UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2002
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 incorporation or organization) (I.R.S. Employer Identification No.)
3445 PEACHTREE ROAD, N.E., SUITE 700, ATLANTA, GA 30326
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 364-9400
(Former name, former address and former fiscal year, if changed since last
report): NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
CLASS OUTSTANDING AS OF MAY 7, 2002
- ----------------------------- ---------------------------------------
Common 28,479,837
This filing includes unaudited condensed consolidated financial
statements which have not been reviewed by an independent public accountant in
accordance with professional standards for conducting such reviews since the
Company was unable to obtain these services from its previous auditors, Arthur
Andersen LLP. The unaudited condensed consolidated financial statements,
included herein, will be reviewed by independent public accountants
consecutively with the Form 10-Q for the quarter ended June 30, 2002 (due to be
released on August 14, 2002).
LODGIAN, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001 .................................................... 1
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2002 and 2001 (unaudited) ................... 2
Condensed Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 2002 (unaudited) and
for the
Year Ended December 31, 2001 ............................................. 3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 (unaudited) ................... 4
Notes to Condensed Consolidated Financial Statements (unaudited) ......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................ 28
Item 2. Changes in Securities .................................................... 28
Item 6. Exhibits and Reports on Form 8-K ......................................... 29
Signatures ....................................................................... 30
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
(UNAUDITED)
-------------- -----------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 18,337 $ 14,007
Cash, restricted ....................................................... 6,341 3,218
Accounts receivable, net of allowances ................................. 16,289 12,489
Inventories ............................................................ 7,235 7,223
Prepaid expenses and other current assets .............................. 6,444 6,284
--------- ---------
Total current assets ............................................... 54,646 43,221
Property and equipment, net .............................................. 903,379 913,968
Deposits for capital expenditures ........................................ 17,059 15,813
Other assets, net ........................................................ 2,353 2,360
--------- ---------
$ 977,437 $ 975,362
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities Not Subject to Compromise
Current liabilities:
Accounts payable ..................................................... $ 10,916 $ 2,706
Accrued interest ..................................................... 3,586 1,192
Other accrued liabilities ............................................ 34,703 29,785
Advance deposits ..................................................... 3,189 1,771
Current portion of long-term debt and capital lease obligations ...... 3,951 7,717
--------- ---------
Total current liabilities ............................................ 56,345 43,171
Other long-term debt and capital lease obligations ..................... 7,770 7,652
Liabilities Subject to Compromise ........................................ 928,671 925,894
Minority interests ....................................................... 5,796 5,326
Commitments and contingencies ............................................ -- --
Stockholders' deficit:
Common stock, $.01 par value, 75,000,000 shares authorized; 28,479,837
issued and outstanding at March 31, 2002 and December 31, 2001 ...... 284 284
Additional paid-in capital ............................................. 263,320 263,320
Accumulated deficit .................................................... (282,736) (268,306)
Accumulated other comprehensive loss ................................... (2,013) (1,979)
--------- ---------
Total stockholders' deficit ........................................ (21,145) (6,681)
--------- ---------
$ 977,437 $ 975,362
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months ended March 31,
-----------------------------
2002 2001
--------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Revenues:
Rooms ...................................................... $ 69,785 $ 84,018
Food and beverage .......................................... 20,531 25,202
Other ...................................................... 4,046 5,553
--------- ---------
94,362 114,773
--------- ---------
Operating expenses:
Direct:
Rooms .................................................... 19,800 24,108
Food and beverage ........................................ 15,374 18,663
Other .................................................... 2,668 3,204
--------- ---------
37,842 45,975
--------- ---------
Gross contribution ..................................... 56,520 68,798
General, administrative and other ............................ 41,815 51,480
Depreciation and amortization ................................ 14,263 15,657
Impairment of long-lived assets .............................. -- 565
Severance and restructuring expenses ......................... 122 750
--------- ---------
Other operating expenses ............................... 56,200 68,452
--------- ---------
320 346
Other income (expenses):
Interest income and other .................................. 181 266
Interest expense ........................................... (8,556) (20,765)
Gain on asset dispositions .................................. -- 24,369
Minority interests:
Preferred redeemable securities ............................ -- (3,226)
Other ...................................................... (473) (146)
--------- ---------
(Loss) income before income taxes and reorganization items ... (8,528) 844
Reorganization items ........................................ (5,827) --
--------- ---------
(Loss) income before income taxes ........................... (14,355) 844
Provision for income taxes .................................. (75) (2,700)
--------- ---------
Net loss ..................................................... $ (14,430) $ (1,856)
========= =========
Loss per common share - basic and diluted ..................... $ (0.51) $ (0.07)
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
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, 2000 . 28,290,424 $ 282 $ 263,320 $(125,542) $(1,180) $ 136,880
401(k) Plan contribution ..... 189,413 2 2
Net loss ..................... -- -- -- (142,764) -- (142,764)
Currency translation
adjustments ............... -- -- -- -- (799) (799)
---------
Comprehensive loss ........... (143,563)
----------- -------- --------- --------- ------- ---------
Balance at December 31, 2001 . 28,479,837 284 263,320 (268,306) (1,979) (6,681)
401(k) Plan contribution ..... -- -- -- --
Net loss ..................... -- (14,430) (14,430)
Currency translation
adjustments ............... -- (34) (34)
---------
Comprehensive loss ........... (14,464)
----------- -------- --------- --------- ------- ---------
Balance at March 31, 2002 .... 28,479,837 $ 284 $ 263,320 $(282,736) $(2,013) $ (21,145)
=========== ======== ========= ========= ======= =========
The comprehensive loss for the three months ended March 31, 2001 was $2.5
million.
The data for the three months ended March 31, 2002 and 2001 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
THREE MONTHS ENDED MARCH 31,
---------------------------------
2002 2001
------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Operating activities:
Net loss ............................................... $(14,430) $ (1,856)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 14,263 15,657
Impairment of long-lived assets ...................... -- 565
Minority interests ................................... 473 3,372
Gain on sale of assets ............................... -- (24,369)
Other ................................................ 103 1,153
Changes in operating assets and liabilities:
Accounts receivable .............................. (3,800) (1,261)
Inventories ...................................... (12) 63
Prepaid expenses and other assets ................ (3,283) (810)
Accounts payable ................................. 8,054 (6,584)
Accrued liabilities .............................. 6,429 (10,542)
Advance deposits ................................. 1,418 1,345
-------- --------
Net cash provided by (used in) operating activities ...... 9,215 (23,267)
-------- --------
Investing activities:
Capital improvements, net .............................. (2,961) (7,324)
Proceeds from sale of assets, net ...................... -- 58,826
(Deposits) withdrawals for capital expenditures ........ (1,246) 1,423
-------- --------
Net cash (used in) provided by investing activities ...... (4,207) 52,925
-------- --------
Financing activities:
Proceeds from borrowings on working capital revolver ... -- 16,000
Principal payments on long-term obligations ............ (678) (42,335)
Principal payments on working capital revolver ......... -- (15,000)
-------- --------
Net cash used in financing activities .................... (678) (41,335)
-------- --------
Net increase (decrease) in cash and cash equivalents ..... 4,330 (11,677)
Cash and cash equivalents at beginning of period ......... 14,007 21,002
-------- --------
Cash and cash equivalents at end of period ............... $ 18,337 $ 9,325
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized .................... $ 6,162 $ 26,057
======== ========
Income taxes, net of refunds ........................... $ -- $ --
======== ========
Deferred stock compensation ............................ $ -- $ 940
======== ========
Operating cash receipts and payments
resulting from Chapter 11 proceedings:
Interest received ....................................... $ 39 $ --
Professional fees paid .................................. (2,690) --
Other reorganization payments ........................... (163) --
-------- --------
$ (2,814) $ --
======== ========
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. SAS 71 REVIEW
The accompanying unaudited condensed consolidated financial statements
have not been reviewed by an independent public accountant in accordance with
professional standards for conducting such reviews since the Company was unable
to obtain these services from its previous auditors, Arthur Andersen LLP. The
unaudited condensed consolidated financial statements, included herein, will be
reviewed by independent public accountants consecutively with the Form 10-Q for
the quarter ended June 30, 2002 (due to be released on August 14, 2002).
2. GENERAL
The condensed consolidated financial statements include the accounts of
Lodgian, Inc., its wholly-owned subsidiaries and four joint ventures in which
Lodgian exercises control (collectively "Lodgian" or the "Company"). Lodgian
believes it has control of the joint ventures 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 Form 10-K for the year ended December 31,
2001.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting primarily
of normal recurring adjustments, necessary to present fairly the financial
position of the Company as of March 31, 2002, and the results of its operations
and its cash flows for the three months ended March 31, 2002 and 2001. 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 Form 10-K for the year ended December
31, 2001.
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.
3. BANKRUPTCY FILING AND GOING CONCERN MATTERS
On December 20, 2001, the Company and eighty-one of its subsidiaries
filed for voluntary reorganization with the United States Bankruptcy Court for
the Southern District of New York under Chapter 11 of the Bankruptcy Code (the
"Chapter 11 Cases"). The Chapter 11 Cases have been consolidated for purposes of
administration under case number 01-16345. The filing was precipitated by the
weaker US economy, the decline in travel since the events of September 11 and
the Company's heavy debt load. The Debtors are currently operating their
businesses as debtors-in-possession and are subject to the jurisdiction of the
Bankruptcy Court while a reorganization plan is being formulated.
As of March 31, 2002, all operating subsidiaries of the Company were
included in the Chapter 11 Cases except for two subsidiaries each owning one
hotel. However, on April 17, 2002, one additional
5
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
(UNAUDITED)
operating subsidiary, New Orleans Airport Motel Associates, LP filed for
voluntary reorganization with the United States Bankruptcy Court for the
Southern District of New York under Chapter 11 of the Bankruptcy Code. The
Chapter 11 case for this subsidiary has also been consolidated with the
previously filed Chapter 11 Cases, for purposes of administration, under case
number 01-16345. The Chapter 11 Cases also exclude 65 non-operating subsidiaries
of the Company. At March 31, 2002 and December 31, 2001, the assets and
liabilities of the operating and non-operating subsidiaries excluded from the
Chapter 11 cases are as follows (amounts in thousands):
March 31, 2002 December 31, 2001
-------------- -----------------
Assets $ 13,341 (1) $ 13,357 (1)
Liabilities $ (28,275)(1) $ (28,107)(1)
As a result of the Chapter 11 filing, the Company is prohibited from
paying pre-petition claims (unless these are approved by the courts) and
creditors are prohibited from attempting to collect loans or debts arising prior
to December 20, 2001. The Company, at its option, may assume or reject contracts
entered into prior to the date of filing. Rejected contracts entered into prior
to the date of the petition would be treated as unsecured claims.
The Company has received approval from the Bankruptcy Court to pay pre
and post petition employee wages, salaries, benefits and other employee
obligations. The Bankruptcy Court also approved orders granting the debtors
authority to pay, among other things, certain pre-petition claims of its
critical service vendors. The Company has been and intends to continue to pay
its post-petition obligations arising in the ordinary course of business.
The Debtors have received debtor-in-possession financing (the "DIP
Facility") of $25 million from a group of lenders led by Morgan Stanley Funding
Inc. and Lehman Brothers Inc. The DIP Facility, along with the rights of the
Debtor to use the cash collateral of these lenders expires one year from the
date of filing or on the effective date of the reorganization plan, whichever is
earlier.
As of May 14, 2002, the Debtors had not yet filed a plan of
reorganization with the Bankruptcy courts but management believes that the Plan
will result in most unsecured claims being settled for less than 100% of their
face value and that the interests of the common stock holders will be
significantly diluted.
Going Concern
The accompanying consolidated financial statements have been prepared
on a going concern basis of accounting and do not reflect adjustments that might
result if the Company is unable to continue as a going concern. The Company's
recent losses and the Chapter 11 Cases, raise substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern and the appropriateness of using the going concern
basis is dependent upon, among other things: (i) the Company's ability to comply
with the debtor-in-possession financing (DIP Facility) agreements, (ii) the
Company's ability to obtain financing upon expiration of the DIP Facility, (iii)
confirmation of a plan of reorganization under the Bankruptcy Code, (iv) the
Company's ability to achieve profitable operations after such confirmation, and
(v) the Company's ability to generate sufficient cash from operations to meet
its obligations. In addition, the Company's debtor-in-possession financing
agreements expire in December 2002; there can be no assurance that the Company
will be successful in obtaining confirmation of a plan of
- -------------------
1 Figures exclude New Orleans Airport Motel Associates LP which petitioned under
Chapter 11 on April 17, 2002.
6
reorganization by December 2002 and, if not, there can be no assurance that the
existing debtor-in-possession lenders will agree to continue to provide
debtor-in-possession financing.
The consolidated financial statements do not include any adjustments
relating to recoverability and classification of recorded asset amounts or the
amount and classification of liabilities that might be necessary should the
Company not be able to continue as a going concern.
A plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. The consolidated financial
statements do not give effect to any adjustments to the carrying value of assets
or amounts and classifications of liabilities that might be necessary as a
result of the Chapter 11 Cases.
4. ACCOUNTING DURING REORGANIZATION PROCEEDINGS
The Company continues to apply generally accepted accounting principles
in the preparation of its consolidated financial statements while in Chapter 11.
However, in accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7 - "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" (SOP 90-7): 1) the consolidated
financial statements distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations of the business;
2) the Company's consolidated balance sheets segregate liabilities subject to
compromise from liabilities not subject to compromise; and 3) where the
underlying collateral in respect of certain debt is considered to be less than
the debt obligation, the Company ceased accruing interest on those debts.
Management believes that 29 of its hotels are significantly
overleveraged in that the estimated fair value of these hotels does not exceed
the outstanding debt on these hotels. Therefore, with the approval of the
Bankruptcy Court, the Company ceased paying interest to the secured lenders of
these properties from the date of the bankruptcy petition. With respect to the
remaining 76 hotels that are currently in Chapter 11, management presently
believes the value of these hotels exceeds the outstanding debt on these
properties. Accordingly, with the approval of the Bankruptcy Court, the Company
agreed to pay interest on these debts. However, while the Company is in Chapter
11, the value of these properties may be adversely affected by changes in the
economy, changes in the hospitality industry, actions taken or that may be taken
by the franchisors, and the Company's ability to obtain exit financing and
achieve a consensual plan of reorganization. Furthermore, management believes
the significant terms of these debts could also be compromised as a result of
the Chapter 11 Cases. Accordingly, management classifies all of its secured debt
as liabilities subject to compromise in the accompanying balance sheets at March
31, 2002 and December 31, 2001.
Liabilities subject to compromise
Liabilities subject to compromise refers to known liabilities incurred
prior to the commencement of the Chapter 11 Cases, including those considered by
the Bankruptcy Court to be pre-petition claims. These liabilities consist
primarily of amounts outstanding under long-term debt and also include accounts
payable, accrued interest, and other accrued expenses. These amounts represent
the Company's estimate of known or potential claims to be resolved in the
Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments
may result from (1) negotiations; (2) actions of the Bankruptcy Court; (3)
further development with respect to disputed claims; (4) proofs of claim; or (5)
other events. Payment terms for these amounts will be established under a plan
of reorganization.
The principal categories of claims classified as liabilities subject to
compromise in the Chapter 11 Cases as of March 31, 2002 and December 31, 2001,
are identified below: (amounts in thousands)
7
March 31, December 31,
2002 2001
--------- ------------
Long-term debt and capital lease obligations $488,948 $485,774
Senior subordinated Notes (including related accrued interest) 210,549 210,549
Minority interest - preferred redeemable securities (including related accrued 197,218 197,218
interest) - CRESTS
Accounts payable 23,185 22,698
Accrued liabilities (including accrued interest of $1,027 at March 31, 2002 and 8,771 9,655
-------- --------
December 31, 2001)
$928,671 $925,894
======== ========
Summary of Reorganization Items
The results for the year ended March 31, 2002 include charges which
relate to the reorganization process and the Chapter 11 Cases. The table below
summarizes these reorganization charges (amounts in thousands):
Legal and professional fees $5,664
Other 163
------
$5,827
======
5. CASH, RESTRICTED
Restricted cash as of March 31, 2002 comprises utility deposits of $1.0
million, property tax escrows of $2.5 million and cash generated from certain
high leveraged properties of $2.8 million (restricted to expenditures on
properties in the same lender pool).
6. PROPERTY AND EQUIPMENT, NET
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS 144 and records impairment losses for assets held for use,
where the estimated future undiscounted cash flows are insufficient to recover
the carrying value of those assets. However, as a result of the filing of the
Chapter 11 Cases, the Company may ultimately sell or otherwise dispose of its
hotel assets for amounts less than the carrying value of these assets and future
actions by the Company, its creditors or the Bankruptcy Court could adversely
impact the Company's ability to hold its assets for periods sufficient for it to
recover the carrying value of its assets on an undiscounted cash flow basis. As
a result, the Company could recognize impairment losses in future periods.
Based on this evaluation, the Company recorded no impairment losses for
the first quarter of 2002 ($0.6 million for the first quarter of 2001). Also, as
previously reported in the Company's Form 10-K for the year ended December 31,
2001, in connection with its bankruptcy petition on December 20, 2001, the
Company determined that 29 of its hotels were significantly overleveraged in
that the estimated fair value of these hotels did not exceed the outstanding
debt on these hotels. Therefore, with the approval of the Bankruptcy Court, the
Company ceased paying interest to the secured lenders of these properties from
the date of the bankruptcy petition. The Company also concluded that it no
longer had the ability to hold these hotels for a period sufficient for their
estimated future undiscounted cash flows to cover their carrying values.
Therefore in accordance with the provisions of FAS 121 (superceded on January 1,
2001 by SFAS 144) the Company determined that an impairment charge of $69
million was necessary to reduce the carrying value of these assets. Also, during
the fourth quarter of 2001, in connection with the bankruptcy petition, the
Company also ceased marketing for sale, four operating properties that were
previously classified as held for sale. Since these assets were not considered
impaired as the estimated future cash
8
flows from the use of these properties exceeded their carrying values, the
Company recaptured $8.5 million of impairment reserves previously recorded in
1999, 2000 and 2001.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2002 2001
--------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net loss $ (14,430) $ (1,856)
========= ========
Denominator:
Denominator for basic and diluted earnings
per share-weighted-average shares 28,480 28,290
========= ========
Basic and diluted earnings per share:
Net loss $ (0.51) $ (0.07)
========= ========
The computation of diluted earnings per share did not include shares
associated with the assumed conversion of the Convertible Redeemable Equity
Structure Trust Securities (CRESTS) or stock options because their inclusion
would have been antidilutive.
8. OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS AND PREFERRED
REDEEMABLE SECURITIES
The Company received debtor-in-possession financing of $25 million from
a group of lenders led by Morgan Stanley Funding Inc. and Lehman Brothers Inc.
The DIP Facility along with the rights of the debtors to use the cash collateral
of these lenders expires one year from the filing or on the effective date of
the reorganization plan, whichever is earlier.
Under the DIP Facility, the Company has the option to borrow at either
base rate plus 2.5% or at LIBOR plus 3.5%. As of May 14, 2002, the Company had
not borrowed from the facility but had issued one letter of credit totaling
$750,000 against it.
In addition, the Company believes that the underlying collateral on
certain of its debts is less than the principal obligation outstanding.
Therefore, in accordance with SOP 90-7, the Company ceased accruing interest on
these debts as well as the Senior Subordinated Notes and the CRESTS. Contractual
interest not accrued between December 20, 2001 and March 31, 2002 amounted to
$12.8 million ($11.4 million for the first quarter of 2002) including interest
on the Senior Subordinated Notes and the CRESTS.
Substantially, all the Company's property and equipment are pledged as
collateral for long-term obligations of which approximately $497 million has
been guaranteed by Lodgian, Inc. Certain of the mortgage notes are subject to a
prepayment penalty if repaid prior to their maturity.
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
9
60% controlling interest in MHA. MHA's sole asset is the Crowne Plaza Hotel
located in Macon, Georgia. MHA did not make this payment on May 20, 2001. 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 included the promissory notes discussed above and a $7.8 million
first mortgage. MHA was not included in the entities that filed for
reorganization under Chapter 11. On April 19, 2002, MHA and the lenders entered
into a Satisfaction and Release Agreement whereby the lenders agreed to fully
discharge the indebtedness under the promissory note of $3.9 million plus
related accrued interest approximating $0.8 million in exchange for payment by
MHA of $0.2 million.
As a result of the Chapter 11 Cases, the Company is technically in
default of its debt agreements with the exception of Macon Hotel Associates,
L.L.C. which was not included in the bankruptcy petition. All of the Company's
pre-petition debts, with the exception of the debt of Macon Hotel Associates,
L.L.C., are recorded in liabilities subject to compromise in the balance sheets
as of March 31, 2002 and December 31, 2001.
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. As a result of the Company's
petition for bankruptcy, the Company is technically in default of its franchise
agreements. However, due to the automatic stay of proceedings, the franchisors
are prohibited from proceeding with certain actions absent approval from the
Bankruptcy Courts. Were the automatic stay, in respect of these franchise
agreements, to be lifted, this could negatively impact operating results and the
value of the Company's hotels. See Note 10 below.
9. INCOME TAXES
The Company recognized an income tax provision of $0.1 million for the
first quarter 2002. This related primarily to provisions for state income taxes.
10. COMMITMENTS AND CONTINGENCIES
On March 7, 2002, Hilton Hotel Corporation, Promus Hotels, Inc.,
Doubletree Hotel Systems, Inc. and Hilton Inns, Inc. filed a Motion for Relief
from the automatic stay of proceedings (which arose as a result of the Debtor's
petition under Chapter 11) to terminate certain license agreements or
alternatively to compel the Debtors to reject the license agreements. The
Company has responded to this motion and believes it has valid defenses to this
matter.
The Company is contingently liable in respect to three pre-petition
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 expire in the third and fourth quarters of 2002 but may require renewal
beyond those dates. Additionally, one letter of credit for $750,000 (expiring in
the fourth quarter of 2002) was issued against the DIP Facility.
The Company is a party in litigation with Hospitality Restoration and
Builders, Inc. ("HRB"), a general contractor hired to perform work on six of the
Company's hotels. The litigation 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 August 2001, the parties agreed to settle the litigation pending
in Texas and Illinois. In exchange for mutual dismissals and full releases, the
Company paid HRB $750,000. With respect to the matter pending in the state of
New York, HRB claims
10
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.
Thomas Arasi, the Company's former President and Chief Executive
Officer, has asserted a claim against the Company under his employment
agreement. Mr. Arasi alleges that he was terminated without cause and claims
damages in the amount of $3.3 million plus other unspecified amounts. The
Company disputes Mr. Arasi's claims and believes it has valid defenses to this
matter.
The Company and individual directors are parties to a lawsuit alleging
violations of federal securities laws and breach of fiduciary duty in connection
with certain investments made in affiliates of Impac Hotel Group, LLC, a
predecessor of the Company. The Company believes that it has valid defenses to
this matter.
The Company is a party to other legal proceedings arising in the
ordinary course of business, the impact of which would not, either individually
or in the aggregate, in management's opinion, have a material adverse effect on
its financial position or results of operations.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, SFAS 142 "Goodwill and other Intangible Assets"
(effective for fiscal years beginning after December 15, 2001) was issued. 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.142 was adopted by the Company in the first quarter of 2002. The adoption had
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) was
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. The Company
believes that the adoption of SFAS No. 143 will not have a significant impact on
its financial statements.
In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets," (effective for fiscal periods commencing December 15,
2001) was issued. 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 No. 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 SFAS No. 121
to determine when long-lived assets are to be considered as held for sale. The
Company adopted SFAS 144 in the first quarter of 2002 and believes that the
impairment provisions of SFAS No. 144 are similar to SFAS No. 121. The adoption
did not have a significant impact on the Company's financial statements.
However, with the adoption of SFAS No. 144, the operating results of any real
estate assets sold will now be included in discontinued operations in the
statement of operations.
In April 2002, SFAS 145 "Rescission of SFAS No. 4, 44, 64 and Amendment
of SFAS No. 13 and Technical Corrections" was issued. SFAS 145, among other
factors, prevents treatment as extraordinary, gains or losses on extinguishment
of debt not meeting the criteria of APB 30. SFAS 145 is effective for fiscal
years beginning after May 15, 2002 and is not expected to have an impact on
previously issued financial statements of the Company. However, the adoption
could impact the financial statements of subsequent periods.
12. RELATED PARTY TRANSACTIONS
On December 15, 2000, the Company sold a partially constructed hotel
located in Richmond, Virginia to an entity controlled by a shareholder who is a
10.9% beneficial owner of the Company's common stock. The Company received net
proceeds of approximately $12.3 million from the sale and recorded a loss on the
sale of approximately $0.5 million. In addition, the Company entered into a
separate management contract with the purchaser to provide construction
management oversight until completion of
11
the project. The project was completed in May 2001 and the final outstanding
amount due under the Project ($1.2 million) was paid on May 3, 2002.
Richard Cartoon, the Company's Executive Vice President and Chief
Financial Officer, is a principal in a business that the Company retained in
November 2001 to provide Richard Cartoon's services as Chief Financial Officer
and other restructuring support and services. In addition to amounts paid for
Richard Cartoon's services, the Company was billed $185,000 for other support
and services provided by associates of Richard Cartoon, LLC for the period
January 1, 2002 to March 31, 2002. The Company expects to continue to utilize
such support and services as needed through the restructuring process.
13. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the Company's sale of $200 million of 12 1/4% Senior
Subordinated Notes (the "Notes") in July 1999, certain of the Company's
subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's
obligations to pay principal and interest with respect to the Notes. Each
Subsidiary Guarantor is wholly-owned and management has determined that separate
financial statements for the Subsidiary Guarantors are not material to
investors. The subsidiaries of the Company that are not Subsidiary Guarantors
are referred to in the note as the "Non-Guarantor Subsidiaries".
The following supplemental condensed consolidating financial statements
present balance sheets as of March 31, 2002 and December 31, 2001 and statements
of operations and cash flows for the three months ended March 31, 2002 and 2001.
In the condensed consolidating financial statements, Lodgian, Inc. (the
"Parent") accounts for its investments in wholly owned subsidiaries using the
equity method.
12
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2002
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- -------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 6 $ 14,055 $ 4,276 $ -- $ 18,337
Cash, restricted .................................. -- -- 6,341 -- 6,341
Accounts receivable, net of allowances ............ -- 7,783 8,506 -- 16,289
Inventories ....................................... -- 3,318 3,917 -- 7,235
Prepaid expenses and other current assets ......... -- 182 6,262 -- 6,444
--------- --------- --------- --------- ---------
Total current assets ........................... 6 25,338 29,302 -- 54,646
Property and equipment, net ......................... -- 526,183 377,196 -- 903,379
Deposits for capital expenditures ................... -- 79 16,980 -- 17,059
Investment in consolidated entities ................. (375,365) -- -- 375,365 --
Due from (to) affiliates ............................ 555,483 (248,663) (306,820) -- --
Other assets, net ................................... -- 1,104 1,249 -- 2,353
--------- --------- --------- --------- ---------
$ 180,124 $ 304,041 $ 117,907 $ 375,365 $ 977,437
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .................................. $ -- -$4,937 $ 5,979 $ -- $ 10,916
Accrued interest .................................. -- -- 3,586 -- 3,586
Other accrued liabilities ......................... -- 4,604 30,099 -- 34,703
Advance deposits .................................. -- 1,211 1,978 -- 3,189
Current portion of long-term debt and capital
lease obligations ............................... -- -- 3,951 -- 3,951
--------- --------- --------- --------- ---------
Total current liabilities ....................... -- 10,752 45,593 -- 56,345
Other long-term debt and capital lease obligations . -- -- 7,770 7,770
Liabilities Subject to Compromise ................... 199,256 427,764 301,651 928,671
Minority interests .................................. -- 554 5,242 -- 5,796
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock ...................................... 284 33 448 (481) 284
Additional paid-in capital ........................ 263,320 22,619 (46,924) 24,305 263,320
Accumulated deficit ............................... (282,736) (155,668) (195,873) 351,541 (282,736)
Accumulated other comprehensive loss .............. -- (2,013) -- -- (2,013)
--------- --------- --------- --------- ---------
Total stockholders' (deficit) equity ........... (19,132) (135,029) (242,349) 375,365 (21,145)
--------- --------- --------- --------- ---------
$ 180,124 $ 304,041 $ 117,907 $ 375,365 $ 977,437
========= ========= ========= ========= =========
13
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 6 $ 6,550 $ 7,451 $ -- $ 14,007
Cash, restricted .................................. -- -- 3,218 -- 3,218
Accounts receivable, net of allowances ............ -- 5,921 6,568 -- 12,489
Inventories ....................................... -- 3,320 3,903 -- 7,223
Prepaid expenses and other current assets ......... -- 143 6,141 -- 6,284
--------- --------- --------- --------- ---------
Total current assets ........................... 6 15,934 27,281 -- 43,221
Property and equipment, net ......................... -- 532,163 381,805 -- 913,968
Deposits for capital expenditures ................... -- 91 15,722 -- 15,813
Investment in consolidated entities ................. (361,752) -- -- 361,752 --
Due from (to) affiliates ............................ 556,300 (247,346) (308,954) -- --
Other assets, net ................................... -- 1,122 1,238 -- 2,360
--------- --------- --------- --------- ---------
$ 194,554 $ 301,964 $ 117,092 $ 361,752 $ 975,362
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities Not Subject to Compromise:
Current liabilities:
Accounts payable .................................. $ -- $ 280 $ 2,426 $ -- $ 2,706
Accrued interest .................................. -- -- 1,192 -- 1,192
Other accrued liabilities ......................... -- 4,837 24,948 -- 29,785
Advance deposits .................................. -- 896 875 -- 1,771
Current portion of long-term debt and capital
lease obligations ................................ -- -- 7,717 -- 7,717
--------- --------- --------- --------- ---------
Total current liabilities ....................... -- 6,013 37,158 -- 43,171
Other long-term debt and capital lease obligations . -- -- 7,652 -- 7,652
Liabilities Subject to Compromise ................... 199,256 428,528 298,110 -- 925,894
Minority interests - other .......................... -- -- 5,326 -- 5,326
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock ...................................... 284 33 448 (481) 284
Additional paid-in capital ........................ 263,320 22,619 (46,924) 24,305 263,320
Accumulated deficit ............................... (268,306) (153,250) (184,678) 337,928 (268,306)
Accumulated other comprehensive loss .............. -- (1,979) -- -- (1,979)
--------- --------- --------- --------- ---------
Total stockholders' (deficit) equity ............ (4,702) (132,577) (231,154) 361,752 (6,681)
--------- --------- --------- --------- ---------
$ 194,554 $ 301,964 $ 117,092 $ 361,752 $ 975,362
========= ========= ========= ========= =========
14
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Rooms ............................................. $ -- $ 33,972 $ 35,813 $ -- $ 69,785
Food and beverage ................................. -- 10,270 10,261 -- 20,531
Other ............................................. -- 1,945 2,101 -- 4,046
-------- -------- -------- ------- --------
Total revenue ....................................... -- 46,187 48,175 -- 94,362
-------- -------- -------- ------- --------
Operating expenses:
Direct:
Rooms ........................................... -- 9,650 10,150 -- 19,800
Food and beverage ............................... -- 7,769 7,605 -- 15,374
Other ........................................... -- 1,213 1,455 -- 2,668
-------- -------- -------- ------- --------
-- 18,632 19,210 -- 37,842
-------- -------- -------- ------- --------
Gross contribution ........................... -- 27,555 28,965 -- 56,520
General, administrative and other ................... -- 19,276 22,539 -- 41,815
Depreciation and amortization ....................... -- 6,604 7,659 -- 14,263
Severance and restructuring expenses ............... -- -- 122 -- 122
-------- -------- -------- ------- --------
Other operating expenses ................ -- 25,880 30,320 -- 56,200
-------- -------- -------- ------- --------
-- 1,675 (1,355) -- 320
Other income (expenses):
Interest income and other ......................... -- -- 181 -- 181
Interest expense .................................. -- (4,508) (4,048) -- (8,556)
Equity in losses of consolidated subsidiaries ..... (14,355) -- -- 14,355 --
Minority interests .................................. -- (402) (71) -- (473)
-------- -------- -------- ------- --------
Loss before income taxes and reorganization items ... (14,355) (3,235) (5,293) 14,355 (8,528)
Reorganization items ................................ -- -- (5,827) -- (5,827)
-------- -------- -------- ------- --------
Loss before income taxes ........................... (14,355) (3,235) (11,120) 14,355 (14,355)
Provision for income taxes ......................... (75) -- (75) 75 (75)
-------- -------- -------- ------- --------
Net loss ............................................ $(14,430) $ (3,235) $(11,195) $14,430 $(14,430)
======== ======== ======== ======= ========
15
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2001
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Rooms .......................................... $ -- $ 40,399- $ 43,619 $ -- $ 84,018
Food and beverage .............................. -- 12,378 12,824 -- 25,202
Other .......................................... -- 2,541 3,012 -- 5,553
-------- -------- -------- --------- ---------
-- 55,318 59,455 -- 114,773
-------- -------- -------- --------- ---------
Operating expenses:
Direct:
Rooms ........................................ -- 11,565 12,543 -- 24,108
Food and beverage ............................ -- 9,098 9,565 -- 18,663
Other ........................................ -- 1,487 1,717 -- 3,204
-------- -------- -------- --------- ---------
-- 22,150 23,825 -- 45,975
-------- -------- -------- --------- ---------
Gross contribution ......................... -- 33,168 35,630 -- 68,798
General, administrative and other ................ -- 22,469 29,011 -- 51,480
Depreciation and amortization .................... -- 7,269 8,388 -- 15,657
Impairment of long-lived assets .................. -- (2,735) 3,300 -- 565
Severance expenses ............................... -- -- 750 -- 750
-------- -------- -------- --------- ---------
Other operating expenses ................. -- 27,003 41,449 -- 68,452
-------- -------- -------- --------- ---------
-- 6,165 (5,819) -- 346
Other income (expenses):
Interest income and other ...................... -- -- 266 -- 266
Interest expense ............................... -- (13,034) (7,731) -- (20,765)
Gain on asset dispositions ..................... -- 20 24,349 -- 24,369
Equity in income of consolidated subsidiaries .. 844 -- -- (844) --
Minority interests:
Preferred redeemable securities ................ -- -- (3,226) -- (3,226)
Other .......................................... -- -- (146) -- (146)
-------- -------- -------- --------- ---------
Income (loss) before income taxes ................ 844 (6,849) 7,693 (844) 844
Provision for income taxes ....................... (2,700) -- (2,700) 2,700 (2,700)
-------- -------- -------- --------- ---------
Net (loss) income ........................ $ (1,856) $ (6,849) $ 4,993 $ 1,856 $ (1,856)
======== ======== ======== ========= =========
16
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS)
Operating activities:
Net loss ................................................ $ - $ (3,235) $ (11,195) $ (14,430)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .......................... - 6,604 7,659 14,263
Minority interests ..................................... - 402 71 473
Other .................................................. - 166 (64) 103
Changes in operating assets and liabilities:
Accounts receivable .................................... - (1,862) (1,938) (3,800)
Inventories ............................................ - 2 (14) (12)
Prepaid expenses and other assets ...................... - (39) (3,244) (3,283)
Accounts payable ....................................... - 4,657 3,397 8,054
Accrued liabilities .................................... - (913) 7,342 6,429
Advance deposits ....................................... - 315 1,103 1,418
------- ------- --------- ----------
Net cash provided by operating activities ................ - 6,098 3,117 9,215
------- ------- --------- ----------
Investing activities:
Capital improvements, net .............................. - (738) (2,222) (2,961)
Net withdrawals (deposits) for capital expenditures ... - 12 (1,258) (1,246)
------- ------- ---------- ----------
Net cash used in investing activities ................. - (726) (3,480) (4,207)
------- ------- --------- ----------
Financing activities:
Proceeds received from (paid to) related parties ....... - 2,134 (2,134) --
Principal payments on long-term obligations ............ - -- (678) (678)
------- ------- --------- ----------
Net cash provided by (used in) financing activities .. - 2,134 (2,812) (678)
------- ------- --------- ----------
Net increase (decrease) in cash and cash equivalents .... - 7,505 (3,175) 4,330
Cash and cash equivalents at beginning of period ......... 6 6,550 7,451 14,007
------- ------- --------- ----------
Cash and cash equivalents at end of period ............... $ 6 $ 14,055 $ 4,276 $ 18,337
======= ======= ========= ==========
17
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS)
Operating activities:
Net loss ................................................ $ -- $ (6,849) $ 4,993 $ (1,856)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................... -- 7,269 8,388 15,657
Impairment of long-lived assets ........................ -- (2,735) 3,300 565
Minority interests ..................................... -- -- 3,372 3,372
Gain on sale of assets ................................. -- (20) (24,349) (24,369)
Other .................................................. 218 773 162 1,153
Changes in operating assets and liabilities:
Accounts receivable .................................... -- (1,620) 359 (1,261)
Inventories ............................................ -- 70 (7) 63
Other assets ........................................... -- 12 (822) (810)
Accounts payable ....................................... -- (1,106) (5,478) (6,584)
Accrued liabilities .................................... -- 571 (11,113) (10,542)
Advance deposits ....................................... -- (7,274) 8,619 1,345
----- -------- -------- --------
Net cash provided by (used in) operating activities ..... 218 (10,909) (12,576) (23,267)
Investing activities:
Capital improvements, net .............................. -- (4,568) (2,756) (7,324)
Proceeds from sale of assets, net ...................... -- 3,153 55,673 58,826
Net withdrawals for capital expenditures .............. -- 402 1,021 1,423
----- -------- -------- --------
Net cash provided by (used in) investing activities .... -- (1,013) 53,938 52,925
Financing activities:
Proceeds from borrowings on working capital revolver ... -- 16,000 -- 16,000
Proceeds received from (paid to) related parties ....... (218) 21,121 (20,903) --
Principal payments on long-term obligations ............ -- (18,775) (23,560) (42,335)
Principal payments on working capital revolver ......... -- (15,000) -- (15,000)
----- -------- -------- --------
Net cash (used in) provided by financing activities .. (218) 3,346 (44,463) (41,335)
----- -------- -------- --------
Net (decrease) increase in cash and cash equivalents ..... -- (8,576) (3,101) (11,677)
Cash and cash equivalents at beginning of period ......... 6 20,653 343 21,002
----- -------- -------- --------
Cash and cash equivalents at end of period ............... $ 6 $ 12,077 $ (2,758) $ 9,325
===== ======== ======== ========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHAPTER 11 PROCEEDINGS
As previously discussed in Note 3 to the Condensed Consolidated
Financial Statements, on December 20, 2001, the Company and eighty-one of its
subsidiaries filed for voluntary reorganization with the Bankruptcy Court. The
Chapter 11 Cases have been consolidated for purposes of administration under
case number 01-16345. The filing was precipitated by the weaker US economy, the
decline in travel since the events of September 11 and the Company's heavy debt
load. The Debtors are currently operating their businesses as
debtors-in-possession and are subject to the jurisdiction of the Bankruptcy
Court while a reorganization plan is being formulated.
As of March 31, 2002, all operating subsidiaries of the Company were
included in the Chapter 11 Cases except for two subsidiaries each owning one
hotel. However, on April 17, 2002, one additional operating subsidiary, New
Orleans Airport Motel Associates, LP filed for voluntary reorganization with the
United States Bankruptcy Court for the Southern District of New York under
Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has
also been consolidated with the previously filed Chapter 11 Cases, for purposes
of administration, under case number 01-16345.
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements have not been
reviewed by an independent public accountant in accordance with professional
standards for conducting such reviews since the Company was unable to obtain
these services from its previous auditors, Arthur Andersen LLP. The unaudited
condensed consolidated financial statements, included herein, will be reviewed
by independent public accountants consecutively with the Form 10-Q for the
quarter ended June 30, 2002 (due to be released on August 14, 2002).
The Company's Consolidated Financial Statements have been prepared on
the going concern basis of accounting and do not reflect any adjustments that
might result if the Company is unable to continue as a going concern. The
Company's recent losses, and the Chapter 11 Cases, raise substantial doubt about
the Company's ability to continue as a going concern. The ability of the Company
to continue as a going concern and the appropriateness of using the going
concern basis is dependent upon, among other factors, the Company's ability (i)
to comply with the debtor-in-possession financing agreements, (ii) to obtain
exit financing to enable it to exit Chapter 11, (iii) to obtain confirmation of
a plan of reorganization under the Bankruptcy Code, (iv) to achieve profitable
operations after such confirmation, and (v) to generate sufficient cash from
operations to meet its obligations.
As a result of the filing of the Chapter 11 Cases and related
circumstances, book values of assets may not be realized and liquidation of
liabilities is subject to substantial doubt. While under the protection of
Chapter 11, the Debtors may sell or otherwise dispose of assets and liquidate or
settle liabilities, for amounts other than those reflected in the Condensed
Consolidated Financial Statements. Further, the confirmation of a plan of
reorganization could materially change the amounts reported in the accompanying
Condensed Consolidated Financial Statements. The Condensed Consolidated
Financial Statements do not include any adjustments relating to recoverability
of the value of the recorded asset amounts or the amounts and classification of
liabilities that might be necessary as a consequence of a plan of
reorganization.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
The following discussion should be read in conjunction with the
Company's financial statements and related notes thereto included elsewhere
herein.
The discussion below and elsewhere in this Form 10-Q includes statements
that are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act. These include
management's expectations with respect to the Chapter 11 filing, 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
19
condition and results of operations. The words "may", "should", "expect",
"believe", "anticipate", "project", "estimate", and similar expressions are
intended to identify forward-looking statements. Such risks and uncertainties,
any one of which may cause actual results to differ materially from those
described in the forward-looking statements, include or relate to, among other
things:
- The impact of the Chapter 11 Cases and related circumstances
which could materially reduce the reported amounts of assets
and liabilities included in these condensed consolidated
financial statements. Liabilities subject to compromise could
increase as a result of negotiations, actions of the
bankruptcy court, changes in the reported amounts of disputed
claims, proof of claims and other events.
- Risks associated with the Company's ability to maintain its
existing franchise affiliations.
- Risks associated with the Company's ability to obtain approval
for its plan of reorganization.
- Risks associated with the Company's ability to obtain exit
financing to replace the DIP Facility.
- The impact of pending or threatened litigation and/or
governmental inquiries and investigation involving the
Company.
- The effect of competition and the economy on the Company's
ability to maintain margins on existing operations, including
uncertainties relating to competition.
- The Company's ability to generate sufficient cash flows from
operations to meet its obligations.
- The effectiveness of changes in management and the ability of
the Company to retain qualified individuals to serve in senior
management positions.
- 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.
GENERAL OVERVIEW
Management believes that results of operations in the hotel industry
are best explained by four key performance measures: occupancy, average daily
rate ("ADR"), revenue per available room ("RevPAR") levels and EBITDA margins.
These measures are influenced by a variety of factors including national,
regional and local economic conditions, the degree of competition with other
hotels in the area and changes in travel patterns. The demand for accommodations
is also affected by normally recurring seasonal patterns 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 rooms revenues, food and beverage
revenues and other revenues. Room revenues are derived from guest room rentals,
whereas food and beverage revenues primarily include sales from hotel
restaurants, room service and hotel catering. Other revenues include charges for
guests' long-distance telephone service, laundry service and use of meeting
facilities.
Operating Expenses. Operating expenses are composed of direct, general
and administrative, other hotel operating expenses and depreciation and
amortization. Direct expenses, including rooms, food and beverage and other
operations, reflect expenses directly related to hotel operations. These
expenses are primarily variable with available rooms and occupancy rates, but
also have a small fixed component, which can be leveraged with increases in
revenues. General and administrative expenses represent corporate salaries and
other corporate operating expenses and are generally fixed. Other expenses
include primarily property level expenses related to general operations such as
marketing, utilities, repairs and maintenance and other property administrative
costs.
20
RESULTS OF OPERATIONS
The downturn in the US economy, the lodging industry and the events of
September 11, 2001 have adversely impacted the Company's results of operations.
In addition, operating results for the first quarter of 2002 have been
impacted by hotel dispositions. During the first quarter of 2001, the Company
sold two hotel properties. Gross sales price of these two properties was $66.2
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 Form 10-Q and should be read in conjunction with such financial
statements and notes thereto.
21
THREE MONTHS ENDED MARCH 31, 2002 ("FIRST QUARTER 2002") COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2001 ("FIRST QUARTER 2001")
REVENUES
At March 31, 2002, the Company owned 105 hotels and had a minority
interest in one hotel compared with 109 hotels owned and a minority interest in
one hotel at March 31, 2001.
Revenues for the Company were $94.4 million for the first quarter 2002,
a 17.8% decrease compared to revenues of $114.8 million for the first quarter
2001. Of this $20.4 million decrease, approximately $4.6 million is a result of
the sale of hotels. Revenues on a same unit basis, for hotels owned at the end
of the first quarter 2002 were $94.4 million for the first quarter 2002 and
$110.2 million for the first quarter 2001 (a decline of 14.3%). RevPAR, on a
same unit basis, for hotels owned at the end of the first quarter 2002 declined
by 13.9% compared with the first quarter 2001 as a result of a decline in
occupancy of 7.4% as well as a decrease in average daily rates of 7.0%. Revenues
and RevPar on the same unit basis for the first quarter 2002 were adversely
impacted by a general decline in the industry, particularly in certain of the
Company's markets. These factors were exacerbated by the events of September 11,
2001.
OPERATING EXPENSES
Direct operating expenses for the Company were $37.8 million (40.1% of
direct revenues) for the first quarter 2002 and $46.0 million (40.1% of direct
revenues) for the first quarter 2001. This $8.2 million decrease was primarily
attributable to the reduction in revenues offset by reduced operating margins in
other direct revenue activities. Other direct revenues are comprised of revenues
from telephone, laundry services, use of meeting facilities and other
miscellaneous activities.
General, administrative and other expenses (which excludes
reorganization items) were $41.8 million (44.3% of direct revenues) for the
first quarter 2002 and $51.5 million (44.9% of direct revenues) for the first
quarter 2001. The decrease in general administrative and other expenses is
partially due to 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. The reductions were, however, offset by increases
in certain property level expenses primarily property taxes. Property taxes
increased due to higher property tax assessments in certain markets. General,
administrative and other expenses also declined as a result of significant
reductions in corporate overhead (excluding reorganization items). Corporate
overhead (excluding reorganization items) decreased as a result of certain
cost-reduction initiatives that were implemented at the corporate office. In
addition, certain costs incurred during the first quarter of 2001 were
eliminated during the latter part of 2001. These related mainly to professional
fees principally related to consultants performing certain financial and
accounting management responsibilities within the Company as well as to certain
legal matters.
Depreciation and amortization expense was $14.3 million in the first
quarter 2002 and $15.7 million in the first quarter 2001. The $1.4 million
decrease is primarily a result of a decrease in depreciation related to hotels
sold and the asset impairment adjustments recorded in the fourth quarter of
2001.
The company recorded no impairment charges for the first quarter 2002
and $0.6 million for the first quarter 2001. The Company's first quarter 2001
charge comprised $4.3 million related to revised estimates of fair value for
properties held for sale and held for investment at March 31, 2001, net of a
recapture of $3.7 million of impairment charges as one hotel previously held for
sale was no longer being actively marketed for sale as of March 31, 2001.
Severance and restructuring charges were $0.1 million for the first
quarter 2002 and $0.8 million for the first quarter 2001. Both the first quarter
2002 and 2001 charges related to senior level management changes. As previously
reported in the Company's Form 10-K for the year ended December 31, 2001,
significant management changes occurred during 2001 and to a lesser extent
during the first quarter of 2002.
22
OTHER INCOME AND EXPENSES
Interest expense was $8.6 million in the first quarter 2002 and $20.8
million in the first quarter 2001. This decrease is partially attributable to a
reduction in the level of debt and also to a decrease in the cost of debt. In
addition, as previously reported in the Company's Form 10-K for the year ended
December 31, 2001, where the underlying collateral in respect of certain debt is
considered to be less than the debt obligation, the Company ceased accruing
interest on those debts. Contractual interest expense in respect of these debts
that was not recorded for the first quarter of 2002 (excluding interest on the
CRESTs) approximated $8.0 million.
Gain on asset dispositions was $24.4 million for the first quarter
2001. This related to the two hotels sold in the first quarter 2001 and
represented the excess of the net proceeds of sale over the net book values of
those assets.
Minority interest expense was $0.5 million in the first quarter 2002
and $3.4 million in the first quarter 2001. This $2.9 million decrease is
primarily due to the non-accrual of the CREST dividend. The Company ceased
accruing interest on the CRESTs as these are considered to be unsecured debts of
the Company. This reduction has been offset by an increase in other minority
interests due to higher net income levels for those hotels which the Company
co-owns with its third-party-minority equity partners.
Reorganization items (mainly professional fees) were $5.8 million for
the first quarter of 2002.
NET INCOME
After a provision for income taxes of $0.1 million in the first quarter
2002 and $2.7 million in the first quarter 2001, the Company had a net loss of
$14.4 million ($0.51 loss per share) in first quarter 2002 compared with a net
loss of $1.9 million ($0.07 loss per share) in the first quarter 2001, for the
reasons discussed above.
INCOME TAXES
As of December 31, 2001, Lodgian had net operating loss carryforwards
of approximately $235 million for federal income tax purposes, which expire in
2004 through 2021. It is likely that under the plan of reorganization,
substantial amounts of net operating losses will be utilized relating to debt
cancellations. The Company's ability to use any remaining net operating loss
carryforwards to offset future income is subject to other 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. In
addition, the Company recognized an income tax provision of $0.1 million during
the first quarter of 2002, which related primarily to a provision for state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Lodgian's principal sources of liquidity consist of existing cash
balances, cash flow from operations and financing.
On December 20, 2001, the Company and eighty-one of its subsidiaries
filed for voluntary reorganization with the United States Bankruptcy Court for
the Southern District of New York under Chapter 11 of the Bankruptcy Code. The
Chapter 11 Cases have been consolidated for purposes of administration under
case number 01-16345. The filing was precipitated by the weaker US economy, the
decline in travel since the events of September 11 and the Company's heavy debt
load. The Debtors are currently operating their businesses as
debtors-in-possession and are subject to the jurisdiction of the Bankruptcy
Court while a reorganization plan is being formulated.
Also, on April 17, 2002, one additional operating subsidiary, New
Orleans Airport Motel Associates, LP filed for voluntary reorganization with the
United States Bankruptcy Court for the Southern
23
District of New York under Chapter 11 of the Bankruptcy Code. The Chapter 11
case for this subsidiary has also been consolidated with the previously filed
Chapter 11 Cases, for purposes of administration, under case number 01-16345.
As a result of the Chapter 11 filing, the Company is prohibited from
paying pre-petition claims (unless these are approved by the courts) and
creditors are prohibited from attempting to collect loans or debts arising prior
to December 20, 2001. The Company, at its option, may assume or reject contracts
entered into prior to the date of filing. Claims related to rejected contracts
entered into prior to the date of the petition would be treated as unsecured
claims.
The Company received approval from the Bankruptcy Court to pay pre and
post petition employee wages, salaries, benefits and other employee obligations.
The Bankruptcy Court also approved orders granting the debtors authority to pay,
among other things, certain pre-petition claims of its critical service vendors.
The Company has been and intends to continue to pay its post-petition
obligations arising in the ordinary course of business.
The Debtors received debtor-in-possession financing of $25 million from
a group of lenders led by Morgan Stanley Funding Inc. and Lehman Brothers Inc.
The DIP Facility, along with the rights of the Debtors to use the cash
collateral of these lenders expires, one year from the date of filing or on the
effective date of the reorganization plan, whichever is earlier. This financing
will allow the Company to operate in the normal course during the bankruptcy
proceedings.
In addition, the Company received approval from the courts to pay the
post-petition interest on debts relating to 76 of its properties. The Company
has not paid any post-petition interest in relation to the Senior Subordinated
Notes, CRESTS and the other 29 properties. Contractual interest not accrued
between December 20, 2001 and March 31, 2002 amounted to $12.8 million ($11.4
million for the first quarter 2002) including interest on the Senior
Subordinated Notes and the CRESTS.
As of May 14, 2002, the Debtor had not yet filed its plan of
reorganization with the Bankruptcy courts but management believes that the Plan
will result in most unsecured claims being settled for less than 100% of their
face value and that the interests of the common stock holders will be
significantly diluted.
Under the DIP Facility, the Company has the option to borrow at either
base rate plus 2.5% or at LIBOR plus 3.5%. The Company is currently in
compliance with the terms of the DIP Facility. As of May 14, 2002, the Company
had not borrowed from the facility but had issued one letter of credit totaling
$750,000 against it.
The Company had earnings from operations before interest, taxes,
depreciation and amortization ("EBITDA"), as adjusted in the first quarter of
2002 of $14.7 million, a 15.0% decrease from the $17.3 million in the first
quarter of 2001. The EBITDA margins for the first quarter 2002 and the first
quarter 2001 were 15.6% and 15.1%, respectively. The Company has computed EBITDA
without regard to the unusual items. During the first quarter of 2002, these
items consisted of reorganization costs of $5.8 million and severance and
restructuring costs of $0.1 million. The unusual charges for the first quarter
of 2001 consisted of severance and restructuring costs of $0.8 million and
impairment charges of $0.6 million. 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 provided by operating activities for the first
quarter of 2002 was $9.2 million compared with net cash used in operating
activities of $23.3 million for the first quarter of 2001.
Cash flows used in investing activities was $4.2 million for the first
quarter 2002 and cash flows provided by investing activities was $52.9 million
in the first quarter 2001. The 2002 amount includes capital expenditures of $3.0
million and deposits for capital expenditure escrows of $1.2 million. The first
quarter 2001 amount includes capital expenditures of $7.3 million, net proceeds
from the sale of assets of $58.8 million and withdrawals for capital expenditure
escrows of $1.4 million.
Cash flows used in financing activities were $0.7 million for first
quarter 2002 and $41.3 million in first quarter 2001. The 2002 amount consists
of principal payments in respect of capital leases and
24
payments on long-term obligations for debts not included in the Chapter 11
filing. The 2001 amount consists primarily of borrowings on the working capital
revolver and repayments of long-term obligations.
At March 31, 2002, the Company had a working capital deficit of $1.7
million as compared with a working capital surplus of $50,000 at December 31,
2001.
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's capital improvement plan for its properties for 2002
and 2003 is estimated at $75.0 million. Of the $75.0 million, $4.3 million was
spent through April 30, 2002 and an additional $36.5 million is expected to be
spent before the end of December 31, 2002. The Company expects to fund its
capital expenditures from a combination of amounts escrowed for such
expenditures, its current cash position, cash from operations and if needed,
from its DIP Facility or financing obtained on exiting Chapter 11.
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 did
not make this payment on May 20, 2001. 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 included the
promissory notes discussed above and a $7.8 million first mortgage. MHA was not
included in the entities that filed for reorganization under Chapter 11. On
April 19, 2002, MHA and the lenders entered into a Satisfaction and Release
Agreement whereby the lenders agreed to fully discharge the indebtedness under
the promissory note of $3.9 million plus related accrued interest approximating
$0.8 million in exchange for payment by MHA of $0.2 million.
As a result of the Chapter 11 Cases, the Company is technically in
default of its debt agreements with the exception of Macon Hotel Associates,
L.L.C which was not included in the bankruptcy petition. All of the Company's
pre-petition debts, with the exception of the debt of Macon Hotel Associates,
L.L.C, are recorded in liabilities subject to compromise in the balance sheets
as of March 31, 2002 and December 31, 2001.
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. As a result of the Company's
petition for bankruptcy, the Company is technically in default of its franchise
agreements. However, due to the automatic stay of proceedings, the franchisors
are prohibited from proceeding with certain actions absent approval from the
Bankruptcy Courts. Were the automatic stay, in respect of these franchise
agreements, to be lifted, this could negatively impact operating results and the
value of the Company's hotels. See Note 10 to the Condensed Consolidated
Financial Statements.
Management believes that the combination of its current cash position,
cash flow from operations, and the DIP Facility will provide sufficient
liquidity to fund the Company's operating, capital expenditure and debt service
obligations during the Chapter 11 proceedings. However, there can be no
assurance that this will be achieved. The Company's recent losses and the
Chapter 11 cases raise substantial doubt about the Company's ability to continue
as a going concern. The ability of the Company to continue as a going concern
and the appropriateness of using the going concern basis is dependent upon,
among other factors, the Company's ability (i) to comply with the
debtor-in-possession financing agreements, (ii) to obtain exit financing to
enable it to exit Chapter 11, (iii) to obtain confirmation of a plan of
reorganization under the Bankruptcy Code, (iv) to achieve profitable operations
after such confirmation, and (v) to generate sufficient cash from operations to
meet its obligations. In addition, the Company's debtor-in-possession financing
agreements expire in December 2002; there can be no assurance that the Company
will be successful in obtaining confirmation of a plan of reorganization by
December 2002 and, if not, there can be
25
no assurance that the existing debtor-in-possession lenders will agree to
continue to provide debtor-in-possession financing. Management believes that the
DIP Facility, along with its current cash and cash provided by operations, will
provide sufficient liquidity to fund its operations in the foreseeable future;
however, there can be no assurance that the sources of liquidity will be
available or sufficient to meet the Company's needs.
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.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with the
United States generally accepted accounting principles (GAAP). The accounting
policies followed for quarterly reporting are the same as those disclosed in
Note 1 of the Notes to Consolidated Financial Statements included in the
Company's Form 10-K for the year ended December 31, 2001. The preparation of the
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. There can be no
assurance that actual results will not differ from these estimates. The critical
accounting policies adopted by the Company relate to capitalization,
useful/depreciable lives of fixed assets, revenue recognition, impairment
evaluations, income taxes and liabilities subject to compromise.
Capitalization and depreciable lives of assets
Capital improvements are capitalized when they extend the useful lives
of the related asset. Management estimates the depreciable lives of the
Company's fixed assets. All items considered to be repair and maintenance items
are expensed as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets (buildings and improvements
10-40 years; furnishings and equipment 3-10 years). Property under capital
leases is amortized using the straight-line method over the shorter of the
estimated useful lives of the assets or the lease term.
Revenue recognition
Revenues are recognized when the services are rendered. Revenues are
composed of rooms, food and beverage and other revenues. Room revenues are
derived from guest room rentals, whereas food and beverage revenues primarily
include sales from hotel restaurants, room service and hotel catering. Other
revenues include charges for guests' long-distance telephone service, laundry
service and use of meeting facilities.
Asset impairment evaluation
Under GAAP, real estate assets are stated at the lower of depreciated
cost or fair value, if deemed impaired. As required by GAAP, the Company
periodically evaluates its real estate assets to determine if there has been any
impairment in carrying value and records impairment losses if there are
indicators of impairment and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts. The
Company recorded no impairment losses for the first quarter of 2002 ($0.6
million for the first quarter of 2001). As a result of the filing of the Chapter
11 Cases and related circumstances, the Company may ultimately sell or otherwise
dispose of its hotel assets for amounts less than the carrying value of such
assets and future actions by the Company, its creditors or the Bankruptcy Court
could adversely impact the Company's ability to hold its assets for periods
sufficient for it to recover the carrying value of its assets on an undiscounted
cash flow basis. As a result, the Company could recognize additional impairment
losses in future periods.
Also, as previously reported in the Company's Form 10-K for the year
ended December 31, 2001, in connection with its bankruptcy petition on December
20, 2001, the Company determined that 29 of its hotels were significantly
overleveraged in that the estimated fair value of these hotels did not exceed
the outstanding debt on these hotels. Therefore, with the approval of the
Bankruptcy Court, the Company
26
ceased paying interest to the secured lenders of these properties from the date
of the bankruptcy petition. The Company also concluded that it no longer had the
ability to hold these hotels for a period sufficient for their estimated future
undiscounted cash flows to cover their carrying values. Therefore in accordance
with the provisions of FAS 121 (superceded on January 1, 2001 by SFAS 144), the
Company determined that an impairment charge of $69 million was necessary to
reduce the carrying value of these assets. Also, during the fourth quarter of
2001, in connection with the bankruptcy petition, the Company also ceased
marketing for sale, four operating properties that were previously classified as
held for sale. Since these assets were not considered impaired as the estimated
future cash flows from the use of these properties exceeded their carrying
values, the Company recaptured $8.5 million of impairment reserves previously
recorded in 1999, 2000 and 2001.
Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS 109) "Accounting for Income Taxes", which requires
the use of the liability method of accounting for deferred income taxes. As a
result of the Company's financial condition, continued losses and the Chapter 11
Cases, the Company has provided a full valuation allowance against its deferred
tax asset as it is more likely than not that the deferred tax asset will not be
realized.
Liabilities subject to compromise
Liabilities subject to compromise refers to known liabilities incurred
prior to the commencement of the Chapter 11 Cases, including those considered by
the Bankruptcy Court to be pre-petition claims. These liabilities consist
primarily of amounts outstanding under long-term debt and also include accounts
payable, accrued interest and other accrued expenses. These amounts represent
the Company's estimate of known or potential claims to be resolved in the
Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments
may result from (1) negotiations, (2) actions of the Bankruptcy Court, (3)
further development with respect to disputed claims, (4) proofs of claim, or (5)
other events. Payment terms for these amounts will be established under a plan
of reorganization.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in the Company's market risk sensitive instruments is
the potential loss arising from adverse changes in interest rates. There have
been no significant changes in the Company's market risk sensitive instruments
since the filing of the Company's Form 10-K for the year ended December 31,
2001.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 20, 2001, the Company and eighty-one of its subsidiaries
filed for voluntary reorganization with the United States Bankruptcy Court for
the Southern District of New York under Chapter 11 of the Bankruptcy Code. The
Chapter 11 Cases have been consolidated for purposes of administration under
case number 01-16345. The filing was precipitated by the weaker US economy, the
decline in travel since the events of September 11 and the Company's heavy debt
load. The Debtors are currently operating their businesses as
debtors-in-possession and are subject to the jurisdiction of the Bankruptcy
Court while a reorganization plan is being formulated.
Also, on April 17, 2002, one additional operating subsidiary, New
Orleans Airport Motel Associates, LP filed for voluntary reorganization with the
United States Bankruptcy Court for the Southern District of New York under
Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has
also been consolidated with the previously filed Chapter 11 Cases, for purposes
of administration, under case number 01-16345.
As of May 14, 2002, the Debtors had not yet filed a plan of
reorganization with the Bankruptcy courts but management believes that the plan
of reorganization will result in most unsecured claims being settled for less
than 100% of their face value and that the interests of the common stock holders
will be significantly diluted.
On March 7, 2002, Hilton Hotel Corporation, Promus Hotels, Inc.,
Doubletree Hotel Systems, Inc. and Hilton Inns, Inc. filed a Motion for Relief
from the automatic stay of proceedings (which arose as a result of the Debtor's
petition under Chapter 11) to terminate certain license agreements or
alternatively to compel the Debtors to reject the license agreements. The
Company has responded to this motion and believes it has valid defenses to this
matter.
The Company is a party in litigation with Hospitality Restoration and
Builders, Inc. ("HRB"), a general contractor hired to perform work on six of the
Company's hotels. The litigation 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 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.
Thomas Arasi, the Company's former President and Chief Executive
Officer, has asserted a claim against the Company under his employment
agreement. Mr. Arasi alleges that he was terminated without cause and claims
damages in the amount of $3.3 million plus other unspecified amounts. The
Company disputes Mr. Arasi's claims and believes it has valid defenses to this
matter.
The Company and individual directors are parties to a lawsuit alleging
violations of federal securities laws and breach of fiduciary duty in connection
with certain investments made in affiliates of Impac Hotel Group, LLC, a
predecessor of the Company. The Company believes that it has valid defenses to
this matter.
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 and is currently prohibited
under various credit agreements from paying
28
any dividends. The Company currently anticipates that it will retain any future
earnings for use in its business. On exiting Chapter 11, 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 was
previously 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 Structured Trust
Securities ("CRESTS"). Payment restrictions contained in the Company's Notes
allowed the Company to defer dividend payments on the CRESTS beginning June 30,
2000. Pursuant to the terms of the instrument, the Company had the right to
defer payment for up to twenty quarters (the "Extension Period"), during which
Extension Period no interest was due and payable.
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
A report on Form 8-K was filed on January 2, 2002 relating to the
Chapter 11 filing of the Company and eighty-one of its subsidiaries.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LODGIAN, INC.
Date: May 15, 2002 By: /s/ DAVID E. HAWTHORNE
-------------------------------------------
DAVID E. HAWTHORNE
President and Chief Executive Officer
Date: May 15, 2002 By: /s/ RICHARD CARTOON
-------------------------------------------
RICHARD CARTOON
Executive Vice President and Chief Financial Officer
30
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO -----------
10.1 - Form of Voluntary Petition under Chapter 11 of the U. S.
Bankruptcy Code filed with the United States Bankruptcy Court
Southern District of New York by New Orleans Airport Motel
Associates LP.
31