-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RlrqH3PSSbqAp8jkMwYe1aTHxZyOHjVWRvzm6BurItH/bBMG26zAasYGsbdh3LXy Au3rwOKRzTJFa+J9fUl+/w== 0000950144-01-001007.txt : 20010123 0000950144-01-001007.hdr.sgml : 20010123 ACCESSION NUMBER: 0000950144-01-001007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20010110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LODGIAN INC CENTRAL INDEX KEY: 0001066138 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 522093696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14537 FILM NUMBER: 1505535 BUSINESS ADDRESS: STREET 1: 3445 PEACHTREE ROAD N E SUITE 700 CITY: ATLANTA STATE: CA ZIP: 30326 BUSINESS PHONE: 4043649400 MAIL ADDRESS: STREET 1: 3445 PEACHTREE ROAD N E SUITE 700 CITY: ATLANTA STATE: CA ZIP: 30326 10-Q 1 g66295e10-q.txt LODGIAN, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED September 30, 2000 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. 1-11342 LODGIAN, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-2093696 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3445 PEACHTREE ROAD, N.E., SUITE 700, 30326 ATLANTA, GA (Zip Code) (Address of principal executive offices)
(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 [ ] No [X] 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 January 3, 2001 ------- ---------------------------------- Common 28,139,481
2 LODGIAN, INC. AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999................................... 1 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999 ..... 2 Condensed Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 2000 and for the Year Ended December 31, 1999................................. 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999..................... 4 Notes to Condensed Consolidated Financial Statements......... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................ 31 Item 2. Changes in Securities........................................ 31 Item 6. Exhibits and Reports on Form 8-K............................. 31 SIGNATURES.................................................................. 33
i 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 14,516 $ 14,644 Restricted cash........................................... 3,242 2,692 Accounts receivable, net of allowances.................... 27,827 26,520 Inventories............................................... 8,155 9,190 Prepaid expenses and other current assets................. 10,936 9,984 ---------- ---------- Total current assets.............................. 64,676 63,030 Property and equipment, net................................. 1,114,010 1,314,141 Deposits for capital expenditures........................... 14,856 12,357 Other assets, net........................................... 32,495 32,468 ---------- ---------- $1,226,037 $1,421,996 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 26,659 $ 34,332 Accrued interest.......................................... 12,532 13,390 Other accrued liabilities................................. 39,006 42,783 Advance deposits.......................................... 2,106 2,384 Current portion of long-term obligations.................. 77,754 35,404 ---------- ---------- Total current liabilities......................... 158,057 128,293 Long-term obligations, less current portion................. 710,418 856,675 Deferred income taxes....................................... 3,977 33,082 Minority interests: Preferred redeemable securities (including related accrued interest).............................................. 181,125 175,000 Other..................................................... 4,012 4,404 ---------- ---------- Total liabilities................................. 1,057,589 1,197,454 Commitments and contingencies............................... Stockholders' equity: Common stock, $.01 par value, 75,000,000 shares authorized; 28,266,682 and 28,130,325 shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively..................................... 282 281 Additional paid-in capital................................ 263,168 262,760 Accumulated deficit....................................... (94,090) (37,587) Accumulated other comprehensive loss...................... (912) (912) ---------- ---------- Total stockholders' equity........................ 168,448 224,542 ---------- ---------- $1,226,037 $1,421,996 ========== ==========
The accompanying notes are an integral part of these financial statements. 1 4 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------- -------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ------------ ------------- ------------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) Revenues: Rooms....................................... $117,425 $116,549 $334,643 $328,212 Food and beverage........................... 30,772 31,892 98,721 101,018 Other....................................... 7,007 7,579 21,398 22,457 -------- -------- -------- -------- Total revenues........................... 155,204 156,020 454,762 451,687 -------- -------- -------- -------- Operating expenses: Direct: Rooms....................................... 32,827 33,213 93,326 90,335 Food and beverage........................... 23,719 23,810 72,402 74,351 Other....................................... 4,225 4,552 13,142 12,768 General, administrative and other............ 56,178 48,864 167,967 145,374 Depreciation and amortization................ 16,908 13,102 49,348 40,602 Impairment of long-lived assets.............. (10,712) -- 55,450 -- Severance and restructuring expenses......... -- -- 1,502 -- -------- -------- -------- -------- Total operating expenses................. 123,145 123,541 453,137 363,430 -------- -------- -------- -------- 32,059 32,479 1,625 88,257 Other income (expenses): Interest income and other................... 467 285 994 1,102 Interest expense............................ (24,596) (20,317) (74,426) (57,456) Interest hedge break fee.................... (4,294) -- (4,294) -- Loss on asset dispositions, net............. (21) -- (24) -- Minority interests: Preferred redeemable securities............. (3,063) (3,338) (9,190) (10,152) Other....................................... 250 1,310 (293) -- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item.......................... 802 10,419 (85,608) 21,751 Provision (benefit) for income taxes......... 275 4,167 (29,105) 8,700 -------- -------- -------- -------- Income (loss) before extraordinary item...... 527 6,252 (56,503) 13,051 Extraordinary item: Loss on early extinguishment of debt, net of income tax benefit of $4,224................ -- (6,336) -- (6,336) -------- -------- -------- -------- Net income (loss)............................ $ 527 $ (84) $(56,503) $ 6,715 ======== ======== ======== ======== Earnings (loss) per common share-basic and diluted: Income (loss) before extraordinary item...... $ 0.02 $ 0.23 $ (2.01) $ 0.48 Extraordinary item........................... -- (0.23) -- $ (0.23) -------- -------- -------- -------- Net income (loss)............................ $ 0.02 $ -- (2.01) $ 0.25 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 2 5 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED ACCUMULATED COMMON STOCK ADDITIONAL EARNINGS OTHER TOTAL ------------------- PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT) LOSS EQUITY ---------- ------ ---------- ------------ ------------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) Balance at December 31, 1998........................ 27,937,057 $278 $261,976 $ 23,106 $(1,593) $283,767 401(k) Plan contribution...... 143,160 2 547 -- -- 549 Exercise of stock options..... 30,000 1 119 -- -- 120 Tax benefit from exercise of stock options............... -- -- 20 -- -- 20 Director compensation......... 20,108 -- 98 -- -- 98 Net loss...................... -- -- -- (60,693) -- (60,693) Currency translation adjustments................. -- -- -- -- 681 681 -------- Comprehensive loss............ -- -- -- -- -- (60,012) ---------- ---- -------- -------- ------- -------- Balance at December 31, 1999........................ 28,130,325 281 262,760 (37,587) (912) 224,542 401(k) Plan contribution...... 127,123 1 373 -- -- 374 Director compensation......... 9,234 -- 35 -- -- 35 Net loss...................... -- -- -- (56,503) -- (56,503) Currency translation adjustments................. -- -- -- -- -- -- -------- Comprehensive loss............ -- -- -- -- -- (56,503) ---------- ---- -------- -------- ------- -------- Balance at September 30, 2000 28,266,682 $282 $263,168 $(94,090) $ (912) $168,448 ========== ==== ======== ======== ======= ========
The comprehensive income for the three months ended September 30, 2000 was $527 and the comprehensive (loss) and income for the three and nine months ended September 30, 1999 was $(84) and $6,679, respectively. The accompanying notes are an integral part of these financial statements. 3 6 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED ----------------- September 30, September 30, 2000 1999 ------------- ------------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss) ................................................. $ (56,503) $ 6,715 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .................................. 49,348 40,602 Loss on asset dispositions, net ................................ 24 -- Deferred income tax provision (benefit) ........................ (29,105) 4,476 Minority interests ............................................. 6,416 -- Impairment of long-lived assets ................................ 55,450 -- Loss on early extinguishment of debt ........................... -- 10,560 Other .......................................................... (944) (5,455) Changes in operating assets and liabilities: Accounts receivable .......................................... (1,307) (14,660) Inventories .................................................. 1,035 28 Other current assets ......................................... (1,502) (19,946) Accounts payable ............................................. (7,673) (26,341) Accrued liabilities .......................................... (4,913) 5,138 --------- --------- Net cash provided by (used in) operating activities ................. 10,326 1,117 --------- --------- INVESTING ACTIVITIES: Capital expenditures, net ......................................... (68,205) (63,659) Acquisitions of property and equipment ............................ -- (1,929) Purchase of minority interests .................................... -- (10,200) Proceeds from disposition of assets ............................... 168,898 20,468 Other ............................................................. -- 371 Net withdrawals (deposits) for capital expenditures ............... (2,970) 27,737 --------- --------- Net cash provided by (used in) investing activities ................. 97,723 (27,212) --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of common stock ............................ -- 120 Proceeds from issuance of long-term obligations ................... 32,326 477,860 Principal payments on long-term obligations ....................... (136,520) (442,299) Payments of deferred loan costs ................................... (3,300) (4,699) Contributions from (distributions to) minority interests .......... (683) (690) --------- --------- Net cash provided by (used in) financing activities ................. (108,177) 30,292 --------- --------- Net increase (decrease) in cash and cash equivalents ................ (128) 4,197 Cash and cash equivalents at beginning of period .................... 14,644 19,185 --------- --------- Cash and cash equivalents at end of period .......................... $ 14,516 $ 23,382 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of amount capitalized ............................. $ 72,509 $ 50,714 ========= ========= Income taxes .................................................... $ 584 $ 3,065 ========= =========
The accompanying notes are an integral part of these financial statements. 4 7 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The condensed consolidated financial statements include the accounts of Lodgian, Inc. ("Lodgian" or the "Company"), its wholly-owned subsidiaries and five partnerships in which Lodgian exercises control. Lodgian believes it has control of partnerships when the Company manages and has control of the partnerships' assets and operations, has the ability and authority to enter into financing arrangements on behalf of the entity or to sell the assets of the entity within reasonable business guidelines. One unconsolidated entity is accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting policies followed for quarterly financial reporting are the same as those disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2000, and the results of its operations for the three and nine month periods ended September 30, 2000 and its cash flows for the nine months ended September 30, 2000. The results for interim periods are not necessarily indicative of results for the entire year. While management believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. As previously reported in the Company's Form 10-K for the year ended December 31, 1999, during the fourth quarter of 1999, the Company initiated an internal review of its accounting records. The Company experienced significant difficulty in the integration and conversion of information and accounting systems subsequent to the merger of Servico, Inc. and Impac Hotel Group, LLC on December 11, 1998 (the "Merger"). In addition, the Company determined that a significant number of reconciliations involving cash, accounts receivable, fixed assets, accounts payable and other accounts had not been completed during 1999. As a result of these systems and reconciliation issues, the Company experienced a significant delay in preparing its 1999 annual financial statements. Certain charges were recorded in the fourth quarter of 1999 after the account reconciliation process was completed in 2000. Also, as previously reported in the Company's Form 10-K for the year ended December 31, 1999, the Company concluded, after consultation with its prior independent auditors that its internal controls for the preparation of interim financial information did not provide an adequate basis for its prior independent auditors to complete reviews of the 1999 quarterly financial information in accordance with standards established by the American Institute of Certified Public Accountants. The Company believes that certain charges that were recorded in the fourth quarter of 1999 may relate to individual prior quarters; however the Company does not have sufficient information to identify all specific charges attributable to prior 1999 quarters. In the opinion of management, the internal control weaknesses described above existed during the first and second quarters of 2000 and to a lesser extent in the third quarter of 2000. These internal control weaknesses caused a significant delay in preparing the Company's September 30, 2000 Form 10-Q. The Company has committed substantial resources to mitigate the previously identified control weaknesses including contracting with outside consulting accountants to ensure the Company has the corporate financial resources needed 5 8 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to provide reasonable assurances that it can comply with the record keeping and internal control requirements applicable to SEC registrants. Management believes these efforts have enabled the Company to produce reliable interim financial statements as of September 30, 2000 and for the three and nine months then ended. The Company is in the process of implementing a plan which, if successful, will enable the Company to timely comply with the financial statement reporting requirements applicable to SEC registrants by the time it is required to file its 2000 annual financial statements and will have substantially developed and implemented an adequate control environment by this date. As part of this plan, during the third and fourth quarters the Company has implemented the following action steps; (i) developed and implemented numerous new controls and policies, (ii) implemented a process to insure that material transactions are recorded on a timely basis, (iii) implemented an account closing process so that all material accounts are reconciled and reviewed on a timely basis and (iv) reorganized and changed personnel in the accounting and finance functions to improve the accuracy and timeliness of the financial accounting processes. 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 disclosure 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 financial statements in order to conform to the current period presentation. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Income (loss) before extraordinary item................. $ 527 $ 6,252 $(56,503) $ 13,051 Extraordinary item...................................... -- (6,336) -- (6,336) -------- -------- -------- -------- Net income (loss)....................................... $ 527 $ (84) $(56,503) $ 6,715 ======== ======== ======== ======== Denominator: Denominator for basic and dilutive earnings per share-adjusted weighted-average shares.............. 28,251 27,282 28,055 27,041 ======== ======== ======== ======== Basic and diluted earnings per share: Income (loss) before extraordinary item................. $ 0.02 $ 0.23 $ (2.01) $ 0.48 Extraordinary item...................................... -- (0.23) -- (0.23) -------- -------- -------- -------- Net (loss) income....................................... $ 0.02 $ -- $ (2.01) $ 0.25 ======== ======== ======== ========
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), employee stock options and contingent shares in connection with the Merger because their inclusion would have been antidilutive. 3. ASSETS HELD FOR SALE As discussed in footnote 7. and Item 2. Management's Discussion and 6 9 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Analysis of Financial Condition and Results of Operations, the Company has adopted strategic plans to reduce the size of the Company's non-core hotel portfolio and reduce the level of overall debt of the Company. In this regard, the Company has identified and will continue to identify throughout 2000 and 2001 properties which will be classified as held for sale to meet these objectives. Impairment charges for the three and nine month periods ended September 30, 2000 were $(10.7) million and $55.5 million, respectively. During 2000 the Company's first quarter charge of $9.6 million related to revised estimates of fair value for properties held for sale at December 31, 1999 and the second quarter charge of $56.6 million related to the ten hotels sold to Sunstone Investors, LLC on August 31, 2000. During the third quarter 2000 the Company recaptured $10.7 million of impairment charges recorded in 1999 and 2000 as seven hotels previously considered held for sale as of December 31, 1999 are no longer being actively marketed for sale. The Company may incur additional impairment charges in the fourth quarter 2000 and in 2001 as it continues to identify properties to be considered held for sale to meet the objectives described. Summary results of operations included in the Statement of Operations with respect to the properties identified as held for sale at September 30, 2000 are as follows (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 2000 ------------- ------------- Revenues................................. $ 9,291 $26,635 ======= ======= Income (loss) before taxes............... $ 1,289(1) $ (2,242)(1) ======= =======
- ------------- (1) Includes impairment charge of $0.0 million and $8.5 million, respectively. Included in property and equipment, net at September 30, 2000 is $62.1 million related to properties identified as held for sale at September 30, 2000. 4. COMMITMENTS AND CONTINGENCIES In July 1999, a contractor hired by Servico to perform work on hotels in New York, Illinois and Texas filed a complaint against the Company in the Supreme Court of the State of New York, claiming breach of contract and quantum meruit, among other claims. The contractor seeks damages totaling $80 million, including $60 million punitive damages. The Company answered the complaint asserting counterclaims aggregating $20 million and successfully filed a motion to dismiss the claims related to two properties located in Illinois and Texas. In October 1999, a subcontractor filed a lawsuit in Texas against the above contractor and the Company. The Company has filed an answer and cross-claim against the contractor in the amount of $2.8 million. In February 2000, the contractor filed a lawsuit in Texas claiming over $3 million in actual damages and an undisclosed amount of punitive damages. The Company answered the complaint and asserted a counterclaim. The Company has also filed a lawsuit against the contractor in Federal District Court in Illinois, seeking $2 million. The contractor has filed an answer and counterclaim aggregating $2.8 million in actual damages and $10 million in punitive damages. The Company believes that it has valid defenses and counterclaims in these matters and that the outcome will not have a material adverse effect on its financial position or results of operations. 7 10 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an arbitration claim against the Company claiming breach of contract relating to a January 4, 1992 contract. WH claims entitlement to profit participation relating to the sale of certain hotel properties by an affiliate and predecessor of the Company. Although the Demand for Arbitration does not make a specific damages demand, it is believed that WH is claiming approximately $1,100,000 from the Company. Lodgian believes it has meritorious defenses to this matter and is defending it vigorously. 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 financial condition or results of operations. 5. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and derivatives used for hedging purposes. SFAS No. 133 requires that entities recognize all derivative financial instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137 and 138, is effective for the Company in its first fiscal quarter 2001. The Company doesn't presently believe that the adoption of SFAS No. 133 will have a significant effect on its financial position or its results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which addresses revenue recognition issues. SAB 101 is required to be adopted for the quarter ending December 31, 2000. The Company has assessed the types of transactions that may be impacted by this pronouncement. The impact of SAB 101 on the financial statements of the Company will not be material. 6. SUPPLEMENTAL GUARANTOR INFORMATION In connection with the Company's sale of $200 million of 12 1/4% Senior Subordinated Notes (the "Notes") in July 1999, certain of the Company's subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's obligations to pay principal and interest with respect to the Notes. Each Subsidiary Guarantor is wholly-owned and management has determined that separate financial statements for the Subsidiary Guarantors are not material to investors. The subsidiaries of the Company that are not Subsidiary Guarantors are referred to in the note as the "Non-Guarantor Subsidiaries". The following supplemental condensed consolidating financial statements present balance sheets as of September 30, 2000 and December 31, 1999 and statements of operations for the three and nine months ended September 30, 2000 and 1999 and the statements of cash flows for the nine months ended September 30, 2000 and 1999. In the condensed consolidating financial statements, Lodgian, Inc. (the "Parent") accounts for its investments in wholly owned subsidiaries using the equity method. 8 11 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2000
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents............ $ 59 $ 20,661 $ (6,204) $ -- $ 14,516 Restricted cash...................... -- -- 3,242 -- 3,242 Accounts receivable, net of allowances......................... -- 12,173 15,654 -- 27,827 Inventories.......................... -- 3,679 4,476 -- 8,155 Prepaid expenses and other current assets............................. 2,254 141 8,541 -- 10,936 --------- --------- --------- -------- ---------- Total current assets........... 2,313 36,654 25,709 -- 64,676 Property and equipment, net............ -- 596,160 517,850 -- 1,114,010 Deposits for capital expenditures...... -- 3,645 11,211 -- 14,856 Investment in consolidated entities............................. (264,817) -- -- 264,817 -- Due from (to) affiliates............... 439,781 (242,179) (197,602) -- -- Other assets, net...................... 36 18,431 14,028 -- 32,495 --------- --------- --------- -------- ---------- $ 177,313 $ 412,711 $ 371,196 $264,817 $1,226,037 ========= ========= ========= ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable..................... $ -- $ 16,813 $ 9,846 $ -- $ 26,659 Accrued interest..................... -- 11,546 986 -- 12,532 Other accrued liabilities............ -- 9,698 29,308 -- 39,006 Advance deposits..................... -- 1,113 993 -- 2,106 Current portion of long-term obligations........................ -- 62,400 15,354 -- 77,754 --------- --------- --------- -------- ---------- Total current liabilities.................. -- 101,570 56,487 -- 158,057 Long-term obligations, less current portion.............................. 3,976 388,315 318,127 -- 710,418 Deferred income taxes.................. 3,977 -- -- -- 3,977 Minority interests: Preferred redeemable securities (including related accrued interest).......................... -- -- 181,125 -- 181,125 Other................................ -- -- 4,012 -- 4,012 --------- --------- --------- -------- ---------- Total liabilities.............. 7,953 489,885 559,751 -- 1,057,589 --------- --------- --------- -------- ---------- Commitments and contingencies.......... Stockholders' equity: Common stock......................... 282 33 441 (474) 282 Additional paid-in capital........... 263,168 22,619 (42,085) 19,466 263,168 Accumulated deficit.................. (94,090) (98,914) (146,911) 245,825 (94,090) Accumulated other comprehensive loss............................... -- (912) -- -- (912) --------- --------- --------- -------- ---------- Total stockholders' equity (deficit)............. 169,360 (77,174) (188,555) 264,817 168,448 --------- --------- --------- -------- ---------- $ 177,313 $ 412,711 $ 371,196 $264,817 $1,226,037 ========= ========= ========= ======== ==========
9 12 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 1999
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents............. $ 59 $ 9,910 $ 4,675 $ -- $ 14,644 Restricted cash....................... -- -- 2,692 -- 2,692 Accounts receivable, net.............. -- 8,257 18,263 -- 26,520 Inventories........................... -- 4,116 5,074 -- 9,190 Prepaid expenses and other current assets.............................. 2,342 64 7,578 -- 9,984 --------- --------- --------- -------- ---------- Total current assets............ 2,401 22,347 38,282 -- 63,030 Property and equipment, net............. -- 610,854 703,287 -- 1,314,141 Deposit for capital expenditures........ -- -- 12,357 -- 12,357 Investment in consolidated entities..... (208,123) -- -- 208,123 -- Due from (to) affiliates................ 467,811 (246,793) (221,018) -- -- Other assets, net....................... 136 18,762 13,570 -- 32,468 --------- --------- --------- -------- ---------- $ 262,225 $ 405,170 $ 546,478 $208,123 $1,421,996 ========= ========= ========= ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................... $ -- $ 13,471 $ 20,861 $ -- $ 34,332 Accrued interest...................... -- 12,310 1,080 -- 13,390 Other accrued liabilities............. -- 7,318 35,465 -- 42,783 Advance deposits...................... -- 1,088 1,296 -- 2,384 Current portion long-term obligations......................... -- 27,400 8,004 -- 35,404 --------- --------- --------- -------- ---------- Total current liabilities....... 61,587 66,706 -- 128,293 Long-term obligations, less current portion............................... 3,689 411,761 441,225 -- 856,675 Deferred income taxes................... 33,082 -- -- -- 33,082 Minority interests: Preferred redeemable securities....... -- -- 175,000 -- 175,000 Other................................. -- -- 4,404 -- 4,404 --------- --------- --------- -------- ---------- Total liabilities............... 36,771 473,348 687,335 -- 1,197,454 --------- --------- --------- -------- ---------- Commitments and contingencies........... Stockholders' equity: Common stock.......................... 281 33 440 (473) 281 Additional paid-in capital............ 262,760 22,619 (41,893) 19,274 262,760 Accumulated deficit................... (37,587) (89,918) (99,404) 189,322 (37,587) Accumulated other comprehensive loss................................ -- (912) -- -- (912) --------- --------- --------- -------- ---------- Total stockholders' equity (deficit)..................... 225,454 (68,178) (140,857) 208,123 224,542 --------- --------- --------- -------- ---------- $ 262,225 $ 405,170 $ 546,478 $208,123 $1,421,996 ========= ========= ========= ======== ==========
10 13 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) Revenues: Rooms.................................. $ -- $ 52,189 $ 65,236 $ -- $117,425 Food and beverage...................... -- 13,033 17,739 -- 30,772 Other.................................. -- 2,633 4,374 -- 7,007 ---- -------- -------- ----- -------- Total revenues................... -- 67,855 87,349 -- 155,204 ---- -------- -------- ----- -------- Operating expenses: Direct: Rooms................................. -- 14,747 18,080 -- 32,827 Food and beverage..................... -- 10,085 13,634 -- 23,719 Other................................. -- 1,856 2,369 -- 4,225 General, administrative and other....... -- 23,203 32,975 -- 56,178 Depreciation and amortization........... -- 7,244 9,664 -- 16,908 Impairment of long-lived assets......... -- (5,396) (5,316) -- (10,712) ---- -------- -------- ----- -------- Total operating expenses........ -- 51,739 71,406 -- 123,145 ---- -------- -------- ----- -------- -- 16,116 15,943 -- 32,059 Other income (expenses): Interest income and other............. -- -- 467 -- 467 Interest expense...................... -- (14,547) (10,049) -- (24,596) Interest hedge break fee.............. -- -- (4,294) -- (4,294) Gain (loss) on asset dispositions, net -- 56 (77) -- (21) Equity in income of consolidated subsidiaries........................ 802 -- -- (802) -- Minority interests: Preferred redeemable securities....... -- -- (3,063) -- (3,063) Other................................. -- -- 250 -- 250 ---- -------- -------- ----- -------- Income (loss) before income taxes....... 802 1,625 (823) (802) 802 Provision (benefit) for income taxes.... 275 597 (322) (275) 275 ---- -------- -------- ----- -------- Net income (loss)....................... $527 $ 1,028 $ (501) $(527) $ 527 ==== ======== ======== ===== ========
11 14 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) Revenues: Rooms................................. $ -- $53,082 $ 63,467 $ -- $116,549 Food and beverage..................... -- 13,835 18,057 -- 31,892 Other................................. -- 3,151 4,428 -- 7,579 ----- ------- -------- ----- -------- Total revenues..................... -- 70,068 85,952 -- 156,020 ----- ------- -------- ----- -------- Operating expenses: Direct: Rooms................................. -- 14,092 19,121 -- 33,213 Food and beverage..................... -- 10,237 13,573 -- 23,810 Other................................. -- 2,197 2,355 -- 4,552 General, administrative and other...... -- 23,857 25,007 -- 48,864 Depreciation and amortization.......... -- 3,866 9,236 -- 13,102 ----- ------- -------- ----- -------- Total operating expenses........... -- 54,249 69,292 -- 123,541 ----- ------- -------- ----- -------- -- 15,819 16,660 -- 32,479 Other income (expenses): Interest income and other............. -- -- 285 -- 285 Interest expense...................... -- (8,420) (11,897) -- (20,317) Equity in loss of consolidated subsidiaries........................ (141) -- -- 141 -- Minority interests: Preferred redeemable securities....... -- -- (3,338) -- (3,338) Other................................. -- -- 1,310 -- 1,310 ----- ------- -------- ----- -------- (Loss) income before income taxes and extraordinary item.................... (141) 7,399 3,020 141 10,419 (Benefit) provision for income taxes... (57) 3,923 244 57 4,167 ----- ------- -------- ----- -------- Net (loss) income before extraordinary item.................................. (84) 3,476 2,776 84 6,252 Extraordinary item: Loss on early extinguishment of debt, net of income tax benefit of $4,224... -- (5,777) (559) -- (6,336) ----- ------- -------- ----- -------- Net (loss) income...................... $ (84) $(2,301) $ 2,217 $ 84 $ (84) ===== ======= ======== ===== ========
12 15 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2000
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) Revenues: Rooms .................................. $ -- $148,723 $185,920 $ -- $334,643 Food and beverage ...................... -- 42,219 56,502 -- 98,721 Other .................................. -- 8,484 12,914 -- 21,398 -------- -------- -------- ------- -------- Total revenues................ -- 199,426 255,336 -- 454,762 -------- -------- -------- ------- -------- Operating expenses: Direct: Rooms .................................. -- 41,934 51,392 -- 93,326 Food and beverage ...................... -- 30,824 41,578 -- 72,402 Other .................................. -- 5,843 7,299 -- 13,142 General, administrative and other ........ -- 69,410 98,557 -- 167,967 Depreciation and amortization ............ -- 19,507 29,841 -- 49,348 Impairment of long-lived assets .......... -- 3,404 52,046 -- 55,450 Severance and restructuring charges ...... -- -- 1,502 -- 1,502 -------- -------- -------- ------- -------- Total operating expenses ..... -- 170,922 282,215 -- 453,137 -------- -------- -------- ------- -------- -- 28,504 (26,879) -- 1,625 Other income (expenses): Interest income and other .............. -- -- 994 -- 994 Interest expense ....................... -- (42,120) (32,306) -- (74,426) Interest hedge break fee ............... -- -- (4,294) -- (4,294) Gain (loss) on asset dispositions, net.. -- 53 (77) -- (24) Equity in loss of consolidated subsidiaries ........................ (85,608) -- -- 85,608 -- Minority interests: Preferred redeemable securities ........ -- -- (9,190) -- (9,190) Other .................................. -- -- (293) -- (293) -------- -------- -------- ------- -------- Loss before income taxes ................. (85,608) (13,563) (72,045) 85,608 (85,608) Benefit for income taxes ................. (29,105) (4,567) (24,538) 29,105 (29,105) -------- -------- -------- ------- -------- Net loss ................................. $(56,503) $ (8,996) $(47,507) $56,503 $(56,503) ======== ======== ======== ======= ========
13 16 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) Revenues: Rooms..................................... $ -- $152,063 $176,149 $ -- $328,212 Food and beverage......................... -- 44,636 56,382 -- 101,018 Other..................................... -- 9,680 12,777 -- 22,457 ------- -------- -------- -------- -------- Total revenues......................... -- 206,379 245,308 -- 451,687 ------- -------- -------- -------- -------- Operating expenses: Direct: Rooms..................................... -- 39,184 51,151 -- 90,335 Food and beverage......................... -- 32,397 41,954 -- 74,351 Other..................................... -- 6,188 6,580 -- 12,768 General, administrative and other.......... -- 68,967 76,407 -- 145,374 Depreciation and amortization.............. -- 12,668 27,934 -- 40,602 ------- -------- -------- -------- -------- Total operating expenses............... -- 159,404 204,026 -- 363,430 ------- -------- -------- -------- -------- -- 46,975 41,282 -- 88,257 Other income (expenses): Interest income and other................. -- -- 1,102 -- 1,102 Interest expense.......................... -- (23,518) (33,938) -- (57,456) Equity in income of consolidated subsidiaries............................. 11,191 -- -- (11,191) -- Minority interests: Preferred redeemable securities........... -- -- (10,152) -- (10,152) ------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item........................ 11,191 23,457 (1,706) (11,191) 21,751 Provision (benefit) for income taxes....... 4,476 9,382 (682) (4,476) 8,700 ------- -------- -------- -------- -------- Income (loss) before extraordinary item.... 6,715 14,075 (1,024) (6,715) 13,051 Extraordinary item: Loss on early extinguishment of debt, net of income tax benefit of $4,224....... -- (5,777) (559) -- (6,336) ------- -------- -------- -------- -------- Net income (loss).......................... $ 6,715 $ 8,298 $ (1,583) $ (6,715) $ 6,715 ======= ======== ======== ======== ========
14 17 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ---------- ------------- ------------ (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss) .................................... $ -- $ (8,996) $ (47,507) $ (56,503) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ....................... -- 19,507 29,841 49,348 Gain (loss) on asset dispositions, net .............. -- (53) 77 24 Deferred income tax provision (benefit) ............. (29,105) -- -- (29,105) Minority interests .................................. -- -- 6,416 6,416 Impairment of long-lived assets ..................... -- 3,404 52,046 55,450 Other ............................................... 375 (28) (1,291) (944) Changes in operating assets and liabilities: Accounts receivable ................................. -- (3,916) 2,609 (1,307) Inventories ......................................... -- 437 598 1,035 Other current assets ................................ -- (77) (1,425) (1,502) Accounts payable .................................... -- 3,342 (11,015) (7,673) Accrued liabilities ................................. -- 1,641 (6,554) (4,913) -------- --------- --------- --------- Net cash provided by (used in) operating activities ........................................ (28,730) 15,261 23,795 10,326 -------- --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures, net .......................... -- (43,539) (24,666) (68,205) Proceeds from asset dispositions ................... -- 37,225 131,673 168,898 Net withdrawals (deposits) for capital expenditures...................................... -- (3,645) 675 (2,970) -------- --------- --------- --------- Net cash provided by (used in) investing activities ....................................... -- (9,959) 107,682 97,723 -------- --------- --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of long-term obligations ....................................... -- 30,000 2,326 32,326 Proceeds received from (paid to) related parties ........................................... 28,730 (4,614) (24,116) -- Principal payments on long-term obligations ........ -- (18,537) (117,983) (136,520) Payments of deferred loan costs .................... -- (1,400) (1,900) (3,300) Contributions from (distributions to) minority interests ......................................... -- -- (683) (683) -------- --------- --------- --------- Net cash provided by (used in) financing activities ........................................ 28,730 5,449 (142,356) (108,177) -------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents ........................................ -- 10,751 (10,879) (128) Cash and cash equivalents at beginning of period ............................................. 59 9,910 4,675 14,644 -------- --------- --------- --------- Cash and cash equivalents at end of period ........... $ 59 $ 20,661 $ (6,204) $ 14,516 ======== ========= ========= =========
15 18 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1999
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ---------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss) .................................... $ -- $ 8,298 $ (1,583) $ 6,715 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss on extinguishment of debt ...................... -- 5,777 4,783 10,560 Depreciation and amortization ....................... -- 12,668 27,934 40,602 Deferred income tax provision ....................... 4,476 -- -- 4,476 Other ............................................... -- 11,246 (16,701) (5,455) Changes in operating assets and liabilities: Accounts receivable ................................. -- (11,977) (2,683) (14,660) Inventories ......................................... -- 25 3 28 Other current assets ................................ 759 2,458 (23,163) (19,946) Accounts payable .................................... (132) (8,343) (17,866) (26,341) Accrued liabilities ................................. -- 17,121 (11,983) 5,138 -------- --------- --------- --------- Net cash provided by (used in) operating activities ........................................ 5,103 37,273 (41,259) 1,117 -------- --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures, net .......................... -- (5,001) (58,658) (63,659) Acquisition of property and equipment .............. -- -- (1,929) (1,929) Purchase of minority interests ..................... -- -- (10,200) (10,200) Proceeds from disposition of assets ................ -- -- 20,468 20,468 Other .............................................. -- -- 371 371 Net withdrawals (deposits) for capital expenditures ..................................... -- 4,460 23,277 27,737 -------- --------- --------- --------- Net cash provided by (used in) investing activities ....................................... -- (541) (26,671) (27,212) -------- --------- --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of long-term obligations ...................................... -- -- 477,860 477,860 Proceeds received from (paid to) related parties .......................................... (6,692) 187,154 (180,462) -- Net proceeds from issuance of common stock ......... -- -- 120 120 Principal payments on long-term obligations ........ -- (252,846) (189,453) (442,299) Payments of deferred loan costs .................... -- -- (4,699) (4,699) Contributions from (distributions to) minority interests ........................................ -- -- (690) (690) -------- --------- --------- --------- Net cash provided by (used in) financing activities ........................................ (6,692) (65,692) 102,676 30,292 -------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents ......................................... (1,589) (28,960) 34,746 4,197 Cash and cash equivalents at beginning of period .............................................. 1,648 7,140 10,397 19,185 -------- --------- --------- --------- Cash and cash equivalents at end of period ........... $ 59 $ (21,820) $ 45,143 $ 23,382 ======== ========= ========= =========
16 19 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. FACTORS AFFECTING BUSINESS During the past twelve months, the Company's Board of Directors has adopted strategic plans that are intended to enhance value for its shareholders. At the end of 1999 the Company adopted a strategic plan to reduce the size of the Company's non-core hotel portfolio. In 2000, the Company adopted a strategic plan to reduce the level of overall debt of the Company and retained an investment banker to review its strategic alternatives. As part of that review the Company is pursuing a sale of the Company. With regard to this strategic alternative the Company had received offers from Whitehall Street Real Estate Partnership ("Whitehall") and Edgecliff Holdings, LLC ("Edgecliff") to acquire the Company. On December 26, 2000, the Company entered into an Exclusivity Agreement with Edgecliff. Under the terms of the Exclusivity Agreement the Company has granted Edgecliff an exclusive 60-day period during which the two parties will attempt to negotiate a definitive agreement, and Edgecliff will complete its due diligence review; Edgecliff has agreed not to make an offer to purchase the Company at any time during the next 12 months for less than $4.75 per share; Lodgian may continue to sell specified assets during the exclusivity period; Lodgian is permitted to consider other unsolicited offers for the Company if the Lodgian board concludes that such offers are superior to Edgecliff's proposal; and the Company is not obligated to reimburse Edgecliff for any of its expenses, nor is the Company obligated to pay any break-up fee should the Company pursue another transaction. During the fourth quarter, per the October 12, 2000 exclusivity agreement with Whitehall, the Company recorded a charge of $3.5 million relating to reimbursing Whitehall the expenses it incurred in connection with evaluating and pursuing the transaction. The Company is unable to predict whether the Exclusivity Agreement entered into with Edgecliff will ultimately result in an actual sale of the Company. In July 1999, the Company sold $200 million of Notes. In addition, the Company entered into a new, multi-tranche senior secured loan credit facility. The facility consists of development loans with a maximum capacity of $75 million (the tranche A and C loans), a $240 million tranche B term loan and a $50 million revolving credit facility. The tranche A and C loans will be used for hotel development projects. The tranche B loan, along with the proceeds from the Notes was used to repay the loan from Lehman Brothers Holding, Inc., ("Lehman") and, in September, a $132.5 million loan (one of three facilities) from Nomura Asset Capital Corporation. These financings contain various financial covenants, coverage ratios and payment restrictions with which the Company was in compliance at September 30, 2000 or which have been waived by the lenders. Payment restrictions contained in the Company's Notes required the Company to defer dividend payments with respect to the CRESTS beginning June 30, 2000. Pursuant to the terms of the agreement the Company has the right to defer the dividend payment for up to 20 quarters. The Company does not anticipate resumption of the quarterly dividend payment on the CRESTS in the near future. The Company was unable to deliver its 1999 annual audited and March 31, and June 30, 2000 quarterly unaudited financial statements to its Senior Secured loan facility lenders on a timely basis. The Company has received a waiver for the late delivery of these financial statements and the time period for delivery of quarterly 2000 financial statements has been extended. In addition, on July 31, 2000, the Company entered into an amendment to its Senior Secured loan credit facility which provides for a 0.50% increase in the interest rate, termination of the tranche A facility which reduces the maximum credit facility by $25 million and provides for additional amortization payment requirements for tranche B term loans of (i) $25 million on or prior to December 31, 2000, (ii) an additional $35 million on or prior to June 30, 2001 and (iii) an additional $40 million on or prior to December 31, 2001. Prior to the amendment, amortization payment requirements were effectively 1% per year of the outstanding tranche B term loans during that period. The amendment modifies various covenants and coverage ratios, with which the Company believes it is in compliance or which have been waived by the lenders. The amendment provides for immediate access to the $25 million unused portion of the revolving credit facility and provides increased flexibility for the sale of hotel assets. The Company paid an amendment fee of approximately $1.4 million. As of December 31, 2000 the Company has paid fully the $25 million required amortization payment due December 31, 2000 and has paid approximately $10.2 17 20 million of the $35 million required amortization payment due June 30, 2001. The Company has adopted strategic plans to reduce the size of the Company's non-core hotel portfolio and reduce the overall level of debt. With regard to these strategic plans the Company has sold nineteen hotel properties and four other assets from January 1, to December 31, 2000. Gross sales price of these twenty three properties was $209.1 million while the reduction of debt was $154.9 million. The balance was used primarily to support capital expenditures related to major renovation projects and the construction of one new hotel. The Company will continue to explore potential property sale transactions in addition to those discussed above. Certain of these transactions include hotels other than those identified for sale currently. The discussions with potential purchasers are in various stages, including the execution of preliminary agreements in a few situations. Those transactions where preliminary agreements have been reached are subject to, among other things, buyer due diligence and financing and the cooperation of the Company's existing lenders. Accordingly, the Company is unable to predict whether any of the transactions being considered will result in an actual sale. The majority of the net proceeds from any completed sales will be used to reduce debt. In June 2000, the Company in an effort to reduce corporate overhead expenses instituted a plan to close four of the six regional offices, close the Company's reservation center located in Baton Rouge, Louisiana and eliminate certain positions in the corporate office. Approximately 65 employees were terminated in this restructuring. The Company recognized a charge of approximately $1.5 million at June 30, 2000 to implement this plan. Of the $1.5 million charge approximately $1.3 million was related to salary and benefits of the terminated employees and $.2 million related to the costs of closing the physical regional offices and the reservation center. During the third and fourth quarters of 2000 $1.3 million and $.2 million was charged against this accrual, respectively. On August 31, 2000, in conjunction with the sale of ten hotels, principally located in the Western United States, the Company and the lenders amended the terms of the credit facilities totaling $213 million at December 31, 1999. Under this amendment two former credit facilities were amended into one new facility and the Company paid down approximately $106 million of the debt with proceeds from the sale, extended the maturity date to November 30, 2002 from November 30, 2000 and converted the remaining balance owed, approximately $107 million, to a floating rate facility. In addition, the Company paid approximately $4.3 million to "break" the interest rate lock agreement on $54 million related to this debt. Under the original terms of the loan agreement when the loan matured in November 2000 and converted to a term loan, the interest rate would be based on a benchmark treasury rate of 7.235%. Considering the amendments to the existing loan agreements and the debt repayments discussed above, the Company's total outstanding debt as of December 31, 2000 (excluding CRESTS) is approximately $754.5 million. Of this amount $80.0 million is due in 2001. As of December 31, 2000, the Company's held for sale properties have an estimated fair value of approximately $49.4 million, which are encumbered by indebtedness of approximately $7.9 million due subsequent to 2001. In 2001, the Company will need to sell assets and therefore will continue to identify properties to be classified as held for sale to meet its $80.0 million amortization payment requirements in 2001 and its capital improvement program, as discussed in Item 2. Liquidity and Capital Resources section following. Although the Company anticipates being able to sell sufficient assets to meet its obligations in 2001, there can be no assurances that the sales will occur or generate sufficient net proceeds to meet these obligations. 18 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below and elsewhere in this Form 10-Q includes statements that are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These include statements that describe anticipated revenues, capital expenditures and other financial items, statements that describe the Company's business plans and objectives, and statements that describe the expected impact of competition, government regulation, litigation and other factors on the Company's future financial condition and results of operations. The words "may," "should," "expect," "believe," "anticipate," "project," "estimate," and similar expressions are intended to identify forward-looking statements. Such risks and uncertainties, any one of which may cause actual results to differ materially from those described in the forward-looking statements, include or relate to, among other things: - The impact of pending or threatened litigation and/or governmental inquiries and investigation involving the Company. - The Company's ability to significantly improve and stabilize its accounting systems and procedures and maintain stability. - The uncertainties relating to the Company's proposed strategic initiatives, including the willingness of prospective purchasers to purchase the hotels the Company has identified as divestiture candidates on terms the Company finds acceptable, the timing and terms on which such hotels may be sold, and other factors affecting the ability of prospective purchasers to consummate such transactions, including the availability of financing. - The effect of competition on the Company's ability to maintain margins on existing operations, including uncertainties relating to competition. - The impact on operations due to renovation work being performed at certain hotels. - The Company's ability to generate sufficient cash flows from operations to cover its cash needs, the Company's ability to obtain additional capital if needed and the possible default under credit facilities if cash flows are lower than expected or capital expenditures are greater than expected. - The effectiveness of changes in management and the ability of the Company to retain qualified individuals to serve in senior management positions. - The potential for additional impairment charges against earnings related to long-lived assets which may result from the Company's strategic initiatives to reduce the size of the hotel portfolio and reduce debt. - The impact of termination of letters of intent from prospective buyers of the Company as a whole. STRATEGIC PLANS During the past twelve months, the Company's Board of Directors have adopted strategic plans that are intended to enhance value for its shareholders. At the end of 1999 the Company adopted a strategic plan to reduce the size of the Company's non-core hotel portfolio. In 2000, the Company adopted a strategic plan to reduce the level of overall debt of the Company and retained an investment banker to review its strategic alternatives. As part of that review the Company is pursuing a sale of the Company. With regard to this strategic alternative the Company had received offers from Whitehall and Edgecliff to acquire the Company. On December 26, 2000, the Company entered into an Exclusivity Agreement with Edgecliff in which the Company has granted Edgecliff an exclusive 60-day period during which the two parties will attempt to negotiate a definitive agreement, and Edgecliff will complete its due diligence review. In addition, during the fourth quarter, the Company recorded a charge of $3.5 million relating to reimbursing Whitehall the expense it 19 22 incurred in connection with evaluating and pursuing the transaction. The Company is unable to predict whether the Exclusivity Agreement entered into will ultimately result in an actual sale of the Company. See further discussion in Liquidity and Capital Resources following. With regard to the strategic plans to reduce the size of the Company's non-core hotel portfolio and reduce the level of overall debt of the Company, the Company has sold nineteen hotel properties and four other assets from January 1, to December 31, 2000. Gross sale price of these twenty three properties was $209.1 million while the reduction of debt was $154.9 million. The balance was used primarily to support capital expenditures related to major renovation projects and the construction of one new hotel. In addition, the Company has several additional assets under contract and scheduled for closing during 2001. See further discussion in Liquidity and Capital Resources following. OVERVIEW Management believes that results of operations in the hotel industry are best explained by four key performance measures: occupancy levels, average daily rate ("ADR"), revenue per available room ("RevPAR") and Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") margins. These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of our hotels experience lower occupancy levels in the fall and winter months (November through February) which may result in lower revenues, lower net income and less cash flow during these months. Our business strategy included the acquisition of underperforming hotels and the implementation of our operational initiatives and repositioning and renovation programs to achieve revenue and margin improvements. Such initiatives typically require a 12 to 18 month period before newly acquired, underperforming hotels are repositioned and stabilized. During this period, the revenues and earnings of these hotels may be adversely affected and may have a negative impact on RevPAR, average daily rate and occupancy rate performance, as well as operating margins for the Company overall. In addition, our strategy also included developing new full service hotels. Newly developed properties typically require 24 months following completion to stabilize. To track the execution of our repositioning and development growth strategy's impact on the Company's results of operations, we classify our hotels as either "Stabilized Hotels," "Stabilizing Hotels" or "Being Repositioned Hotels," as described below: Stabilized Hotels are properties which have experienced little or no disruption to their operations over the past 24 to 36 months as the result of redevelopment or repositioning efforts or newly-constructed hotels which have been in service for 24 months or more. Stabilizing Hotels are (1) properties which have undergone renovation or repositioning investment within the last 36 months, which work is now completed, or (2) newly developed properties placed into service within the past 24 months. Management believes that these properties should experience higher rates of growth in RevPAR and operating margin than the Stabilized Hotels. On average, our hotels which have undergone renovation have generally reached stabilization within approximately 12 to 18 months after their completion date, and our newly developed hotels have reached stabilization in approximately 24 months after their completion date. Being Repositioned Hotels are hotels experiencing disruption to their operations due to renovation and repositioning. During this period (generally 12 to 18 months) hotels will usually experience lower operating results, such as RevPAR, and operating margins. We expect significant improvements in the operating performance of those hotels which have undergone repositioning once the renovation is completed. After the reposition work is completed these properties will be reclassified as Stabilizing Hotels. 20 23 Management classifies each hotel into one of the three categories at the beginning of each fiscal year. Management will determine the category most appropriate for each hotel based on its evaluation of objective and subjective factors, including the time of completion of renovation and whether the full benefit of renovations have been realized. 21 24 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 HISTORICAL RESULTS OF OPERATIONS The following table presents, for the periods indicated, the period to period change in dollars (in thousands) and percentages for the various consolidated statements of operations line items.
PERIOD TO PERIOD PERIOD TO PERIOD CHANGE FOR THE THREE CHANGE FOR THE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 SEPTEMBER 30, 2000 AND 1999 --------------------------- --------------------------- (UNAUDITED) Favorable/(unfavorable) Revenues: Rooms...................................................... $ 876 0.8% $ 6,431 2.0% Food and beverage.......................................... (1,120) (3.5) (2,297) (2.3) Other...................................................... (572) (7.5) (1,059) (4.7) ------- ------ --------- ------ Total revenues....................................... (816) (0.5) 3,075 0.7 ------- ------ --------- ------ Operating expenses: Direct: Rooms...................................................... 386 1.2 (2,991) (3.3) Food and beverage.......................................... 91 0.4 1,949 2.6 Other...................................................... 327 7.2 (374) (2.9) General, administrative and other............................ (7,314) (15.0) (22,593) (15.5) Depreciation and amortization................................ (3,806) (29.0) (8,746) (21.5) Impairment of long-lived assets.............................. 10,712 100.0 (55,450) (100.0) Severance and restructuring expenses......................... -- 0.0 (1,502) (100.0) ------- ------ --------- ------ Total operating expenses............................. 396 0.3 (89,707) (24.7) ------- ------ --------- ------ (420) (1.3) (86,632) (98.2) Other income/expenses: Interest income and other.................................. 182 63.9 (108) (9.8) Interest expense........................................... (4,279) (21.1) (16,970) (29.5) Interest hedge break fee................................... (4,294) (100.0) (4,294) (100.0) Loss on asset dispositions, net............................ (21) (100.0) (24) (100.0) Minority interests: Preferred redeemable securities............................ 275 8.2 962 9.5 Other...................................................... (1,060) (80.9) (293) (100.0) ------- ------ --------- ------ Income/loss before income taxes and extraordinary item....... (9,617) (92.3) (107,359) (493.6) Provision/benefit for income taxes........................... 3,892 93.4 37,805 434.5 ------- ------ --------- ------ Income/loss before extraordinary item........................ (5,725) (91.6) (69,554) (532.9) Extraordinary item: Loss on early extinguishment of debt, net of income tax benefit of $4,224.......................................... 6,336 100.0 6,336 100.0 ------- ------ --------- ------ Net income/loss.............................................. $ 611 727.4% $ (63,218) (941.4)% ======= ====== ========= ======
22 25 The following table presents for the periods indicated, the percentage relationship that the various statements of operations line items bear to operating revenues: LODGIAN, INC. AND SUBSIDIARIES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (UNAUDITED) Revenues: Rooms......................................... 75.7% 74.7% 73.6% 72.7% Food and beverage............................. 19.8 20.4 21.7 22.3 Other......................................... 4.5 4.9 4.7 5.0 ----- ----- ----- ----- Total revenues............................ 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Operating expenses: Direct: Rooms......................................... 21.2 21.3 20.5 20.0 Food and beverage............................. 15.3 15.3 15.9 16.5 Other......................................... 2.7 2.9 2.9 2.8 General, administrative and other.............. 36.2 31.3 36.9 32.2 Depreciation and amortization.................. 10.9 8.4 10.9 9.0 Impairment of long-lived assets................ (6.9) 0.0 12.2 0.0 Severance and restructuring expenses........... 0.0 0.0 0.3 0.0 ----- ----- ----- ----- Total operating expenses.................. 79.4 79.2 99.6 80.5 ----- ----- ----- ----- 20.6 20.8 0.4 19.5 Other income (expenses): Interest income and other..................... 0.3 0.2 0.2 0.2 Interest expense.............................. (15.8) (13.0) (16.4) (12.7) Interest hedge break fee...................... (2.8) 0.0 (0.9) 0.0 Loss on asset dispositions, net............... 0.0 0.0 0.0 0.0 Minority interests: Preferred redeemable securities............... (2.0) (2.1) (2.0) (2.2) Other......................................... 0.2 0.8 (0.1) 0.0 ----- ----- ----- ----- Income (loss) before income taxes and extraordinary item............................ 0.5 6.7 (18.8) 4.8 Provision (benefit) for income taxes........... 0.2 2.7 (6.4) 1.9 ----- ----- ----- ----- Income (loss) before extraordinary item........ 0.3 4.0 (12.4) 2.9 Extraordinary item: Loss on early extinguishment of debt, net of income tax benefit of $4,224............... 0.0 (4.1) 0.0 (1.4) ----- ----- ----- ----- Net income (loss).............................. 0.3% (0.1)% (12.4)% 1.5% ===== ===== ===== =====
23 26 As previously reported in the Company's Form 10-K for the year ended December 31, 1999, during the fourth quarter of 1999, the Company initiated an internal review of its accounting records. The Company experienced significant difficulty in the integration and conversion of information and accounting systems subsequent to the Merger. In addition, the Company determined that a significant number of reconciliations involving cash, accounts receivable, fixed assets, accounts payable and other accounts had not been completed during 1999. As a result of these systems and reconciliation issues, the Company experienced a significant delay in preparing its 1999 annual financial statements. Certain charges were recorded in the fourth quarter of 1999 after the account reconciliation process was completed in 2000. Also, as previously reported in the Company's Form 10-K for the year ended December 31, 1999, the Company concluded, after consultation with its prior independent auditors that its internal controls for the preparation of interim financial information did not provide an adequate basis for its prior independent auditors to complete reviews of the 1999 quarterly financial information in accordance with standards established by the American Institute of Certified Public Accountants. The Company believes that certain charges that were recorded in the fourth quarter of 1999 and were principally recognized in general, administrative and other in the consolidated statements of operations may relate to individual prior quarters; however the Company does not have sufficient information to identify all specific charges attributable to prior 1999 quarters. In the opinion of management, the internal control weaknesses described above existed during the first and second quarters of 2000 and to a lesser extent in the third quarter of 2000. These internal control weaknesses caused a significant delay in preparing the Company's September 30, 2000 Form 10-Q. The Company has committed substantial resources to mitigate the previously identified control weaknesses including contracting with outside consulting accountants to ensure the Company has the corporate financial resources needed to provide reasonable assurances that it can comply with the record keeping and internal control requirements applicable to SEC registrants. Management believes these efforts have enabled the Company to produce reliable interim financial statements as of September 30, 2000 and for the three and nine months then ended. The Company is in the process of implementing a plan which, if successful, will enable the Company to timely comply with the financial statement reporting requirements applicable to SEC registrants by the time it is required to file its 2000 annual financial statements and will have substantially developed and implemented an adequate control environment by this date. As part of this plan, during the third and fourth quarters the Company has implemented the following action steps; (i) developed and implemented numerous new controls and policies, (ii) implemented a process to insure that material transactions are recorded on a timely basis, (iii) implemented an account closing process so that all material accounts are reconciled and reviewed on a timely basis and (iv) reorganized and changed personnel in the accounting and finance functions to improve the accuracy and timeliness of the financial accounting processes. THREE MONTHS ENDED SEPTEMBER 30, 2000 ("THIRD QUARTER 2000") COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 ("THIRD QUARTER 1999") REVENUES Revenues are composed of room, food and beverage and other revenues. Room revenues are derived from guest room rentals, whereas food and beverage revenues primarily include sales from our hotel restaurants, room service and hotel catering. Other revenues include charges for guests' long-distance telephone service, laundry service, use of meeting facilities and fees earned by the Company for services rendered in conjunction with managed properties. Total revenue for the third quarter 2000 was $155.2 million, a decrease of 0.5% and RevPAR was $55.30, an increase of 6.5%, compared to 1999, despite a decrease of nineteen hotels in the owned portfolio. 24 27 The following table summarizes certain operating data for the Company's hotels for the three months ended September 30, 2000 and 1999. The Stabilized, Stabilizing and Being Repositioned Hotels refers to classifications in these respective categories as of January 1 of the year indicated.
HOTELS(1) ADR OCCUPANCY REVPAR ----------- -------------- ------------- -------------- 2000 1999 2000 1999 2000 1999 2000 1999 ---- ---- ------ ------ ----- ----- ------ ------ Stabilized................ 91 77 $73.46 $73.13 70.05% 71.00% $51.45 $51.92 Stabilizing............... 6 35 92.32 75.22 77.56 67.70 71.60 50.94 Being repositioned........ 18 22 89.84 80.12 70.80 66.50 63.60 53.32 --- --- ------ ------ ----- ----- ------ ------ Total................. 115 134 $78.12 $74.89 70.79% 69.30% $55.30 $51.93 === === ====== ====== ===== ===== ====== ======
- ---------------- (1) Excludes the hotel managed for a third party and the partially owned non- consolidated hotel. OPERATING EXPENSES Operating expenses are composed of direct, general and administrative, other hotel operating expenses and depreciation and amortization. Direct expenses, including both rooms and food and beverage 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. The Company has incurred significant professional fees in 2000 to correct internal control weaknesses identified in late 1999. Other expenses include primarily property level expenses related to general operations such as marketing, utilities, repairs and maintenance and other property administrative costs. These expenses are primarily fixed. Direct operating expenses for the Company were $60.8 million (39.2% of direct revenues) for the third quarter 2000 and $61.6 million (39.5% of direct revenues) for the third quarter of 1999. This $0.8 million decrease was primarily attributable to the $0.8 million decrease in direct revenues. General, administrative and other expenses were $56.2 million in the third quarter 2000 and $48.9 million in the third quarter 1999. Included in the $7.3 million increase is $2.0 million of professional fees that the Company expended in its effort to reconcile accounts and to improve its accounting systems and procedures. Depreciation and amortization were $16.9 million in third quarter 2000 and $13.1 million in the third quarter 1999. The $3.8 million increase is primarily as a result of the completion of a significant number of renovation projects and the opening of three hotels in the latter part of 1999 as well as in the first quarter of 2000, offset by a decrease in depreciation related to hotels sold. In addition, as of September 30, 2000 the Company recorded depreciation expense of $1.6 million representing nine months of expense related to the seven hotels previously considered held for sale as of December 31, 1999 and that are no longer being actively marketed for sale as of September 30, 2000. During the third quarter 2000 the Company recaptured $10.7 million of impairment charges recorded in 1999 and 2000 as seven hotels previously considered held for sale as of December 31, 1999 are no longer being actively marketed for sale. Interest expense was $24.6 million in third quarter 2000 and $20.3 million in third quarter 1999. This increase is primarily attributable to an increase in the level of debt throughout 2000 as well as an increase in the cost of debt offset by approximately $121.1 million of debt repayments occurring late in the third quarter 2000. 25 28 During the third quarter 2000 the Company paid a $4.3 million interest hedge break fee to break the interest rate lock agreement on one of its credit facilities. Minority interest expense was $2.8 million in third quarter 2000 and $2.0 million in third quarter 1999. The $0.8 million increase is primarily attributable to higher net income levels for those hotels which the Company co-owns with its third-party-minority equity partners. NET INCOME (LOSS) After a provision for income taxes of $0.3 million and $4.2 million in third quarter 2000 and third quarter 1999, respectively, the Company had income before extraordinary item of $0.5 million ($0.02 per share) in the third quarter 2000 compared with $6.3 million ($.23 per share) in third quarter 1999. In third quarter 1999 the Company had an extraordinary item, net of income tax benefit of $4.2 million, of $6.3 million ($.23 loss per share) from the loss on early extinguishment of debt. Net income for the third quarter 2000 amounted to $0.5 million ($0.02 per share) compared with a net loss of ($0.1) million ($.00 per share) in third quarter 1999, for the reasons discussed above. NINE MONTHS ENDED SEPTEMBER 30, 2000 (THE "2000 PERIOD") COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (THE "1999 PERIOD") REVENUES Revenues for the Company were $454.8 million for the 2000 period, a 0.7% increase over revenues of $451.7 million for the 1999 period and RevPAR was $51.05, an increase of 4.7%, despite a decrease of nineteen hotels in the owned portfolio. The following table summarizes certain operating data for the Company's hotels for the Nine Months ended September 30, 2000 and 1999. The Stabilized, Stabilizing and Being Repositioned Hotels refers to classifications in these respective categories as of January 1 of the year indicated.
HOTELS(1) ADR OCCUPANCY REVPAR ----------- -------------- ------------- -------------- 2000 1999 2000 1999 2000 1999 2000 1999 ---- ---- ------ ------ ----- ----- ------ ------ Stabilized................ 91 77 $73.35 $74.07 67.78% 68.20% $49.72 $50.50 Stabilizing............... 6 35 87.72 75.44 66.01 63.40 57.90 47.83 Being repositioned........ 18 22 86.62 79.13 61.50 56.50 53.27 44.68 --- --- ------ ------ ----- ----- ------ ------ Total................. 115 134 $76.75 $75.23 66.52% 64.80% $51.05 $48.75 === === ====== ====== ===== ===== ====== ======
- ---------------- (1) Excludes the hotel managed for a third party and the partially owned non- consolidated hotel. OPERATING EXPENSES Direct operating expenses for the Company were $178.9 million (39.3% of direct revenues) for the 2000 period and $177.5 million (39.3% of direct revenue) for the 1999 period. This $1.4 million increase was primarily attributable to the $3.1 million increase in direct revenues. General administrative and other expenses were $168.0 million in the 2000 period and $145.4 million in the 1999 period. Included in the $22.6 million 26 29 increase is $5.8 million of professional fees that the Company expended in its effort to reconcile accounts and to improve its accounting systems and procedures. Depreciation and amortization expense was $49.3 million in the 2000 period and $40.6 million in the 1999 period. The $8.7 million increase is primarily a result of the completion of a significant number of renovation projects and the opening of 3 hotels in the latter part of 1999 as well as in the first quarter of 2000, offset by a decrease in depreciation related to hotels sold. In addition, as of September 30, 2000 the Company recorded depreciation expense of $1.6 million representing nine months of expense related to the seven hotels previously considered held for sale as of December 31, 1999 and that are no longer being actively marketed for sale as of September 30, 2000. Impairment of long-lived assets was $55.5 million in the 2000 period, consisting of $9.6 million and $56.6 million in the first and second quarters, respectively. The first quarter charge related to revised estimates of fair value for properties held for sale at December 31, 1999 and the second quarter charge related to the ten hotels sold to Sunstone Investors, LLC on August 31, 2000. During the third quarter 2000 the Company recaptured $10.7 of impairment charges recorded in 1999 and 2000 as seven hotels previously considered held for sale as of December 31, 1999 are no longer being actively marketed for sale. Interest expense was $74.4 million in the 2000 period and $57.5 million in the 1999 period. This increase is primarily attributable to an increase in the level of debt throughout 2000 as well as an increase in the cost of debt offset by approximately $121.1 million of debt repayments occurring late in the third quarter 2000. During the third quarter the Company paid a $4.3 million interest hedge break fee to break the interest rate lock agreement on one of its credit facilities. Minority interest expense was $9.5 million in the 2000 period and $10.2 million in the 1999 period. This $0.7 million decrease is primarily attributable to higher net income levels for those hotels which the Company co-owns with its third-party-minority equity partners. NET INCOME After a benefit for income taxes of $29.1 million in the 2000 period and provision for income taxes of $8.7 million in the 1999 period, the Company had a loss before extraordinary item of $56.5 million ($2.01 loss per share) in the 2000 period compared with income before extraordinary item of $13.1 million ($0.48 per share) in the 1999 period. In the 1999 period the Company had an extraordinary item, net of income tax benefit of $4.2 million of $6.3 million ($.23 loss per share) from the loss on early extinguishment of debt. Net loss for the 2000 period amounted to $56.5 million ($2.01 loss per share) compared with net income of $6.7 million ($0.25 per share) for the 1999 period, for the reasons discussed above. INCOME TAXES As of December 31, 1999, Lodgian had net operating loss carryforwards of approximately $90.3 million for federal income tax purposes, which expire in 2005 through 2018. The Company's ability to use these net operating loss carryforwards to offset future income is subject to certain 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. LIQUIDITY AND CAPITAL RESOURCES Lodgian's principal sources of liquidity consist of existing cash balances, cash flow from operations and financing. Additionally, the Company expects to generate cash from the disposition of hotels it has targeted for sale and that will be targeted for sale in the future. The majority of net proceeds from the sale of hotels is expected to be used to reduce long-term debt. The Company had earnings from operations before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted in 2000 of $116.7 million, a 10.1% decrease from the $129.8 million for the 1999 period. The Company has computed EBITDA without regard to the unusual items and non-recurring charges. During 2000 these items consisted of unusual costs, principally professional fees and restructuring costs, of $10.3 million and impairment charges of $55.5 million. There were no such items recorded during 27 30 the first nine months of 1999. 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. Cash flows provided by (used in) in investing activities were $97.7 million and ($27.2) million in 2000 and 1999, respectively. The 2000 amount includes capital expenditures of $68.2 million, net proceeds from the sale of assets of $168.9 million and deposits for capital expenditure escrows of $3.0 million. The 1999 amount includes capital expenditures of $63.6 million, net proceeds from the sale of assets of $20.5 million, withdrawals from capital expenditure escrows of $27.7 million, additions of property and equipment of $1.9 million, purchase of minority interest of $10.2 million and other items of $.4 million. Cash flows provided by (used in) financing activities were ($108.2) million and $30.3 million in 2000 and 1999, respectively. The 2000 and 1999 amounts consist primarily of the net proceeds from the issuance and repayment of long-term obligations. At September 30, 2000, the Company had a working capital deficit of $93.4 million as compared with a working capital deficit of $65.3 million at December 31, 1999. The increase in the deficit is primarily attributable to the $42.4 million increase in the current portion of long-term obligations. At September 30, 2000, long-term obligations were $710.4 million. Long-term obligations were $856.7 million at December 31, 1999. Both periods exclude the CRESTS. The Company has a capital improvement program to address the capital improvements required at the hotels related to product improvement plans specified by license agreements with franchisors, re-branding of several hotels and general renovation projects intended to ultimately improve the operations of the hotels. As of December 31, 2000, the Company's capital budget for 2001 is approximately $53.3 million and the Company has approximately $14.7 million escrowed for such improvements. In connection with the Merger on December 11, 1998, the Company obtained $265 million of mortgage notes from Lehman. The net proceeds were used to repay existing debt and related obligations. In July 1999, the Company sold $200 million of Notes. In addition, the Company entered into a new, multi-tranche senior secured loan credit facility. The facility consists of development loans with a maximum capacity of $75 million (the tranche A and C loans), a $240 million tranche B term loan and a $50 million revolving credit facility. The tranche A and C loans will be used for hotel development projects. The tranche B loan, along with the proceeds from the Notes was used to repay the Lehman loan and, in September, a $132.5 million loan (one of three facilities) from Nomura Asset Capital Corporation. These financings contain various financial covenants, coverage ratios and payment restrictions with which the Company was in compliance at September 30, 2000 or which have been waived by the lenders. Payment restrictions contained in the Company's Notes required the Company to defer dividend payments with respect to the CRESTS beginning June 30, 2000. Pursuant to the terms of the agreement the Company has the right to defer the dividend payment for up to twenty quarters. The Company does not anticipate resumption of the quarterly dividend payment on the CRESTS in the near future. The Company was unable to deliver its 1999 annual audited and quarterly 2000 unaudited financial statements to its Senior Secured loan facility lenders on a timely basis. The Company has received a waiver for the late delivery of these financial statements and the time period for delivery of quarterly 2000 financial statements has been extended. In addition, on July 31, 2000, the Company entered into an amendment to its Senior Secured loan credit facility which provides for a 0.50% increase in the interest rate, termination of the tranche A facility which reduces the maximum credit facility by $25 million and provides for additional amortization payment requirements for tranche B term loans of (i) $25 million on or prior to December 31, 2000, (ii) an additional $35 million on or prior to June 30, 2001 and (iii) an additional $40 million on or prior to December 31, 2001. Prior to the amendment, amortization payment requirements were effectively 1% per year of the 28 31 outstanding tranche B term loans during that period. The amendment modifies various covenants and coverage ratios, with which the Company believes it is in compliance or which have been waived by the lenders. The amendment provides for immediate access to the $25 million unused portion of the revolving credit facility and provides increased flexibility for the sale of hotel assets. The Company paid an amendment fee of approximately $1.4 million. As of December 31, 2000 the Company has paid fully the $25 million required amortization payment due December 31, 2000 and has paid approximately $10.2 million of the $35 million required amortization payment due June 30, 2001. As discussed previously in Item 2, the Company has adopted strategic plans to reduce the size of the Company's non-core hotel portfolio and reduce the overall level of debt. With regard to these strategic plans the Company has sold nineteen hotel properties and four other assets from January 1, to December 31, 2000. Gross sales price of these twenty three properties was $209.1 million while the reduction of debt was $154.9 million. The balance was used primarily to support capital expenditures related to major renovation projects and the construction of one new hotel. The Company will continue to explore potential property sale transactions in addition to those discussed above. Certain of these transactions include hotels other than those identified for sale currently. The discussions with potential purchasers are in various stages, including the execution of preliminary agreements in a few situations. Those transactions where preliminary agreements have been reached are subject to, among other things, buyer due diligence and financing and the cooperation of the Company's existing lenders. Accordingly, the Company is unable to predict whether any of the transactions being considered will result in an actual sale. The majority of the net proceeds from any completed sales will be used to reduce debt. In June 2000, the Company in an effort to reduce corporate overhead expenses instituted a plan to close four of the six regional offices, close the Company's reservation center located in Baton Rouge, Louisiana and eliminate certain positions in the corporate office. Approximately 65 employees were terminated in this restructuring. The Company recognized a charge of approximately $1.5 million at June 30, 2000 to implement this plan. Of the $1.5 million charge approximately $1.3 million was related to salary and benefits of the terminated employees and $.2 million related to the costs of closing the physical regional offices and the reservation center. During the third and fourth quarters of 2000 $1.3 million and $.2 million was charged against this accrual, respectively. In the future the Company anticipates approximately $5 million in annual savings from instituting this plan. On August 31, 2000, in conjunction with the sale of ten hotels, principally located in the Western United States, the Company and the lenders amended the terms of the credit facilities totaling $213 million at December 31, 1999. Under this amendment two former credit facilities were amended into one new facility and the Company paid down approximately $106 million of the debt with proceeds from the sale, extended the maturity date to November 30, 2002 from November 30, 2000 and converted the remaining balance owed, approximately $107 million, to a floating rate facility. In addition, the Company paid approximately $4.3 million to "break" the interest rate lock agreement on $54 million related to this debt. Under the original terms of the loan agreement when the loan matured in November 2000 and converted to a term loan, the interest rate would be based on a benchmark treasury rate of 7.235%. Also as discussed previously in Item 2, the Board of Directors is actively pursuing the sale of the Company as a whole. During the fourth quarter of 2000 Whitehall and Edgecliff each made a proposal to acquire all of the outstanding shares of the Company. With regard to this strategic alternative the Company had received offers from Whitehall and Edgecliff to acquire the Company. On December 26, 2000, the Company entered into an Exclusivity Agreement with Edgecliff. Under the terms of the Exclusivity Agreement the Company has granted Edgecliff an exclusive 60-day period during which the two parties will attempt to negotiate a definitive agreement, and Edgecliff will complete its due diligence review; Edgecliff has agreed not to make an offer to purchase the Company at any time during the next 12 months for less than $4.75 per share; Lodgian may continue to sell specified assets during the exclusivity period; Lodgian is permitted to consider other unsolicited offers for the Company if the Lodgian board concludes that such offers are superior to 29 32 Edgecliff's proposal; and the Company is not obligated to reimburse Edgecliff for any of its expenses, nor is the Company obligated to pay any break-up fee should the Company pursue another transaction. During the fourth quarter, per the October 12, 2000 exclusivity agreement with Whitehall, the Company recorded a charge of $3.5 million relating to reimbursing Whitehall the expenses it incurred in connection with evaluating and pursuing the transaction. The Company is unable to predict whether the Exclusivity Agreement entered into with Edgecliff will ultimately result in an actual sale of the Company. Considering the amendments to the existing loan agreements and the debt repayments discussed above, the Company's total outstanding debt as of December 31, 2000 (excluding CRESTS) is approximately $754.5 million. Of this amount $80.0 million is due in 2001. As discussed previously, the Company's estimated capital expenditures for 2001 is approximately $38.6 million (net of escrowed funds of $14.7 million). As of December 31, 2000, the Company's held for sale properties have an estimated fair value of approximately $49.4 million, and which are encumbered by indebtedness of approximately $7.9 million due subsequent to 2001. In 2001, the Company will need to sell assets and therefore will continue to identify properties to be classified as held for sale to meet its $80.0 million amortization payment requirements in 2001 and its capital improvement program. Although the Company anticipates being able to sell sufficient assets to meet its obligations in 2001, there can be no assurances that the sales will occur or generate sufficient net proceeds to meet these obligations. On December 15, 2000 the Company sold its hotel under construction in Richmond, Virginia and retained $10.0 million of the proceeds for general corporate purposes. The Company currently has $23.3 million of availability on its revolving credit facility. The Company anticipates borrowing the majority available under its revolving credit facility in January 2001 to cover certain interest and operating obligations. The Company believes that the combination of its current cash position, cash flow from operations, availability on the revolving credit facility and net proceeds from property (both properties identified and to be identified) sales will provide sufficient liquidity to fund the Company's operating, capital expenditure and debt service obligations through December 31, 2001. INFLATION The rate of inflation has not had a material effect on the Company's revenues or costs and expenses in recent years and it is not anticipated that inflation will have a material effect on the Company in the near term. 30 33 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In July 1999, a contractor hired by Servico to perform work on hotels in New York, Illinois and Texas filed a complaint against the Company in the Supreme Court of the State of New York, claiming breach of contract and quantum meruit, among other claims. The contractor seeks damages totaling $80 million, including $60 million punitive damages. The Company answered the complaint asserting counterclaims aggregating $20 million and successfully filed a motion to dismiss the claims related to two properties located in Illinois and Texas. In October 1999, a subcontractor filed a lawsuit in Texas against the above contractor and the Company. The Company has filed an answer and cross-claim against the contractor in the amount of $2.8 million. In February 2000, the contractor filed a lawsuit in Texas claiming over $3 million in actual damages and an undisclosed amount of punitive damages. The Company answered the complaint and asserted a counterclaim. The Company has also filed a lawsuit against the contractor in Federal District Court in Illinois, seeking $2 million. The contractor has filed an answer and counterclaim aggregating $2.8 million in actual damages and $10 million in punitive damages. The Company believes that it has valid defenses and counterclaims in these matters and that the outcome will not have a material adverse effect on its financial position or results of operations. On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an arbitration claim against the Company claiming breach of contract relating to a January 4, 1992 contract. WH claims entitlement to profit participation relating to the sale of certain hotel properties by an affiliate and predecessor of the Company. Although the Demand for Arbitration does not make a specific damages demand, it is believed that WH is claiming approximately $1,100,000 from the Company. Lodgian believes it has meritorious defenses to this matter and is defending it vigorously. 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 financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES The Company has not paid any cash dividends since the Merger and has no current plans to initiate the payment of dividends. The Company currently anticipates that it will retain any future earnings for use in its business. The Board of Directors of the Company will determine future dividend policies based on the Company's financial condition, profitability, cash flow, capital requirements and business outlook, among other factors. The Company's ability to pay dividends is restricted by the Indenture governing the Company's 12 1/4% Senior Subordinated Notes due 2009, the 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 Structures Trust Securities ("CRESTS"). On June 30, 2000, the Company exercised its rights to begin the deferral of dividend payments on the CRESTS, effective with the interest payment due June 30, 2000. Pursuant to the terms of the instrument, the Company has the right to defer payment for up to twenty quarters (the "Extension Period"), during which Extension Period no interest shall be due and payable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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. 31 34 (b) Reports on Form 8-K A report on Form 8-K was filed on July 25, 2000 relating to announcement of the date of the 2000 Annual Stockholders Meeting. A report on Form 8-K was filed on September 21, 2000 relating to retention of new independent auditors for the year ending December 31, 2000. 32 35 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. Registrant DATE: January 10, 2001 /s/ Robert S. Cole --------------------------------------------------- Robert S. Cole President and Chief Executive Officer DATE: January 10, 2001 /s/ Thomas R. Eppich --------------------------------------------------- Thomas R. Eppich Chief Financial Officer
33 36 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 27 -- Financial Data Schedule (For SEC use only)
34 EX-27 2 g66295ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2000 AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 2000. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 17,758 0 27,827 0 8,155 64,676 1,114,010 0 1,226,037 158,057 710,418 0 181,125 282 168,166 1,226,037 0 454,762 0 453,137 12,807 0 74,426 (85,608) 29,105 (56,503) 0 0 0 (56,503) (2.01) (2.01)
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