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 SEPTEMBER 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 NOVEMBER 1, 2001
- ----------------------------- -------------------------------------
Common 28,479,837
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 September 30, 2001 (unaudited)
and December 31, 2000......................................................... 1
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and 2000 ...................... 2
(unaudited).............
Condensed Consolidated Statements of Stockholders' Equity
for the Nine Months Ended September 30, 2001 (unaudited) and for the
Year Ended December 31, 2000.................................................. 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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..................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 32
Item 2. Changes in Securities......................................................... 32
Item 6. Exhibits and Reports on Form 8-K.............................................. 33
Signatures .............................................................................. 34
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
----------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 5,625 $ 21,002
Cash, restricted .......................................................... 2,996 2,237
Accounts receivable, net of allowances .................................... 17,598 20,624
Inventories ............................................................... 7,268 7,805
Prepaid expenses and other current assets ................................. 9,123 9,261
----------- -----------
Total current assets ............................................... 42,610 60,929
Property and equipment, net .................................................... 992,231 1,059,048
Deposits for capital expenditures .............................................. 14,422 14,005
Other assets, net .............................................................. 23,969 29,965
----------- -----------
$ 1,073,232 $ 1,163,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 18,658 $ 25,088
Accrued interest ......................................................... 8,782 16,795
Other accrued liabilities ................................................ 34,456 37,203
Advance deposits ......................................................... 2,062 1,854
Current portion of long-term obligations ................................. 701,358 79,843
Minority interests - preferred redeemable securities (including
related accrued interest) ............................................... 194,198 --
----------- -----------
Total current liabilities .......................................... 959,514 160,783
Long-term obligations, less current portion .................................... -- 674,038
Deferred income taxes .......................................................... 3,603 3,603
Minority interests:
Preferred redeemable securities (including related accrued interest) ..... -- 184,349
Other .................................................................... 5,547 4,294
----------- -----------
Total liabilities .................................................. 968,664 1,027,067
Commitments and contingencies .................................................. -- --
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares authorized; 28,479,837 and
28,139,481 issued at September 30, 2001 and December 31, 2000, respectively;
28,479,837 and 28,290,424 shares outstanding at September 30, 2001 and
December 31, 2000, respectively ............................................ 284 282
Additional paid-in capital .................................................. 263,687 263,320
Accumulated deficit ......................................................... (157,533) (125,542)
Accumulated other comprehensive loss ........................................ (1,870) (1,180)
----------- -----------
Total stockholders' equity ........................................... 104,568 136,880
----------- -----------
$ 1,073,232 $ 1,163,947
=========== ===========
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Revenues:
Rooms .............................................. $ 85,161 $ 117,425 $ 261,116 $ 334,643
Food and beverage .................................. 21,777 30,772 74,778 98,721
Other .............................................. 4,436 7,007 16,150 21,262
------------- ------------- ------------- -------------
111,374 155,204 352,044 454,626
------------- ------------- ------------- -------------
Operating expenses:
Direct:
Rooms ............................................ 23,227 32,827 71,604 93,326
Food and beverage ................................ 16,886 23,719 55,041 72,402
Other ............................................ 2,932 4,225 9,281 13,142
General, administrative and other .................... 47,554 56,178 148,716 168,037
Depreciation and amortization ........................ 14,471 16,908 44,619 49,348
Impairment of long-lived assets ...................... 2,270 (10,712) 6,835 55,450
Severance and restructuring expenses ................. 624 -- 2,091 1,502
------------- ------------- ------------- -------------
Total operating expenses ....................... 107,964 123,145 338,187 453,207
------------- ------------- ------------- -------------
3,410 32,059 13,857 1,419
Other income (expenses):
Interest income and other .......................... 158 467 638 1,200
Interest expense ................................... (18,464) (24,596) (57,833) (74,426)
Interest hedge break fee ........................... -- (4,294) -- (4,294)
Gain (loss) on asset dispositions .................. 97 (21) 24,206 (24)
Minority interests:
Preferred redeemable securities .................... (3,340) (3,063) (9,849) (9,190)
Other .............................................. (65) 250 (181) (293)
------------- ------------- ------------- -------------
(Loss) income before income taxes .................... (18,204) 802 (29,162) (85,608)
(Provision) benefit for income taxes ................ (129) (275) (2,829) 29,105
------------- ------------- ------------- -------------
Net (loss) income .................................... $ (18,333) $ 527 $ (31,991) $ (56,503)
============= ============= ============= =============
(Loss) earnings per common share - basic and diluted . $ (0.64) $ 0.02 $ (1.12) $ (2.01)
============= ============= ============= =============
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------------------ PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL 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 ........ 189,413 2 367 369
Net loss ........................ -- -- -- (31,991) -- (31,991)
Currency translation
adjustments .................. -- -- -- -- (690) (690)
-------------
Comprehensive loss .............. (32,681)
------------- ------------- ------------- ------------- ------------- -------------
Balance at September 30, 2001 ... 28,479,837 $ 284 $ 263,687 $ (157,533) $ (1,870) $ 104,568
============= ============= ============= ============= ============= =============
</Table>
The comprehensive loss for the nine months ended September 30, 2000 was $56.5
million and for the three months ended September 30, 2001 was $18.8 million. The
comprehensive income for the three months ended September 30, 2000 was $0.5
million.
The data for the three and nine months ended September 30, 2001 and 2000 is
unaudited.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
Operating activities:
Net loss ........................................................... $ (31,991) $ (56,503)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization .................................... 44,619 49,348
(Gain) loss on sale of assets .................................... (24,206) 24
Deferred income tax benefit ...................................... -- (29,105)
Minority interests ............................................... 10,030 9,483
Impairment of long-lived assets .................................. 6,835 55,450
401 (k) plan contributions ....................................... 369 376
Amortization of deferred loan fees ............................... 4,620 3,460
Other ............................................................ (171) (3,404)
Changes in operating assets and liabilities:
Accounts receivable .......................................... 3,026 (1,307)
Inventories .................................................. 537 1,035
Prepaid expenses and other assets ............................ (621) (1,502)
Accounts payable ............................................. (7,283) (3,834)
Accrued liabilities .......................................... (10,760) (4,635)
Advance deposits ............................................. 208 (278)
--------- ---------
Net cash (used in) provided by operating activities .................. (4,788) 18,608
Investing activities:
Capital improvements, net .......................................... (21,528) (72,044)
Proceeds from sale of assets, net .................................. 64,590 164,455
Net deposits for capital expenditures .............................. (417) (2,970)
--------- ---------
Net cash provided by investing activities ........................... 42,645 89,441
Financing activities:
Proceeds from borrowings on working capital revolver ............... 16,000 30,000
Proceeds from issuance of long-term obligations .................... -- 2,326
Principal payments on long-term obligations ........................ (53,669) (131,520)
Principal payments on working capital revolver ..................... (15,000) (5,000)
Payments of deferred loan costs .................................... (565) (3,300)
Distributions to minority interests ................................ -- (683)
--------- ---------
Net cash used in financing activities .............................. (53,234) (108,177)
--------- ---------
Net decrease in cash and cash equivalents ............................ (15,377) (128)
Cash and cash equivalents at beginning of period ..................... 21,002 14,644
--------- ---------
Cash and cash equivalents at end of period ........................... $ 5,625 $ 14,516
========= =========
Supplemental cash flow information: Cash paid during the period for:
Interest, net of amount capitalized ................................ $ 61,226 $ 71,767
========= =========
Income taxes, net of refunds ....................................... $ 103 $ 584
========= =========
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
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 September 30, 2001, and the results of its
operations for the three and nine months ended September 30, 2001 and 2000 and
its cash flows for the nine months ended September 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. MATTERS AFFECTING BUSINESS
The Company's future financial condition and results of operations are
subject to a number of risks and uncertainties, some of which are set forth
below and in other sections of this Form 10-Q.
SUBSTANTIAL LEVERAGE
The Company has indebtedness which is substantial in relation to its
stockholders' equity. As of September 30, 2001, the Company had total debt of
approximately $701.4 million (excluding Preferred Redeemable Securities of
$194.2 million and $64.0 million of trade payables, other accrued liabilities
and advance deposits). Stockholders' equity as of September 30, 2001 is
approximately $104.6 million. In addition, as further discussed in Note 7, the
Company has additional borrowings available under its revolving credit facility
but the Company's ability to draw down on this availability is subject to the
approval of the lenders. The Company's leveraged financial position exposes it
to the risk of increased interest rates, may impede its ability to obtain
financing in the future for working capital, capital expenditures and general
corporate purposes, and may make the Company more vulnerable to economic
downturns and limit its ability to withstand competitive pressures.
The Company's debt instruments contain a number of covenants, which
limit the ability of the Company to, among other things, incur debt and incur
liens.
5
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company will need to use a large portion of its future cash flows
to pay principal and interest on its debt obligations, which will reduce the
amount of money available for use in its operations or for responding to
potential business opportunities if these arise. The Company does not anticipate
being able to generate the cash necessary to service its debt obligations and
may further reduce or delay capital expenditures, sell assets, restructure its
debt or seek additional equity capital. There can be no assurance that any of
these actions can be effected on commercially reasonable terms, if at all, and
the terms of existing or future indebtedness may restrict the Company from
adopting any of these alternatives.
Based on its third quarter 2001 results, the Company is not in compliance with
the financial covenants related to its Senior Secured Loan Credit Facility (the
senior facility), on which, as of November 14, 2001, the Company has
outstanding borrowings of $196.2 million. However on November 13, 2001, the
Company reached an agreement in principle with the lenders of this facility
(the senior lenders) with respect to the financial covenant violations,
pursuant to which the senior lenders agreed to forbear from the exercise of
their default-related remedies against the Company until December 31, 2001
(unless an additional event of default occurs earlier). The Company expects to
formally execute the forbearance agreement within the next few days. The
forbearance agreement also reduced the commitment on the working capital
revolver from $25.0 million to $13.4 million leaving the Company with $3.0
million of unused availability on the working capital revolver portion of the
senior facility. The forbearance agreement also requires that the remaining
$3.0 million be used only to pay the interest in respect of the senior facility
due on November 15, 2001 and that the Company make semi-monthly interest
payments on the senior facility. The Company also anticipates that it will not
be able to make the remaining $36.0 million of required special amortization
payments to its senior lenders due December 31, 2001 and is working with its
senior lenders to seek an acceptable resolution of these problems. There can be
no assurance that the Company will be successful in such negotiations and there
is not certainty as to what actions the senior lenders may take if the Company
is unable to negotiate a resolution.
The Company anticipates that because of limited liquidity it will not
be making the $12.3 million interest payment due January 15, 2002 to the holders
of the Company's Senior Subordinated Notes. In addition, as a result of the
events of default with respect to its Senior Secured Loan Facility, the
Company's Senior Subordinated Notes and the CRESTS are also in default due to
cross-default provisions in those agreements. The Company intends to attempt to
negotiate a debt restructuring with both the holders of the Senior Subordinated
Notes and the holders of the CRESTS. There can be no assurances that the Company
will be successful in such negotiations and there is no certainty as to what
actions the lenders may take if the Company is unable to negotiate a resolution.
Any further failure of the Company to comply with the covenants
contained in its debt instruments, or to adequately service its debt
obligations, could result in additional defaults under its debt instruments. If
a default occurs under any of the Company's debt instruments (including the
CRESTS) the lenders thereunder may elect to declare all associated borrowings
outstanding, together with interest and fees, to be immediately due and payable.
If the Company was unable to repay any borrowings when due, the lenders
thereunder would have the right to proceed against the collateral available to
them to secure the debt. Certain defaults under the Company's debt instruments,
particularly any default that results in acceleration of indebtedness or
foreclosure on collateral, would have a material adverse effect on the Company.
As a result of the events of default currently existing with respect to
the Company's Senior Secured Loan Facility, the Senior Subordinated Notes and
the CRESTS, the uncertainty regarding the Company's ability to generate the
liquidity necessary to meet its debt obligations as they become due and payable,
and the uncertainty regarding the Company's ability to comply with its debt
covenants, the Company believes that future defaults with respect to its debt
agreements are likely within the next twelve months. Consequently, the Company
has classified all of its debt and the CRESTS as current liabilities in the
accompanying financial statements.
6
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPETITION
The hotel industry is highly competitive, as the Company currently
competes with other major hoteliers of varying sizes. Competition within the
industry may also increase due to the recent economic downturn. See Item 2.
Management Discussion and Analysis of financial condition for a discussion on
the impact on the Company's results.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is also dependent upon its senior management
team, as well as its ability to attract and retain qualified personnel. There is
no assurance that the Company will be able to retain its existing senior
management or to attract additional qualified personnel. The Company has been
subject to recent management changes as disclosed in Note 10 to these financial
statements.
LIQUIDITY
Amidst the challenges of the current economic environment and the
specific challenges peculiar to the Company, particularly those adversely
impacting the hospitality industry and the Company since the events of September
11, 2001, management considers the restructuring of its debt obligations and the
availability of additional liquidity to be critical if the Company is to have
sufficient liquidity to fund its operating, capital expenditures and debt
service obligations beyond December 31, 2001. The Company does not anticipate
having sufficient liquidity without such a restructuring. If the Company
executes a restructuring of its debt terms, it may recognize a charge to
write-off all or a portion of the deferred financing costs currently
capitalized.
3. GOING CONCERN
The Company's independent auditors have indicated that if the Company
is unsuccessful in obtaining waivers or amendments to cure existing or probable
future events of default with respect to its debt agreements and is unsuccessful
in restructuring its current debt obligations on terms sufficient to provide the
Company with the liquidity necessary to fund its operating, capital expenditure
and debt service obligations, their report on the Company's financial statements
for the year ending December 31, 2001 will likely contain a modification as to
the Company's ability to continue as a going concern.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net (loss) income $ (18,333) $ 527 $ (31,991) $ (56,503)
============ ============ ============ ============
Denominator:
Denominator for basic and diluted earnings
per share-weighted-average shares 28,685 28,251 28,465 28,055
============ ============ ============ ============
Basic and diluted earnings per share:
Net (loss) income $ (0.64) $ 0.02 $ (1.12) $ (2.01)
============ ============ ============ ============
</Table>
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.
7
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. ASSET DISPOSITIONS AND DEBT REDUCTIONS
As discussed in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 6 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-five hotel
properties as well as four other assets between January 1, 2000 and November 14,
2001. Gross sales price of these twenty-nine properties was $285.2 million while
the reduction of debt was $216.6 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:
<Table>
<Caption>
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, to June 30, 2001 3 6.0 5.7
July 1, to September 30, 2001 -- -- --
October 1, to November 14, 2001 1 4.2 4.0
----------- ----------- -----------
29 $ 285.2 $ 216.6
=========== =========== ===========
</Table>
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 nine
months ended September 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 nineteen properties.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues $ 144,035 $ 417,004
Net income (loss) $ 1,899 $ (17,281)
Net income (loss) per common
share, basic and diluted $ 0.07 $ (0.61)
</Table>
The Company's total outstanding debt as of November 14, 2001 (excluding
CRESTS) was approximately $701.4 million. Of this amount, $41.6 million was
originally scheduled as due during the remainder of 2001. As of November 14,
2001, the Company's held for sale properties (5 properties) have an estimated
fair value of approximately $22.9 million.
The Company may continue to sell assets to partly fund its remaining
$41.6 million amortization payment requirements in 2001 and its capital
improvement program, as discussed in the Liquidity and Capital Resources section
following. However, amidst the challenges of the current economic environment,
the Company does not believe it will be able to sell sufficient assets, if any,
to meet its obligations for the remainder of 2001 and is therefore actively
pursuing a restructuring of its outstanding debt. There can be no assurance that
a restructuring will occur or that if a restructuring does occur, that the
8
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Company will have sufficient liquidity to meet its continuing obligations. As
previously discussed in Note 3, if the Company is unsuccessful in restructuring
its debt obligations and in generating sufficient liquidity to meet its
continuing operating and capital obligations, the auditors' report on the
financial statements for the year ending December 31, 2001 will likely contain a
modification as to the Company's ability to continue as a going concern.
6. ASSETS HELD FOR SALE
As discussed in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 5 to the financial
statements, the Company had 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 identified properties which it classified
as held for sale to meet these objectives.
Impairment charges for the nine month period ended September 30, 2001
were $6.8 million. This consisted of charges of $0.5 million, $4.0 million and
$2.3 million in the first, second and third quarters, respectively. The
Company's first quarter charge of $0.5 million was comprised of $4.2 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. The third quarter charge of $2.3 million
related to revised estimates of fair value for properties held for sale at
September 30, 2001, one of which was sold in the fourth quarter of 2001.
Impairment charges for the nine month period ended September 30, 2000 were $55.5
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, a second quarter charge of $56.6 million related to the ten hotels sold to
Sunstone Investors, LLC on August 31, 2000 and a third quarter impairment
recapture of $10.7 million related to seven hotels previously considered held
for sale which were no longer being actively marketed. The Company may incur
additional impairment charges in subsequent quarters if it identifies additional
properties to be disposed of or if other events occur, with respect to the
Company's expected future use of its properties and the amount of estimated
future undiscounted future cash flows expected thereon.
Summary results of operations included in the Condensed Consolidated
Statements of Operations with respect to the properties identified as held for
sale at September 30, 2001 are as follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues $ 3,126 $ 3,720 $ 9,564 $ 10,956
=========== =========== =========== ===========
(Loss) income before income taxes $ (1,675)(1) $ 870(1) $ (1,533)(2) $ (111)(2)
=========== =========== =========== ===========
</Table>
(1) Includes impairment charges of $2.3 million for the three months ended
September 30, 2001 ($0 for the three months ended September 30, 2000).
(2) Includes impairment charges of $3.3 million and $2.8 million, for the
nine months ended September 30, 2001 and 2000, respectively.
Included in property and equipment is $21.3 million (5 properties) and
$39.8 million (10 properties) related to properties identified as held for sale
at September 30, 2001 and December 31, 2000, respectively.
9
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. FORBEARANCE, 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. 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 May 15, 2001.
Based on its third quarter 2001 results, the Company is not in
compliance with the financial covenants related to its Senior Secured Loan
Credit Facility (the senior facility), on which, as of November 14, 2001 the
Company has outstanding borrowings of $196.2 million. However on November 13,
2001, the Company has reached an agreement in principle with the lenders of this
facility (the senior lenders) with respect to the financial covenant violations,
pursuant to which the senior lenders agreed to forbear from the exercise of
their default-related remedies against the Company until December 31, 2001
(unless an additional event of default occurs earlier). The Company expects to
formally execute the forbearance agreement within the next few days. The
forbearance agreement also reduced the commitment on the working capital
revolver from $25.0 million to $13.4 million leaving the Company with $3.0
million of unused availability on the working capital revolver portion of the
senior facility. The forbearance agreement also requires that the remaining $3.0
million be used only to pay the interest in respect of the senior facility due
on November 15, 2001 and that the Company make semi-monthly payments on the
senior facility. The Company also anticipates that it will not be able to make
the remaining $36.0 million of required special amortization payments to its
senior lenders due December 31, 2001 and is working with its senior lenders to
seek an acceptable resolution of these problems. There can be no assurance that
the Company will be successful in such negotiations and there is no certainty as
to what actions the senior lenders may take if the Company is unable to
negotiate a resolution.
The Company anticipates that because of limited liquidity it will not
be making the $12.3 million interest payment due January 15, 2002 to the holders
of the Company's Senior Subordinated Notes. In addition, as a result of the
events of default with respect to its Senior Secured Loan Facility, the
Company's Senior Subordinated Notes and the CRESTS are also in default due to
cross-default provisions in those agreements. The Company intends to attempt to
negotiate a debt restructuring with both the holders of the Senior Subordinated
Notes and the holders of the CRESTS. There can be no assurances that the Company
will be successful in such negotiations and there is no certainty as to what
actions the lenders may take if the Company is unable to negotiate a resolution.
As a result of the events of default currently existing with respect to
the Company's Senior Secured Loan Facility, the Senior Subordinated Notes and
the CRESTS, the uncertainty regarding the Company's ability to generate the
liquidity necessary to meet its debt obligations as they become due and payable,
and the uncertainty regarding the Company's ability to comply with its debt
covenants, the Company believes that future defaults with respect to its debt
agreements are likely within the next twelve months. Consequently, the Company
has classified all of its debt and the CRESTS as current liabilities in the
accompanying financial statements.
10
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company's independent auditors have indicated that if the Company
is unsuccessful in obtaining waivers or amendments to cure existing or probable
future events of default with respect to its debt agreements and is unsuccessful
in restructuring its current debt obligations on terms sufficient to provide the
Company with the liquidity necessary to fund its operating, capital expenditure
and debt service obligations, their report on the Company's financial statements
for the year ending December 31, 2001 will likely contain a modification as to
the Company's ability to continue as a going concern.
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, which approximates the amount of the debt
outstanding, there will not be any remaining net proceeds available for MHA or
the Company.
The Company is subject to certain property maintenance and quality
standard compliance requirements under its franchise agreements. The Company
periodically receives notifications from its franchisors of events of
noncompliance with such agreements and may continue to receive notifications if
the liquidity and cash constraints of the Company limit its ability to comply
with its franchise agreements. In the past, management has cured most cases of
noncompliance within the applicable cure periods and the events of noncompliance
did not result in events of default under the respective loan agreements.
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 currently in noncompliance with any of its loan
agreements as a result of noncompliance with its franchise agreements as of
September 30, 2001. However, given the Company's current financial condition and
the current economic environment, there can be no assurance that future events
of noncompliance will not occur with respect to its franchisor agreements,
causing the Company to go into default with respect to the related loan
agreements.
8. SEVERANCE EXPENSES
On February 9, 2001, a former Chief Executive Officer and President
(the Officer) and Lodgian entered into a Separation Agreement. On this date, the
Officer, with the Company's consent, resigned his position and continued as a
non-officer employee through March 2, 2001. The Officer received a severance
payment of $750,000 in full settlement of all amounts due by reason of the
termination of his employment agreement. This severance payment is included in
severance and restructuring expenses on the Statement of Operations. The Company
and the Officer 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.
In addition, during 2001, the Company, in an effort to reduce expenses,
instituted a plan to reduce hotel level employees and to eliminate certain
positions at the corporate office. As part of this plan, the equivalent of over
1600 full time employees were expected to be terminated at the hotels while 39
employees were terminated at the Corporate office. Approximately 1800 full time
equivalents were terminated under the plan. In 2001, the Company recognized a
charge of approximately $0.8 million to implement this plan. All of this charge
related to salary and benefits of the terminated employees. As of September 30,
2001, $0.5 million had already been paid. The corporate component of this charge
($0.1 million for the third quarter 2001 and $0.7 million for the nine months
ended September 30, 2001) is reflected in severance and restructuring expenses
on the Statement of Operations while the hotel level component is reflected in
direct operating expenses and in general, administrative and other expenses.
11
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
The Company recognized an income tax provision of $2.7 million for the
nine months ended September 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. In addition, the Company paid Canadian federal
income taxes of $0.1 million as a result of its Canadian operations.
10. MANAGEMENT STRUCTURE
- 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.
- On and with effect from October 1, 2001, Tom Arasi, the Company's
former President and Chief Executive Officer resigned to pursue
other opportunities.
- On October 1, 2001, the Board of Directors named David E.
Hawthorne as the Company's interim Chief Executive Officer and
President. The executive was permanently appointed on November 1,
2001.
- On October 11, 2001, William J. Yung resigned from the Board of
Directors. The resignation took effect on October 11, 2001 and
was tendered for personal reasons.
- Effective October 12, 2001, Thomas Stoughton, the former Senior
Vice President of Finance resigned to pursue other opportunities.
- On October 12, 2001, Thomas Gryboski, the Company's Vice
President of Legal Affairs and Secretary resigned to pursue other
opportunities. The resignation will take effect on November 15,
2001.
- On November 1, 2001, the Company's Executive Vice President and
Chief Operating Officer, Karyn Marasco resigned to pursue other
opportunities. The resignation will take effect on November 30,
2001.
- On November 13, 2001, Richard Cartoon was appointed Executive
Vice President and Chief Financial Officer, Michael Amaral was
appointed Senior Vice President of Operations and Daniel Ellis
was appointed Secretary and Vice President of Legal Affairs and
Risk Management.
11. REGULATION
The Company has been notified by the New York Stock Exchange (the
"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.
The Company has been notified more recently by the Exchange that it is
also not in compliance with the Exchange's continuing listing requirements
because the Company's total market capitalization has fallen below $15 million
over a consecutive thirty trading day period. Pursuant to Exchange requirements
relating to this listing standard, the Company is required to promptly
demonstrate to the Exchange that it has a plan to come into compliance with the
minimum market capitalization requirement or be subject to suspension of trading
and de-listing. The Company is considering actions that may be taken to bring
itself into compliance with the Exchange's requirements, but, in particular
because the Company's share price has been abnormally low, there can be no
assurance that the Company's plans will be acceptable to the Exchange.
12
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
The Company is contingently liable in respect to three (3) irrevocable
Letters of Credit totaling $7.4 million issued as guarantees to Zurich Insurance
Company and Safeco Insurance Company of America. The Letters of Credit all
expire in the third quarter of 2002 but may require renewal beyond that date.
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 involves hotels 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 to settle the litigation pending in
Texas and Illinois. In exchange for mutual dismissals and full releases, the
Company has paid 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 claimed entitlement to profit participation
relating to the Company's acquisition of AMI Operating Partners, LP. WH sought
damages totaling $764,500. The Company settled this matter by paying WH $100,000
in exchange for a full release.
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.
13. 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 for
transactions initiated after June 30, 2001) and SFAS 142 "Goodwill and other
Intangible Assets" (effective for fiscal years beginning after December 15,
2001) 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. SFAS No. 141 was adopted by the Company in the current fiscal quarter.
The adoption had no impact on the Company's financial statements. SFAS No. 142,
which will be implemented in January 2002, is also expected to have no impact on
the Company's financial statements.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" (effective for fiscal periods commencing after June 15, 2002) and
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(effective for fiscal periods commencing after December 15, 2001) were
13
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
issued. SFAS No. 143 requires that entities recognize the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. SFAS No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. The statement supersedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and among other factors, establishes criteria beyond
that previously specified in Statement 121 to determine when a long-lived asset
is to be considered as held for sale. The Company believes that the adoption of
SFAS No. 143 will not have a significant impact on the Company's financial
statements. The Company is currently evaluating the impact of SFAS 144.
14. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the Company's sale of $200 million of 12 1/4% Senior
Subordinated Notes (the "Notes") in July 1999, certain of the Company's
subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's
obligations to pay principal and interest with respect to the Notes. Each
Subsidiary Guarantor is wholly-owned and management has determined that separate
financial statements for the Subsidiary Guarantors are not material to
investors. The subsidiaries of the Company that are not Subsidiary Guarantors
are referred to in the note as the "Non-Guarantor Subsidiaries".
The following supplemental condensed consolidating financial statements
present balance sheets as of September 30, 2001 and December 31, 2000,
statements of operations for the three and nine months ended September 30, 2001
and 2000 and cash flows for the nine months ended September 30, 2001 and 2000.
In the condensed consolidating financial statements, Lodgian, Inc. (the
"Parent") accounts for its investments in wholly owned subsidiaries using the
equity method.
14
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2001
<Table>
<Caption>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ -------------
(UNAUDITED IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ............................$ 6 $ 3,606 $ 2,013 $ -- $ 5,625
Cash, restricted ..................................... -- -- 2,996 -- 2,996
Accounts receivable, net of allowances ............... -- 8,100 9,498 -- 17,598
Inventories .......................................... -- 3,286 3,982 -- 7,268
Prepaid expenses and other current assets ............ 3,603 138 5,382 -- 9,123
------------ ------------ ------------ ------------ ------------
Total current assets .......................... 3,609 15,130 23,871 -- 42,610
Property and equipment, net ............................... -- 534,934 457,297 -- 992,231
Deposits for capital expenditures ......................... -- 140 14,282 -- 14,422
Investment in consolidated entities ....................... (335,505) -- -- 335,505 --
Due from (to) affiliates .................................. 446,128 (257,193) (188,935) -- --
Other assets, net ......................................... -- 13,871 10,098 -- 23,969
------------ ------------ ------------ ------------ ------------
$ 114,232 $ 306,882 $ 316,613 $ 335,505 $ 1,073,232
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................$ -- $ 9,148 $ 9,510 $ -- $ 18,658
Accrued interest .................................... -- 7,201 1,581 -- 8,782
Other accrued liabilities ........................... -- 9,848 24,608 -- 34,456
Advance deposits .................................... -- 999 1,063 -- 2,062
Current portion of long-term obligations ............ 4,191 394,756 302,411 -- 701,358
Minority interests - preferred redeemable securities
(including related accrued interest) ............... -- -- 194,198 -- 194,198
------------ ------------ ------------ ------------ ------------
Total current liabilities ..................... 4,191 421,952 533,371 -- 959,514
Deferred income taxes ..................................... 3,603 -- -- -- 3,603
Minority interests - other ................................ -- 205 5,342 -- 5,547
------------ ------------ ------------ ------------ ------------
Total liabilities ............................. 7,794 422,157 538,713 -- 968,664
------------ ------------ ------------ ------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock ....................................... 284 33 443 (476) 284
Additional paid-in capital ......................... 263,687 22,619 (40,970) 18,351 263,687
Accumulated deficit ................................ (157,533) (136,057) (181,573) 317,630 (157,533)
Accumulated other comprehensive loss ............... -- (1,870) -- -- (1,870)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity (deficit) .......... 106,438 (115,275) (222,100) 335,505 104,568
------------ ------------ ------------ ------------ ------------
$ 114,232 $ 306,882 $ 316,613 $ 335,505 $ 1,073,232
============ ============ ============ ============ ============
</Table>
15
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
<Table>
<Caption>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .................... $ 6 $ 20,653 $ 343 $ -- $ 21,002
Cash, restricted ............................. -- -- 2,237 -- 2,237
Accounts receivable, net of allowances ....... -- 8,031 12,593 -- 20,624
Inventories .................................. -- 3,609 4,196 -- 7,805
Prepaid expenses and other current assets .... 3,603 110 5,548 -- 9,261
------------- ------------- ------------- ------------- -------------
Total current assets .................. 3,609 32,403 24,917 -- 60,929
Property and equipment, net ....................... -- 553,941 505,107 -- 1,059,048
Deposits for capital expenditures ................. -- 917 13,088 -- 14,005
Investment in consolidated entities ............... (295,521) -- -- 295,521 --
Due from (to) affiliates .......................... 437,585 (233,776) (203,809) -- --
Other assets, net ................................. -- 16,501 13,464 -- 29,965
------------- ------------- ------------- ------------- -------------
$ 145,673 $ 369,986 $ 352,767 $ 295,521 $ 1,163,947
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ -- $ 9,107 $ 15,981 $ -- $ 25,088
Accrued interest ............................ -- 15,200 1,595 -- 16,795
Other accrued liabilities ................... -- 9,095 28,108 -- 37,203
Advance deposits ............................ -- 855 999 -- 1,854
Current portion of long-term obligations .... -- 67,190 12,653 -- 79,843
------------- ------------- ------------- ------------- -------------
Total current liabilities ............. -- 101,447 59,336 -- 160,783
Long-term obligations, less current portion ....... 4,010 353,213 316,815 -- 674,038
Deferred income taxes ............................. 3,603 -- -- -- 3,603
Minority interests:
Preferred redeemable securities (including
related accrued interest) .................. -- -- 184,349 -- 184,349
Other ....................................... -- -- 4,294 -- 4,294
------------- ------------- ------------- ------------- -------------
Total liabilities ..................... 7,613 454,660 564,794 -- 1,027,067
------------- ------------- ------------- ------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock ............................... 282 33 441 (474) 282
Additional paid-in capital ................. 263,320 22,619 (41,337) 18,718 263,320
Accumulated deficit ........................ (125,542) (106,146) (171,131) 277,277 (125,542)
Accumulated other comprehensive loss ....... -- (1,180) -- -- (1,180)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity (deficit) .. 138,060 (84,674) (212,027) 295,521 136,880
------------- ------------- ------------- ------------- -------------
$ 145,673 $ 369,986 $ 352,767 $ 295,521 $ 1,163,947
============= ============= ============= ============= =============
</Table>
16
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms ......................................... $ -- $ 41,871 $ 43,290 $ -- $ 85,161
Food and beverage ............................. -- 10,761 11,016 -- 21,777
Other ......................................... -- 2,170 2,266 -- 4,436
------------- ------------- ------------- ------------- -------------
-- 54,802 56,572 -- 111,374
------------- ------------- ------------- ------------- -------------
Operating expenses:
Direct:
Rooms ......................................... -- 11,306 11,921 -- 23,227
Food and beverage ............................. -- 8,388 8,498 -- 16,886
Other ......................................... -- 1,479 1,453 -- 2,932
General, administrative and other ................. -- 21,270 26,284 -- 47,554
Depreciation and amortization ..................... -- 6,626 7,845 -- 14,471
Impairment of long-lived assets ................... -- 2,270 0 -- 2,270
Severance and restructuring expenses ............. -- -- 624 -- 624
------------- ------------- ------------- ------------- -------------
Total operating expenses .............. -- 51,339 56,625 -- 107,964
------------- ------------- ------------- ------------- -------------
-- 3,463 (53) -- 3,410
Other income (expenses):
Interest income and other ....................... -- -- 158 -- 158
Interest expense ................................ -- (11,524) (6,940) -- (18,464)
Gain on asset dispositions ...................... -- 62 35 -- 97
Equity in losses of consolidated subsidiaries ... (18,204) -- -- 18,204 --
Minority interests:
Preferred redeemable securities ................. -- -- (3,340) -- (3,340)
Other ........................................... -- (205) 140 -- (65)
------------- ------------- ------------- ------------- -------------
Loss before income taxes .......................... (18,204) (8,204) (10,000) 18,204 (18,204)
Provision for income taxes ....................... (129) (129) -- 129 (129)
------------- ------------- ------------- ------------- -------------
Net loss ......................... $ (18,333) $ (8,333) $ (10,000) $ 18,333 $ (18,333)
============= ============= ============= ============= =============
</Table>
17
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000
<Table>
<Caption>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms ......................................... $ -- $ 52,189 $ 65,236 $ -- $ 117,425
Food and beverage ............................. -- 13,033 17,739 -- 30,772
Other ......................................... -- 2,633 4,374 -- 7,007
------------- ------------- ------------- ------------- -------------
-- 67,855 87,349 -- 155,204
------------- ------------- ------------- ------------- -------------
Operating expenses:
Direct:
Rooms ....................................... -- 14,747 18,080 -- 32,827
Food and beverage ........................... -- 10,085 13,634 -- 23,719
Other ....................................... -- 1,856 2,369 -- 4,225
General, administrative and other ............... -- 23,203 32,975 -- 56,178
Depreciation and amortization ................... -- 7,244 9,664 -- 16,908
Impairment of long-lived assets ................. -- (5,396) (5,316) -- (10,712)
Severance and restructuring charges ............. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses ............ -- 51,739 71,406 -- 123,145
------------- ------------- ------------- ------------- -------------
-- 16,116 15,943 -- 32,059
Other income (expenses):
Interest income and other ..................... -- -- 467 -- 467
Interest expense .............................. -- (14,547) (10,049) -- (24,596)
Interest hedge break fee ...................... -- -- (4,294) -- (4,294)
Gain (loss) on asset dispositions ............. -- 56 (77) -- (21)
Equity in income of consolidated subsidiaries . 802 -- -- (802) --
Minority interests:
Preferred redeemable securities ............... -- -- (3,063) -- (3,063)
Other ......................................... -- -- 250 -- 250
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes ............... 802 1,625 (823) (802) 802
(Provision) benefit for income taxes ............ (275) (597) 322 275 (275)
------------- ------------- ------------- ------------- -------------
Net income (loss) ............................... $ 527 $ 1,028 $ (501) $ (527) $ 527
============= ============= ============= ============= =============
</Table>
18
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms ......................................... $ -- $ 127,357 $ 133,759 $ -- $ 261,116
Food and beverage ............................. -- 36,862 37,916 -- 74,778
Other ......................................... -- 7,601 8,549 -- 16,150
------------- ------------- ------------- ------------- -------------
-- 171,820 180,224 -- 352,044
------------- ------------- ------------- ------------- -------------
Operating expenses:
Direct:
Rooms ....................................... -- 34,843 36,761 -- 71,604
Food and beverage ........................... -- 27,197 27,844 -- 55,041
Other ....................................... -- 4,503 4,778 -- 9,281
General, administrative and other ............... -- 65,967 82,749 -- 148,716
Depreciation and amortization ................... -- 20,597 24,022 -- 44,619
Impairment of long-lived assets ................. -- 3,535 3,300 -- 6,835
Severance and restructuring expenses ........... -- -- 2,091 -- 2,091
------------- ------------- ------------- ------------- -------------
Total operating expenses ............ -- 156,642 181,545 -- 338,187
------------- ------------- ------------- ------------- -------------
-- 15,178 (1,321) -- 13,857
Other income (expenses):
Interest income and other ..................... -- -- 638 -- 638
Interest expense .............................. -- (36,215) (21,618) -- (57,833)
(Loss) gain on asset dispositions ............. -- (178) 24,384 -- 24,206
Equity in losses of consolidated subsidiaries . (29,162) -- -- 29,162 --
Minority interests:
Preferred redeemable securities ............... -- -- (9,849) -- (9,849)
Other ......................................... -- (205) 24 -- (181)
------------- ------------- ------------- ------------- -------------
Loss before income taxes ....................... (29,162) (21,420) (7,742) 29,162 (29,162)
Provision for income taxes ..................... (2,829) (129) (2,700) 2,829 (2,829)
------------- ------------- ------------- ------------- -------------
Net loss ....................... $ (31,99) $ (21,549) $ (10,442) $ 31,991 $ (31,991)
============= ============= ============= ============= =============
</Table>
19
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<Table>
<Caption>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------- ------------ ------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms .................................................... $ -- $ 148,723 $ 185,920 $ -- $ 334,643
Food and beverage ........................................ -- 42,219 56,502 -- 98,721
Other .................................................... -- 8,484 12,778 -- 21,262
---------- ------------ ------------- ------------ ------------
-- 199,426 255,200 -- 454,626
---------- ------------ ------------- ------------ ------------
Operating expenses:
Direct:
Rooms .................................................. -- 41,934 51,392 -- 93,326
Food and beverage ...................................... -- 30,824 41,578 -- 72,402
Other .................................................. -- 5,843 7,299 -- 13,142
General, administrative and other .......................... -- 69,410 98,627 -- 168,037
Depreciation and amortization .............................. -- 19,507 29,841 -- 49,348
Impairment of long-lived assets ............................ -- 3,404 52,046 -- 55,450
Severance and restructuring charges ........................ -- -- 1,502 -- 1,502
---------- ------------ ------------- ------------ ------------
Total operating expenses ....................... -- 170,922 282,285 -- 453,207
---------- ------------ ------------- ------------ ------------
-- 28,504 (27,085) -- 1,419
Other income (expenses):
Interest income and other ................................ -- -- 1,200 -- 1,200
Interest expense ......................................... -- (42,120) (32,306) -- (74,426)
Interest hedge break fee ................................. -- -- (4,294) -- (4,294)
Gain (loss) on asset dispositions ........................ -- 53 (77) -- (24)
Equity in losses of consolidated subsidiaries............. (85,608) -- -- 85,608 --
Minority interests:
Preferred redeemable securities .......................... -- -- (9,190) -- (9,190)
Other .................................................... -- -- (293) -- (293)
---------- ------------ ------------- ------------ ------------
Loss before income taxes ................................... (85,608) (13,563) (72,045) 85,608 (85,608)
Benefit for income taxes ................................... 29,105 4,567 24,538 (29,105) 29,105
---------- ------------ ------------- ------------ ------------
Net loss ................................................... $ (56,503) $ (8,996) $ (47,507) $ 56,503 $ (56,503)
========== ============ ============= ============ ============
</Table>
20
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------- ------------- ------------- -------------
(UNAUDITED IN THOUSANDS)
Operating activities:
Net loss ............................................................ $ -- $ (21,549) $ (10,442) $ (31,991)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................................... -- 20,597 24,022 44,619
Loss (gain) on sale of assets ...................................... -- 178 (24,384) (24,206)
Minority interests ................................................. -- 205 9,825 10,030
Impairment of long-lived assets .................................... -- 3,535 3,300 6,835
401 (k) plan contributions ......................................... 369 -- -- 369
Amortization of deferred loan fees ................................. -- 3,046 1,574 4,620
Other .............................................................. 181 3 (355) (171)
Changes in operating assets and liabilities:
Accounts receivable ................................................ -- (69) 3,095 3,026
Inventories ........................................................ -- 323 214 537
Prepaid expenses and other assets ................................... -- (28) (593) (621)
Accounts payable ................................................... -- 41 (7,324) (7,283)
Accrued liabilities ................................................ -- (7,246) (3,514) (10,760)
Advance deposits ................................................... -- 144 64 208
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities ................. 550 (820) (4,518) (4,788)
------------- ------------- ------------- -------------
Investing activities:
Capital improvements, net .......................................... -- (14,709) (6,819) (21,528)
Proceeds from sale of assets, net .................................. -- 8,862 55,728 64,590
Net withdrawals (deposits) for capital expenditures ............... -- 777 (1,194) (417)
------------- ------------- ------------- -------------
Net cash (used in) provided by investing activities ............... -- (5,070) 47,715 42,645
------------- ------------- ------------- -------------
Financing activities:
Proceeds from borrowings on working capital revolver ............... -- 16,000 -- 16,000
Proceeds (paid to) received from related parties ................... (550) 15,055 (14,505) --
Principal payments on long-term obligations ........................ -- (26,647) (27,022) (53,669)
Principal payments on working capital revolver ...................... -- (15,000) -- (15,000)
Payments of deferred loan costs .................................... -- (565) -- (565)
------------- ------------- ------------- -------------
Net cash used in financing activities ............................ (550) (11,157) (41,527) (53,234)
------------- ------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents ................. -- (17,047) 1,670 (15,377)
Cash and cash equivalents at beginning of period ..................... 6 20,653 343 21,002
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period ........................... $ 6 $ 3,606 $ 2,013 $ 5,625
============= ============= ============= =============
</Table>
21
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<Table>
<Caption>
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------- ------------- ------------- -------------
(UNAUDITED IN THOUSANDS)
Operating activities:
Net loss .............................................................. $ -- $ (8,996) $ (47,507) $ (56,503)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ........................................ -- 19,507 29,841 49,348
(Gain ) loss on sale of assets ....................................... -- (53) 77 24
Deferred income tax benefits ......................................... (29,105) -- -- (29,105)
Minority interests ................................................... -- -- 9,483 9,483
Impairment of long-lived assets ...................................... -- 3,404 52,046 55,450
401 (k) plan contributions .......................................... -- -- 376 376
Amortization of deferred loan fees .................................. -- 1,715 1,745 3,460
Other ................................................................ 375 (623) (3,156) (3,404)
Changes in operating assets and liabilities:
Accounts receivable .................................................. -- (3,916) 2,609 (1,307)
Inventories .......................................................... -- 437 598 1,035
Prepaid expenses and other assets .................................... -- (77) (1,425) (1,502)
Accounts payable ..................................................... -- 3,342 (7,176) (3,834)
Accrued liabilities .................................................. -- 1,616 (6,251) (4,635)
Advance deposits .................................................... -- 25 (303) (278)
------------- ------------- ------------- -------------
Net cash (used in) provided by operating activities .................... (28,730) 16,381 30,957 18,608
------------- ------------- ------------- -------------
Investing activities:
Capital expenditures, net ............................................ -- (43,539) (28,505) (72,044)
Proceeds from sale of assets, net .................................... -- 36,105 128,350 164,455
Net (deposits) withdrawals for capital expenditures .................. -- (3,645) 675 (2,970)
------------- ------------- ------------- -------------
Net cash (used in) provided by investing activities .................. -- (11,079) 100,520 89,441
------------- ------------- ------------- -------------
Financing activities:
Proceeds from borrowings on working capital revolver ................. -- 30,000 -- 30,000
Proceeds from issuance of long-term obligations ...................... -- -- 2,326 2,326
Proceeds received from (paid to) related parties ..................... 28,730 (4,614) (24,116) --
Principal payments on long-term obligations .......................... -- (13,537) (117,983) (131,520)
Principal payments on working capital revolver ....................... -- (5,000) -- (5,000)
Payments of deferred loan costs ...................................... -- (1,400) (1,900) (3,300)
Distributions to minority interests .................................. -- -- (683) (683)
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities .................. 28,730 5,449 (142,356) (108,177)
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ................... -- 10,751 (10,879) (128)
Cash and cash equivalents at beginning of period ....................... 59 9,910 4,675 14,644
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period ............................. $ 59 $ 20,661 $ (6,204) $ 14,516
============= ============= ============= =============
</Table>
22
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 ability of the Company to restructure its Senior Secured Credit
Facility, its Senior Subordinated Notes and the CRESTS.
- - The impact of pending or threatened litigation and/or governmental
inquiries and investigations involving the Company.
- - The uncertainties relating to sale of assets, 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 restructure certain existing debt
obligations, the Company's ability to obtain additional capital if needed
and the possible additional or continuing 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.
- - The impact of increased expenses due to layoffs of employees.
Many of these factors are not within the Company's control and readers
are cautioned not to put undue reliance on these forward looking statements.
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 debt
restructuring, improving operations, capital structure and optimizing the value
of the Company's assets. The current economic environment has made the selling
of hotels at acceptable prices a challenge and the Company has decided to only
continue to sell hotels if acceptable prices can be achieved.
23
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 the Company's
hotels experience lower occupancy levels in the fall and winter months (November
through February) which may result in lower revenues, lower net income and less
cash flow during these months.
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.
Nine months ended September 30, 2001
In the first nine 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 sixteen hotel properties sold in the first nine 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 Condensed
Consolidated Financial Statements set forth in "Item I. Financial Statements"
included in this report on Form 10-Q and should be read in conjunction with such
financial statements and notes thereto.
24
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:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Rooms ..................................... 76.5% 75.7% 74.2% 73.6%
Food and beverage ......................... 19.5 19.8 21.2 21.7
Other ..................................... 4.0 4.5 4.6 4.7
------------- ------------- ------------- -------------
100.0 100.0 100.0 100.0
------------- ------------- ------------- -------------
Operating expenses:
Direct:
Rooms ................................... 20.9 21.2 20.3 20.5
Food and beverage ....................... 15.2 15.3 15.6 15.9
Other ................................... 2.6 2.7 2.6 2.9
General, administrative and other ........... 42.7 36.2 42.2 37.0
Depreciation and amortization ............... 13.0 10.9 12.7 10.9
Impairment of long-lived assets ............. 2.0 (6.9) 1.9 12.2
Severance and restructuring expenses ........ 0.6 -- 0.6 0.3
------------- ------------- ------------- -------------
Total operating expenses ........ 97.0 79.4 95.9 99.7
------------- ------------- ------------- -------------
3.0 20.6 4.1 0.3
Other income (expenses):
Interest income and other ................. 0.1 0.3 0.2 0.3
Interest expense .......................... (16.6) (15.8) (16.4) (16.4)
Interest hedge break fee .................. -- (2.8) -- (0.9)
Gain (loss) on asset dispositions ......... 0.1 (0.0) 6.9 (0.0)
Minority interests:
Preferred redeemable securities ........... (3.0) (2.0) (2.8) (2.0)
Other ..................................... (0.1) 0.2 (0.1) (0.1)
------------- ------------- ------------- -------------
(Loss) income before income taxes ........... (16.5) 0.5 (8.1) (18.8)
(Provision) benefit for income taxes ....... (0.1) (0.2) (0.8) 6.4
------------- ------------- ------------- -------------
Net (loss) income ........................... (16.6)% 0.3% (8.9)% (12.4)%
============= ============= ============= =============
</Table>
25
THREE MONTHS ENDED SEPTEMBER 30, 2001 ("THIRD QUARTER 2001") COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2000 ("THIRD QUARTER 2000")
REVENUES
At September 30, 2001, the Company owned 106 hotels and had a minority
interest in one hotel compared with 115 hotels owned, a minority interest in one
hotel and one hotel managed for a third party at September 30, 2000.
Total revenues for the Company were $111.4 million for the third
quarter 2001 and $155.2 million for the third quarter 2000. Of this $43.8
million or a 28.2% decrease, $24.9 million is due to the disposition of nine
hotels in the owned portfolio. Revenues for hotels owned at the end of the third
quarter 2001 were $111.4 million for the third quarter 2001 and $130.3 million
for the third quarter 2000 (a decline of 14.5%). RevPAR for hotels owned at the
end of the third quarter 2001 declined by 14.1% compared to the third quarter
2000, primarily as a result of a decline in occupancy of 11.3% as well as a
decrease in average daily rates of 3.2%. Revenues and RevPar on the same unit
basis for the third quarter 2001 was adversely impacted by a general decline in
the industry, particularly in certain of the Company's markets, which factors
were exacerbated by the events of September 11, 2001.
OPERATING EXPENSES
Direct operating expenses for the Company were $43.0 million (38.6% of
direct revenues) for the third quarter 2001 and $60.8 million (39.2% of direct
revenues) for the third quarter 2000. This $17.8 million decrease was primarily
attributable to the reduction of nine 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 in the food and beverage department.
General, administrative and other expenses were $47.6 million (42.7% of
direct revenues) for the third quarter 2001 and $56.2 million (36.2% of direct
revenues) for the third quarter 2000. Of this $8.6 million decrease,
approximately $6.7 million is due to the reduction of nine hotels in the owned
portfolio. The remaining decrease is primarily due to reduced property level
expenses as a result of the reduction in revenues. Property level expenses
include expenses related to general operations such as marketing, franchise
fees, property repairs and maintenance and other property administrative costs.
These reductions were offset by certain higher general, administrative and other
expenses, utilities, property insurance and property taxes. 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.
Property taxes increased due to higher property tax assessments in certain
markets. Corporate overhead contributed to the remaining increase in general
administrative and other expenses as a percentage of revenues, which though
reduced, are primarily fixed expenses.
Depreciation and amortization expense was $14.5 million in the third
quarter 2001 and $16.9 million in the third quarter 2000. The $2.4 million
decrease is primarily as a result of the reduction of nine hotels in the owned
portfolio.
Impairment charges for the third quarter 2001 were $2.3 million while
for the third quarter 2000, there was an impairment recapture of $10.7 million.
The Company's third quarter 2001 charge relates to revised estimates of fair
value for properties held for sale as of September 30, 2001, one of which was
sold in the fourth quarter of 2001. The third quarter 2000 impairment recapture
of $10.7 million related to impairment charges recorded in 1999 and 2000 on
seven hotels which were no longer being actively marketed for sale as of
September 30, 2000.
26
OTHER INCOME AND EXPENSES
Interest expense was $18.5 million in the third quarter 2001 and $24.6
million in the third quarter 2000. This decrease is primarily attributable to a
reduction in the level of debt and, to a lesser extent, a decrease in the cost
of debt.
Gain on asset dispositions was $0.1 million for the third quarter 2001.
This represents third quarter adjustments primarily in respect of one hotel
which was sold in the second quarter of 2001.
Minority interest expense was $3.4 million in the third quarter 2001
and $2.8 million in the third 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 third quarter
2001 but recorded an income tax charge of $0.1 million, mainly in respect of
federal income taxes paid to the Canadian Federal Authorities as a result of the
Company's Canadian operations. A provision for income taxes of $0.3 million was
recorded in the third quarter 2000. After accounting for these taxation
provisions, the net loss was $18.3 million ($0.64 loss per share) in third
quarter 2001 compared with a net income of $0.5 million ($0.02 per share) in the
third quarter 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 ("THE 2001 PERIOD") COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 ("THE 2000 PERIOD")
REVENUES
Total revenues for the Company were $352.0 million, for the 2001 period
and $454.6 million for the 2000 period. Of this $102.6 million or a 22.6%
decrease, $82.9 million is due to the disposition of nine hotels in the owned
portfolio. Revenues for hotels owned at the end of the third quarter 2001 were
$346.7 million for the 2001 period and $371.7 million for the 2000 period (a
decline of 6.7%). RevPAR for hotels owned at the end of the 2001 period declined
by 6.2% compared to the 2000 period, primarily as a result of a decline in
occupancy of 7.0% partially offset by an increase in average daily rates of
0.8%. Revenues and RevPar on the same unit basis for the 2001 period was
adversely impacted by a general decline in the industry, particularly in certain
of the Company's markets, which factors were exacerbated by the events of
September 11, 2001.
OPERATING EXPENSES
Direct operating expenses for the Company were $135.9 million (38.6% of
direct revenues) for the 2001 period and $178.9 million (39.3% of direct
revenues) for the 2000 period. This $43.0 million decrease was due primarily to
a reduction of nine hotels in the owned portfolio.
General administrative and other expenses were $148.7 million (42.2% of
direct revenues) for the 2001 period and $168.0 million (37.0% of direct
revenue) for the 2000 period. Of this $19.3 million decrease, approximately
$24.4 million is due to the reduction of nine hotels in the owned portfolio.
Reductions also resulted from reduced property level expenses related to
reductions in revenues. Property level expenses include expenses related to
general operations such as marketing, franchise fees, property repairs and
maintenance and other property administrative costs. These reductions were,
however, offset by certain higher general, administrative and other expenses,
mainly utilities, property insurance, franchise fees and property taxes. 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 higher property tax assessments in certain markets.
Corporate overhead contributed to the remaining increase in general
administrative and other expenses as a percentage of revenues, which though
reduced, are primarily fixed expenses.
27
Depreciation and amortization expense was $44.6 million in the 2001
period and $49.3 million in the 2000 period. The $4.7 million decrease is
primarily a result of a decrease of $6.2 million in depreciation related to
hotels sold, net of additional depreciation expense of $1.5 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 $6.8 million and
$55.5 million, respectively. The charge for the 2001 period consists of $0.5
million, $4.0 million and $2.3 million in the first, second and third quarters,
respectively. The Company's first quarter charge of $0.5 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. The third quarter charge of $2.3
million related to revised estimates of fair value for properties held for sale
at September 30, 2001, one of which was sold in the fourth quarter of 2001.
Impairment charges for the nine month period ended September 30, 2000 were $55.5
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, a second quarter charge of $56.6 million related to the ten hotels sold to
Sunstone Investors, LLC on August 31, 2000 and a third quarter impairment
recapture of $10.7 million related to seven hotels previously considered held
for sale which were no longer being actively marketed.
OTHER INCOME AND EXPENSES
Interest expense was $57.8 million in the 2001 period and $74.4 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 $24.2 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 $10.0 million in the 2001 period and $9.4
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 tax charge of $2.8 million, including Canadian federal income
taxes paid of $0.1 million, in the 2001 period and a benefit for income taxes of
$29.1 million in the 2000 period, the Company had a net loss of $32.0 million
($1.12 loss per share) in the 2001 period compared with a net loss of $56.5
million ($2.01 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
nine months of 2001, which related primarily to a provision for state income
taxes on the gain on sale of one hotel.
LIQUIDITY AND CAPITAL RESOURCES
Lodgian's principal sources of liquidity consist of existing cash
balances, cash flows from operations and financing.
The Company had earnings from operations before interest, taxes,
depreciation and amortization ("EBITDA"), as adjusted in 2001 of $72.9 million,
a 37.5% decrease from the $116.6 million for the 2000
28
period. This decrease was primarily due to a reduction of nine hotels in the
owned portfolio, and a general decline in the industry which was exacerbated by
the events of September 11, 2001, as well as other factors discussed below.
EBITDA, as adjusted, on a same unit basis was $72.5 million for the 2001 period
and $93.9 million for the 2000 period, a decrease of 22.8%. This decrease on a
same unit basis was due primarily to a 6.2% decline in RevPar (caused by a 7.0%
decline in occupancy partially offset by a 0.8% increase in average daily
rates), 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 0.3% decrease in
direct operating expenses as a percentage of revenues. 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, severance, one-time bonus charges account write-offs and provisions)
of $7.6 million and impairment charges of $6.8 million, compared to $10.3
million and $55.5 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 $4.8 million compared to net cash provided by operations
of $18.6 million for the 2000 period.
Cash flows provided by investing activities was $42.6 million for the
2001 period and $89.4 million for the 2000 period. The 2001 amount includes
capital expenditures of $21.5 million, net proceeds from the sale of assets of
$64.6 million and withdrawals for capital expenditure escrows of $0.4 million.
The 2000 period includes capital expenditures of $72.0 million, net proceeds
from the sale of assets of $164.5 million and withdrawals for capital
expenditure escrows of $3.0 million.
Cash flows used in financing activities were $53.2 million for the 2001
period and $108.2 million for the 2000 period. The 2001 and 2000 amounts consist
primarily of borrowings on the working capital revolver, payments of deferred
loan costs as well as repayments of long-term and working capital revolver
obligations. The 2000 amounts also consisted of distributions to minority
interests of $0.7 million.
As previously discussed in Note 7 and further discussed below,
the Company is not in compliance with the financial covenants related to its
Senior Secured Loan Credit Facility based on its third quarter 2001 results. As
a result of the events of default currently existing with respect to the
Company's Senior Secured Loan Facility, the Senior Subordinated Notes and the
CRESTS, the uncertainty regarding the Company's ability to generate the
liquidity necessary to meet its debt obligations as they become due and payable,
and the uncertainty regarding the Company's ability to comply with its debt
covenants, the Company believes that future defaults with respect to its debt
agreements are likely within the next twelve months. Consequently, the Company
has classified all of its debt and the CRESTS as current liabilities in the
accompanying financial statements. Primarily as a result of this third quarter
reclassification, at September 30, 2001, the Company had a working capital
deficit of $916.9 million as compared with a working capital deficit of $99.9
million at December 31, 2000. Excluding the current portion of long-term
obligations, and the CRESTS, the Company had a working capital deficit of $21.3
million at September 30, 2001 compared with a working capital deficit of $20.0
million at December 31, 2000.
After the third quarter reclassification discussed above, there were no
long-term obligations at September 30, 2001 and $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 $32.0 million under its 2001 capital improvement program, but has
subsequently ceased all but emergency capital expenditures. An aggregate $22.4
million was spent in the first, second and third quarters of 2001.
As discussed previously, the Company had 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-five hotel properties and four other assets between January 1, 2000 and
November 14, 2001. Gross sales price of these twenty-nine properties was $285.2
million while the reduction of debt was $216.6 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:
29
<Table>
<Caption>
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, to June 30, 2001 3 6.0 5.7
July 1, to September 30, 2001 -- -- --
October 1, to November 14, 2001 1 4.2 4.0
------------ ------------ ------------
29 $ 285.2 $ 216.6
============ ============ ============
</Table>
The Company's total outstanding debt as of November 14, 2001 (excluding
CRESTS) was approximately $701.4 million. Of this amount, $41.6 million was
originally scheduled as due during the remainder of 2001. As of November 14,
2001, the Company's held for sale properties (5 properties) have an estimated
fair value of approximately $22.9 million.
The Company may continue to sell assets to partly fund its remaining
$41.6 million amortization payment requirements in 2001 and its capital
improvement program. However, amidst the challenges of the current economic
environment, the Company does not believe it will be able to sell sufficient
assets, if any, to meet its obligations for the remainder of 2001 and is
therefore actively pursuing a restructuring of its outstanding debt. There can
be no assurance that a restructuring will occur, or that if a restructuring does
occur, that the Company will have sufficient liquidity to meet its 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 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. 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 May 15, 2001.
Based on its third quarter 2001 results, the Company is not in
compliance with the financial covenants related to its Senior Secured Loan
Credit Facility (the senior facility), on which, as of November 14, 2001 the
Company has outstanding borrowings of $196.2 million. However on November 13,
2001, the Company reached an agreement in principle with the lenders of this
facility (the senior lenders) with respect to the financial covenant violations,
pursuant to which the senior lenders agreed to forbear from the exercise of
their default-related remedies against the Company until December 31, 2001
(unless an additional event of default occurs earlier). The Company expects to
formally execute the forbearance agreement within the next few days. The
forbearance agreement also reduced the commitment on the working capital
revolver from $25.0 million to $13.4 million leaving the Company with $3.0
million of unused availability on the working capital revolver portion of the
senior facility. The forbearance agreement also requires that the remaining $3.0
million be used only to pay the interest in respect of the senior facility due
on November 15, 2001 and that the Company make semi-monthly interest payments on
the senior facility. The Company also anticipates that it will not be able to
make the remaining $36.0 million of required special amortization payments to
its senior lenders due December 31, 2001 and is working with its senior lenders
to seek an acceptable resolution of these problems. There can be no assurance
that the Company will be successful in such negotiations and there is no
certainty as to what actions the senior lenders may take if the Company is
unable to negotiate a resolution.
30
The Company anticipates that because of limited liquidity it will not
be making the $12.3 million interest payment due January 15, 2002 to the holders
of the Company's Senior Subordinated Notes. In addition, as a result of the
events of default with respect to its Senior Secured Loan Facility, the
Company's Senior Subordinated Notes and the CRESTS are also in default due to
cross-default provisions in those agreements. The Company intends to attempt to
negotiate a debt restructuring with both the holders of the Senior Subordinated
Notes and the holders of the CRESTS. There can be no assurances that the Company
will be successful in such negotiations and there is no certainty as to what
actions the lenders may take if the Company is unable to negotiate a resolution.
The Company's independent auditors have indicated that if the Company
is unsuccessful in obtaining waivers or amendments to cure existing or probable
future events of default with respect to its debt agreements and is unsuccessful
in restructuring its current debt obligations on terms sufficient to provide the
Company with the liquidity necessary to fund its operating, capital expenditure
and debt service obligations, their report on the Company's financial statements
for the year ending December 31, 2001 will likely contain a modification as to
the Company's ability to continue as a going concern.
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.
Amidst the challenges of the current economic environment and the
specific challenges peculiar to the Company, particularly those adversely
impacting the hospitality industry and the Company since the events of September
11, 2001, management considers the restructuring of its debt obligations to be
critical if the Company is to have sufficient liquidity to fund its operating,
capital expenditure and debt service obligations beyond 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.
The Company has been notified more recently by the Exchange that it is
also not in compliance with the Exchange's continuing listing requirements
because the Company's total market capitalization has fallen below $15 million
over a consecutive thirty trading day period. Pursuant to Exchange requirements
relating to this listing standard, the Company is required to promptly
demonstrate to the Exchange that it has a plan to come into compliance with the
minimum market capitalization requirement or be subject to suspension of trading
and de-listing. The Company is considering actions that may be taken to bring
itself into compliance with the Exchange's requirements, but, in particular
because the Company's share price has been abnormally low, there can be no
assurance that the Company's plans will be acceptable to the Exchange.
31
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.
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 involves hotels 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 to settle the litigation pending in
Texas and Illinois. In exchange for mutual dismissals and full releases, the
Company has paid 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 claimed entitlement to profit participation
relating to the Company's acquisition of AMI Operating Partners, LP. WH sought
damages totaling $754,500. The Company settled this matter by paying WH $100,000
in exchange for a full release.
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.
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.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of the exhibits required to be filed as part of this Report on
Form 10-Q is set forth in the "Exhibit Index" which immediately
precedes such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 2001.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LODGIAN, INC.
Date: November 14, 2001 By: /s/ DAVID E. HAWTHORNE
---------------------------------------
DAVID E. HAWTHORNE
President and Chief Executive Officer
Date: November 14, 2001 By: /s/ CHARLES E. MILLER, JR.
---------------------------------------
CHARLES E. MILLER, JR.
Chief Accounting Officer
Date: November 14, 2001 By: /s/ RICHARD D. CARTOON
---------------------------------------
RICHARD D. CARTOON
Executive Vice President and
Chief Financial Officer
34
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 - Employment Agreement dated November 1, 2001, between Lodgian, Inc. and David E. Hawthorne.
35