality Restoration and
Builders, Inc. ("HRB"), a general contractor hired to perform work on six (6) of
the Company's hotels. The litigation is pending in Texas, Illinois, and New
York. In general, HRB claims that the Company breached contracts to renovate the
hotels by not paying for work performed. The Company contends that it was
over-billed by HRB and that a significant portion of the completed work was
defective. In July 2001, the parties agreed, in principle, to settle the
litigation pending in Texas and Illinois. In exchange for mutual dismissals and
full releases, the Company has agreed to pay HRB $750,000. With respect to the
matter pending in the state of New York, HRB claims that it is owed $10.7
million. The Company asserted a counterclaim of $7 million and 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 Company's acquisition of AMI Operating Partners, LP. WH seeks
damages totaling $754,500. The Company 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"). In July 2001, the plaintiffs agreed to dismiss the Consolidated
Action, hence relieving the Company of any potential claim for damages.
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 and its
directors, 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. The case
remains pending but it is the opinion of management that the resolution of this
matter will not have a material adverse effect on the Company's financial
position or results of operations.
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 the remaining claims were dismissed on
April 13, 2001.
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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
No reports on Form 8-K were filed during the second quarter of 2001.
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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: August 14, 2001 By: /s/ THOMAS ARASI
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THOMAS ARASI
President and Chief Executive Officer
Date: August 14, 2001 By: /s/ CHARLES E. MILLER, JR.
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CHARLES E. MILLER, JR.
Chief Accounting Officer
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