10-Q 1 g69318e10-q.txt LODGIAN, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-14537 ------- LODGIAN, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-2093696 -------- ---------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 3445 PEACHTREE ROAD, N.E., SUITE 700, ATLANTA, GA 30326 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 364-9400 (Former name, former address and former fiscal year, if changed since last report): NOT APPLICABLE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS OUTSTANDING AS OF MAY 2, 2001 ----------------------------- ----------------------------- Common 28,139,481 2 LODGIAN, INC. AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000.................................. 1 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000 (unaudited)............. 2 Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2001 (unaudited) and for the Year Ended December 31, 2000....................................... 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 (unaudited)............. 4 Notes to Consolidated Financial Statements (unaudited)............. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................. 24 Item 2. Changes in Securities.............................................. 25 Item 6. Exhibits and Reports on Form 8-K................................... 25 Signatures ................................................................... 26
i 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 DECEMBER 31, (UNAUDITED) 2000 ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents .................................................... $ 9,325 $ 21,002 Cash, restricted ............................................................. 2,803 2,237 Accounts receivable, net of allowances ....................................... 21,885 20,624 Inventories .................................................................. 7,742 7,805 Prepaid expenses and other current assets .................................... 9,505 9,261 ----------- ----------- Total current assets ..................................................... 51,260 60,929 Property and equipment, net .................................................... 1,018,762 1,059,048 Deposits for capital expenditures .............................................. 12,582 14,005 Other assets, net .............................................................. 27,017 29,965 ----------- ----------- $ 1,109,621 $ 1,163,947 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................. $ 19,166 $ 25,088 Accrued interest ............................................................. 10,189 16,795 Other accrued liabilities .................................................... 33,267 37,203 Advance deposits ............................................................. 3,199 1,854 Current portion of long-term obligations ..................................... 61,789 79,843 ----------- ----------- Total current liabilities ................................................ 127,610 160,783 Long-term obligations, less current portion .................................... 650,792 674,038 Deferred income taxes .......................................................... 3,603 3,603 Minority interests: Preferred redeemable securities (including related accrued interest) ......... 187,575 184,349 Other ........................................................................ 5,520 4,294 ----------- ----------- Total liabilities ........................................................ 975,100 1,027,067 Commitments and contingencies .................................................. -- -- Stockholders' equity: Common stock, $.01 par value, 75,000,000 shares authorized; 28,415,849 and 28,290,424 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively ............................................ 284 282 Additional paid-in capital ................................................... 264,402 263,320 Deferred stock compensation .................................................. (901) -- Accumulated deficit .......................................................... (127,398) (125,542) Accumulated other comprehensive loss ......................................... (1,866) (1,180) ----------- ----------- Total stockholders' equity ............................................... 134,521 136,880 ----------- ----------- $ 1,109,621 $ 1,163,947 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 4 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED ---------------------------------- MARCH 31, MARCH 31, 2001 2000 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) Revenues: Rooms .......................................... $ 84,018 $ 100,117 Food and beverage .............................. 25,202 31,504 Other .......................................... 5,553 6,736 --------- --------- 114,773 138,357 Operating expenses: Direct: Rooms ........................................ 24,108 28,601 Food and beverage ............................ 18,663 23,218 Other ........................................ 3,204 4,310 General, administrative and other ................ 51,480 55,145 Depreciation and amortization .................... 15,657 16,032 Impairment of long-lived assets .................. 565 9,613 Severance expense ................................ 750 -- --------- --------- Total operating expenses ................... 114,427 136,919 --------- --------- 346 1,438 Other income (expenses): Interest income and other ...................... 266 305 Interest expense ............................... (20,765) (23,987) Gain on asset dispositions ..................... 24,369 95 Minority interests: Preferred redeemable securities ................ (3,226) (3,063) Other .......................................... (146) (307) --------- --------- Income (loss) before income taxes ................ 844 (25,519) Provision (benefit) for income taxes ............. 2,700 (8,677) --------- --------- Net loss ......................................... $ (1,856) $ (16,842) ========= ========= Loss per common share - basic and diluted ........ $ (0.07) $ (0.60) ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 5 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED COMMON STOCK ADDITIONAL DEFERRED OTHER TOTAL ------------------ PAID-IN STOCK ACCUMULATED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS EQUITY ---------- ------ -------- ------------ ------------- ------------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1999 ..... 28,130,325 $281 $262,760 $ -- $ (37,587) $ (912) $ 224,542 401(k) Plan contribution ......... 144,131 1 504 -- -- 505 Director compensation ............ 15,968 56 -- -- 56 Net loss ......................... -- -- -- (87,955) -- (87,955) Currency translation adjustments .................... -- -- -- -- (268) (268) --------- Comprehensive loss ............... -- -- -- -- -- (88,223) ---------- ---- -------- -------- --------- -------- --------- Balance at December 31, 2000 ..... 28,290,424 282 263,320 -- (125,542) (1,180) 136,880 401(k) Plan contribution ......... 125,425 2 142 144 Deferred stock compensation ...... -- -- 940 (940) -- -- Amortization of deferred stock compensation .................... -- -- -- 39 -- -- 39 Net loss ......................... -- -- -- -- (1,856) -- (1,856) Currency translation adjustments .................... -- -- -- -- -- (686) (686) --------- Comprehensive loss ............... (2,542) ---------- ---- -------- -------- --------- -------- --------- Balance at March 31, 2001 ........ 28,415,849 $284 $264,402 $ (901) $(127,398) $ (1,866) $ 134,521 ========== ==== ======== ======== ========= ======== =========
The data for the three months ended March 31, 2001 is unaudited. The comprehensive loss for the three months ended March 31, 2000 was $16,842. The accompanying notes are an integral part of these condensed consolidated financial statements. 3 6 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED ---------------------------- MARCH 31, MARCH 31, 2001 2000 --------- --------- (IN THOUSANDS) (UNAUDITED) Operating activities: Net loss ................................................. $ (1,856) $(16,842) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .......................... 15,657 16,032 Gain on sale of assets ................................. (24,369) (95) Deferred income tax benefit ............................ -- (8,677) Minority interests ..................................... 3,372 308 Impairment of long-lived assets ........................ 565 9,613 401(k) plan contributions .............................. 144 -- Amortization of non-cash stock compensation ............ 39 -- Other .................................................. 970 1,006 Changes in operating assets and liabilities: Accounts receivable .................................. (1,261) (934) Inventories .......................................... 63 182 Other assets ......................................... (810) (1,513) Accounts payable ..................................... (6,584) (14,561) Accrued liabilities and advance deposits ............. (9,197) (3,324) -------- -------- Net cash used in operating activities ...................... (23,267) (18,805) Investing activities: Capital improvements, net ................................ (7,324) (23,994) Proceeds from sale of assets, net ........................ 58,826 19,400 Net withdrawals (deposits) for capital expenditures ...... 1,423 (1,978) -------- -------- Net cash provided by (used in) investing activities ........ 52,925 (6,572) Financing activities: Proceeds from borrowings on working capital revolver ..... 16,000 30,000 Proceeds from issuance of long-term obligations .......... -- 2,085 Principal payments on long-term obligations .............. (42,335) (2,115) Principal payments on working capital revolver ........... (15,000) (5,000) Distributions to minority interests ...................... -- (93) -------- -------- Net cash (used in) provided by financing activities ....... (41,335) 24,877 -------- -------- Net decrease in cash and cash equivalents .................. (11,677) (500) Cash and cash equivalents at beginning of period ........... 21,002 14,644 -------- -------- Cash and cash equivalents at end of period ................. $ 9,325 $ 14,144 ======== ======== Supplemental cash flow information: Cash paid during the period for: Interest, net of amount capitalized ...................... $ 26,057 $ 28,088 ======== ======== Income taxes, net of refunds ............................. $ 2,700 $ 111 ======== ======== Supplemental disclosure of non-cash investing and financing activities: Net non-cash debt increase ............................... $ 35 $ -- ======== ======== Deferred stock compensation .............................. $ 940 $ -- ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 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., its wholly-owned subsidiaries and five partnerships in which Lodgian exercises control (collectively "Lodgian" or the "Company"). Lodgian believes it has control of partnerships when the Company manages and has control of the partnerships' assets and operations, has the ability and authority to enter into financing arrangements on behalf of the entity or to sell the assets of the entity within reasonable business guidelines. One unconsolidated entity (owning 1 hotel) is accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting policies followed for quarterly financial reporting are the same as those disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 2001, and the results of its operations for the three months ended March 31, 2001 and 2000 and its cash flows for the three months ended March 31, 2001 and 2000. The results for interim periods are not necessarily indicative of the results for the entire year. While management believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts in the financial statements in order to conform to the current period presentation. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED MARCH 31, ------------------------- 2001 2000 -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net loss $ (1,856) $ (16,842) ======== ========= Denominator: Denominator for basic and diluted earnings per share-weighted-average shares 28,290 28,029 ======== ========= Basic and diluted earnings per share: Net loss $ (0.07) $ (0.60) ======== =========
5 8 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED The computation of diluted earnings per share did not include shares associated with the assumed conversion of the Convertible Redeemable Equity Structure Trust Securities (CRESTS) or stock options because their inclusion would have been antidilutive. 3. ASSET DISPOSITIONS AND DEBT REDUCTIONS As discussed in Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations and Note 4 to the financial statements, at the end of 1999, the Company's Board of Directors adopted a strategic plan to reduce the size of the Company's non-core hotel portfolio and in 2000 adopted a strategic plan to reduce the level of overall debt of the Company. With regard to these strategic plans, the Company sold twenty-two hotel properties and four other assets between January 1, 2000 and May 15, 2001. Gross sales price of these twenty-six properties was $275.6 million while the reduction of debt was $207.4 million. The balance was used primarily to support capital expenditures related to major renovation projects and the construction of one new hotel, which was sold prior to completion. A breakdown of the property sales by period is as follows:
Properties Gross Sales Debt Period Sold Price Reduction ------------------------------- --------- ----------- --------- January 1, to December 31, 2000 23 $ 208.8 $ 151.1 January 1, to March 31, 2001 2 66.2 55.8 April 1, 2001 to May 15, 2001 1 0.6 0.5 --------- ----------- --------- 26 $ 275.6 $ 207.4 ========= =========== =========
Included in the twenty-three properties sold in 2000 was a group of ten hotels, located in the western United States, which were sold to a single unaffiliated third party purchaser on August 31, 2000. The gross sales price was $132 million and the net proceeds of $118 million, after deducting closing costs and prorations, were used to pay down debt. The following unaudited proforma information is presented as if the Company had completed the sale of the ten hotels, located in the western United States, as of January 1, 2000. This proforma information is not necessarily indicative of what the actual results would have been for the three months ended March 31, 2000, nor does it purport to represent the results for future periods and does not represent the effect of the sales of the remaining sixteen properties.
Three Months Ended MARCH 31, 2000 -------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues $126,958 Net loss $(13,403) Net loss per common share, basic and diluted $ (0.48)
The Company's total outstanding debt as of May 15, 2001 (excluding CRESTS) was approximately $711.5 million. Of this amount, $59.8 million is due in 2001. As of May 15, 2001, the Company's held for sale properties have an estimated fair value of approximately $23.6 million. 6 9 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED The Company may continue to explore potential property sale transactions in addition to those discussed above. Certain of these transactions may include hotels other than those identified for sale currently. The discussions with potential purchasers are in various stages, including the execution of preliminary agreements in a few situations. Those transactions where preliminary agreements have been reached are subject to, among other things, buyer due diligence and financing and the cooperation of the Company's existing lenders. Accordingly, the Company is unable to predict whether any of the transactions being considered will result in an actual sale. The majority of the net proceeds from any completed sales will be used to reduce debt. In 2001, the Company may need to sell assets to meet its remaining $59.8 million amortization payment requirements in 2001 and its capital improvement program, as discussed in the Liquidity and Capital Resources section following. Therefore, the Company may continue to identify properties to be classified as held for sale. Although the Company anticipates being able to sell sufficient assets to meet its obligations in 2001, if the Company is unable to complete a refinancing as discussed in Note 5, there can be no assurance that the sales will occur or generate sufficient net proceeds to meet these obligations. 4. ASSETS HELD FOR SALE As discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 3 to the financial statements, the Company has adopted strategic plans to reduce the size of the Company's non-core hotel portfolio and reduce the level of overall debt of the Company. In this regard, the Company has identified and may continue to evaluate throughout 2001 properties which may be classified as held for sale to meet these objectives. Impairment charges for the three months ended March 31, 2001 and March 31, 2000, were $0.6 million and $9.6 million, respectively. The Company's first quarter 2001 charge comprises $4.3 million related to revised estimates of fair value for properties held for sale and held for investment at March 31, 2001, net of a recapture of $3.7 million of impairment charges as one hotel previously considered held for sale is no longer being actively marketed for sale as of March 31, 2001. The first quarter 2000 charge related to revised estimates of fair value for properties held for sale as of March 31, 2000. The Company may incur additional impairment charges in subsequent quarters if it identifies properties to be considered held for sale to meet the objectives described. Summary results of operations included in the Statement of Operations with respect to the properties identified as held for sale at March 31, 2001 are as follows (in thousands):
THREE MONTHS ENDED MARCH 31, ------------------------ 2001 2000 ---------- ---------- Revenues $ 2,760 $ 3,046 ======= ======= Loss before income taxes $ 645(1) $ 3,456(1) ======= =======
(1) Includes impairment charge of $0.6 million and $4.0 million, respectively. Included in property and equipment is $19.5 million (7 properties) and $39.8 million (10 properties) related to properties identified as held for sale at March 31, 2001 and December 31, 2000, respectively. 7 10 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 5. DEBT AMENDMENTS AND COVENANTS Due to, among other factors, weakness in the Company's first quarter 2001 operating results, the Company would have been in violation of certain financial covenant ratios related to its Senior Secured loan credit facility when it completed its financial statements for the period ended March 31, 2001. On May 15, 2001, the Company reached an oral agreement to amend its Senior Secured loan credit facility. The Company expects to execute the amendment within the next few days. The interest rate spread, currently LIBOR plus 4.25%, will increase 25 basis points in each month from August 2001 to February 2002 up to a maximum of LIBOR plus 6.00% and then remain in effect until maturity. If the Company's debt is downgraded by a rating agency subsequent to the amendment date the interest rate spread will increase a one time additional 25 basis points up to a maximum of LIBOR plus 6.00%. The interest rate spread will decrease 50 basis points for each aggregate $60.0 million of principal reductions made subsequent to the amendment date as long as the Company is in compliance with certain coverage ratios. Additional amortization payment requirements for tranche B term loans of $7.5 million are required on April 30, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, respectively. The amendment modifies various covenants and coverage ratios, which the Company is now in compliance with as of March 31, 2001. The Company will pay an amendment fee of $565,000 on the date of the amendment and is obligated to pay an additional 75 basis point fee on January 2, 2002 based on any outstanding borrowings and commitments on that date. In addition, on the amendment date, $25.0 million of the outstanding balance on the working capital revolver will be converted to the tranche B term loan, thereby reducing the commitment on the working capital revolver to $25.0 million. As of May 15, 2001, the Company has $22.3 million of unused availability on the working capital revolver portion of its Senior Secured loan credit facility of which $1.0 million is available for borrowings through June 30, 2001 and, subject to continued compliance, the full amount of the unused availability is available for borrowings starting July 1, 2001. The Company anticipates paying the remaining $6.7 million amortization due on June 30, 2001 on its Senior Secured loan credit facility from its existing cash and cash flow from operating activities through June 30, 2001. At May 15, 2001, the Company had $202.0 million outstanding on its Senior Secured loan credit facility. The Company is considering a variety of refinancing opportunities to completely pay off these obligations prior to January 2, 2002. However, there can be no assurances that the Company can complete a refinancing on more favorable terms. On May 20, 2001, promissory notes of approximately $3.9 million secured by the pledge of 100% of the ownership interests of Macon Hotel Associates, L.L.C. ("MHA") are due. The Company owns a 60% controlling interest in MHA. MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA and the Company do not intend to make this payment on May 20, 2001. MHA and the Company are cooperating with the note holders in marketing the hotel for sale. As of March 31, 2001, the Company has recorded an impairment charge of $2.2 million to reduce the carrying value of the hotel to the outstanding debt balance, which includes the promissory notes discussed above and a $7.8 million first mortgage. Based on the estimated sales price of the property, there will not be any remaining net proceeds available for MHA or the Company. The Company is subject to certain property maintenance and quality standard compliance requirements under its franchise agreements. The Company periodically receives notifications from its franchisors of events of noncompliance with such agreements. In most cases, management has the intention and believes they have the ability to cure such instances of noncompliance within the applicable cure periods and that these events of noncompliance will not result in events of default under the respective loan agreements during 2001. However, in selected situations, as warranted based on economic evaluations, management may elect to not comply with the franchisor requirements. In such situations, the Company will either select an alternative franchisor or operate the property independent of any franchisor. Management has not been notified of nor does it believe it is in noncompliance with any of its loan agreements as a result of noncompliance with its franchise agreements as of March 31, 2001. 6. DEFERRED STOCK COMPENSATION As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, on February 9, 2001, the Company named a new President and Chief Executive Officer. As part of the employment agreement, the Company granted the executive options to acquire 2,000,000 shares of common stock, which vest equally over four years. As the exercise price of the options was less than the fair market value of the stock on the measurement date, the Company recognized deferred stock compensation expense of $940,000 which will be amortized over the vesting period. The options were granted outside of the Lodgian, Inc. 1998 Stock Incentive Plan. 8 11 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 7. SEVERANCE EXPENSES On February 9, 2001, the Company's former Chief Executive Officer and President and Lodgian entered into a Separation Agreement. On this date, the former Chief Executive Officer and President, with the Company's consent, resigned his position and continued as a non-officer employee through March 2, 2001. The former Chief Executive Officer and President received a severance payment of $750,000 in full settlement of all amounts due by reason of the termination of his employment agreement. The Company and the former Chief Executive Officer and President released one another from all claims rising out of his employment with the Company. In addition, any future contingent development fee obligations arising from the Company acquiring or developing any hotels or properties identified in the Merger Agreement as Impac's acquisition land development pipeline also ceased. 8. INCOME TAXES The Company recognized an income tax provision of $2.7 million for the first quarter 2001. This related, primarily, to a provision for state income taxes on the gain on sale of one hotel. There were no operating losses to offset this gain. 9. COMMITMENTS AND CONTINGENCIES In July 1999, a contractor hired by Servico to perform work on hotels in New York, Illinois and Texas filed a complaint against the Company in the Supreme Court of the State of New York, claiming breach of contract, quantum meruit, and fraud among other claims. The contractor seeks damages totaling $80 million, including $60 million for punitive damages. The Company answered the complaint asserting counterclaims aggregating $20 million and successfully filed a motion to dismiss the claims related to two properties located in Illinois and Texas. In October 1999, a subcontractor filed a lawsuit in Texas against the above contractor and the Company. The Company has filed an answer and cross-claim against the contractor in the amount of $2.8 million. In February 2000, the contractor filed a lawsuit in Texas claiming an undisclosed amount of actual damages and punitive damages. The Company answered the complaint and asserted a counterclaim. The Company has also filed a lawsuit against the contractor in Federal District Court in Illinois, seeking $2 million. The contractor has filed an answer and counterclaim aggregating $2.8 million in actual damages and $10 million in punitive damages. On March 1, 2001, a New York Court dismissed all of the contractor's claims based upon fraud, effectively reducing the plaintiff's outstanding claims by $40 million. The contractor subsequently agreed to withdraw its claims for punitive damages in the Illinois action. The Company believes that it has valid defenses and counterclaims to the contractor's remaining claims and that the outcome will not have a material adverse effect on its financial position or results of operations. On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an arbitration claim against the Company claiming breach of contract relating to a January 4, 1992 agreement. WH claims entitlement to profit participation relating to the sale of certain hotel properties by an affiliate and predecessor of the Company. Although the Demand for Arbitration did not make a specific damages demand, WH claimed in its pre-hearing statement an amount of $764,500. Management believes it has meritorious defenses to this matter and is defending it vigorously. The Company and individual Company officers and directors are parties to various class action lawsuits filed by Company shareholders. The complaints claim, among other things, that the defendants breached certain fiduciary duties in connection with various offers to acquire the Company and in effecting certain changes to the size and composition of the Company's Board of Directors. Although the ultimate outcome of these class action lawsuits cannot be predicted with certainty, it is the opinion of management that the resolution of these class action lawsuits will not have a material adverse effect on its financial position or results of operations. 9 12 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED The Company is a party to other legal proceedings arising in the ordinary course of business, the impact of which would not, either individually or in the aggregate, in management's opinion, have a material adverse effect on its financial position or results of operations. 10. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts, and derivatives used for hedging purposes. SFAS No. 133 requires that entities recognize all derivative financial instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 as amended by SFAS No. 137 and 138, was adopted by the Company in the current fiscal quarter. The adoption did not have any impact on the Company's financial statements. 11. SUPPLEMENTAL GUARANTOR INFORMATION In connection with the Company's sale of $200 million of 12 1/4% Senior Subordinated Notes (the "Notes") in July 1999, certain of the Company's subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's obligations to pay principal and interest with respect to the Notes. Each Subsidiary Guarantor is wholly-owned and management has determined that separate financial statements for the Subsidiary Guarantors are not material to investors. The subsidiaries of the Company that are not Subsidiary Guarantors are referred to in the note as the "Non-Guarantor Subsidiaries". The following supplemental condensed consolidating financial statements present balance sheets as of March 31, 2001 and December 31, 2000 and statements of operations and cash flows for the three months ended March 31, 2001 and 2000. In the condensed consolidating financial statements, Lodgian, Inc. (the "Parent") accounts for its investments in wholly owned subsidiaries using the equity method. 10 13 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2001
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ........................ $ 6 $ 12,077 $ (2,758) $ -- $ 9,325 Cash, restricted ................................. -- -- 2,803 -- 2,803 Accounts receivable, net of allowances ........... -- 9,652 12,233 -- 21,885 Inventories ...................................... -- 3,539 4,203 -- 7,742 Prepaid expenses and other current assets ........ 3,603 98 5,804 -- 9,505 --------- --------- --------- -------- ---------- Total current assets ...................... 3,609 25,366 22,285 -- 51,260 Property and equipment, net ........................... -- 550,219 468,543 -- 1,018,762 Deposits for capital expenditures ..................... -- 515 12,067 -- 12,582 Investment in consolidated entities ................... (304,655) -- -- 304,655 -- Due from (to) affiliates .............................. 445,081 (263,259) (181,822) -- -- Other assets, net ..................................... -- 15,664 11,353 -- 27,017 --------- --------- --------- -------- ---------- $ 144,035 $ 328,505 $ 332,426 $304,655 $1,109,621 ========= ========= ========= ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................ $ -- $ 8,001 $ 11,165 $ -- $ 19,166 Accrued interest ................................ -- 8,419 1,770 -- 10,189 Other accrued liabilities ....................... -- 8,602 24,665 -- 33,267 Advance deposits ................................ -- 1,426 1,773 -- 3,199 Current portion of long-term obligations ........ -- 49,037 12,752 -- 61,789 --------- --------- --------- -------- ---------- Total current liabilities ................. -- 75,485 52,125 -- 127,610 Long-term obligations, less current portion ........... 4,045 353,591 293,156 -- 650,792 Deferred income taxes ................................. 3,603 -- -- -- 3,603 Minority interests: Preferred redeemable securities (including related accrued interest) ...................... -- -- 187,575 -- 187,575 Other ........................................... -- -- 5,520 -- 5,520 --------- --------- --------- -------- ---------- Total liabilities .......................... 7,648 429,076 538,376 -- 975,100 --------- --------- --------- -------- ---------- Commitments and contingencies ......................... -- -- -- -- -- Stockholders' equity: Common stock ................................... 284 33 443 (476) 284 Additional paid-in capital ..................... 264,402 22,619 (40,255) 17,636 264,402 Deferred stock compensation .................... (901) -- -- -- (901) Accumulated deficit ............................ (127,398) (121,357) (166,138) 287,495 (127,398) Accumulated other comprehensive loss ........... -- (1,866) -- -- (1,866) --------- --------- --------- -------- ---------- Total stockholders' equity (deficit) ..... 136,387 (100,571) (205,950) 304,655 134,521 --------- --------- --------- -------- ---------- $ 144,035 $ 328,505 $ 332,426 $304,655 $1,109,621 ========= ========= ========= ======== ==========
11 14 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ------------- ------------ ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ........................ $ 6 $ 20,653 $ 343 $ -- $ 21,002 Cash, restricted ................................. -- -- 2,237 -- 2,237 Accounts receivable, net of allowances ........... -- 8,031 12,593 -- 20,624 Inventories ...................................... -- 3,609 4,196 -- 7,805 Prepaid expenses and other current assets ........ 3,603 110 5,548 -- 9,261 --------- --------- --------- -------- ---------- Total current assets ...................... 3,609 32,403 24,917 -- 60,929 Property and equipment, net ........................... -- 553,941 505,107 -- 1,059,048 Deposits for capital expenditures ..................... -- 917 13,088 -- 14,005 Investment in consolidated entities ................... (295,521) -- -- 295,521 -- Due from (to) affiliates .............................. 437,585 (233,776) (203,809) -- -- Other assets, net ..................................... -- 16,501 13,464 -- 29,965 --------- --------- --------- -------- ---------- $ 145,673 $ 369,986 $ 352,767 $295,521 $1,163,947 ========= ========= ========= ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................ $ -- $ 9,107 $ 15,981 $ -- $ 25,088 Accrued interest ................................ -- 15,200 1,595 -- 16,795 Other accrued liabilities ....................... -- 9,095 28,108 -- 37,203 Advance deposits ................................ -- 855 999 -- 1,854 Current portion of long-term obligations ........ -- 67,190 12,653 -- 79,843 --------- --------- --------- -------- ---------- Total current liabilities ................. -- 101,447 59,336 -- 160,783 Long-term obligations, less current portion ........... 4,010 353,213 316,815 -- 674,038 Deferred income taxes ................................. 3,603 -- -- -- 3,603 Minority interests: Preferred redeemable securities (including related accrued interest) ...................... -- -- 184,349 -- 184,349 Other ........................................... -- -- 4,294 -- 4,294 --------- --------- --------- -------- ---------- Total liabilities ......................... 7,613 454,660 564,794 -- 1,027,067 --------- --------- --------- -------- ---------- Commitments and contingencies ......................... -- -- -- -- -- Stockholders' equity: Common stock ................................... 282 33 441 (474) 282 Additional paid-in capital ..................... 263,320 22,619 (41,337) 18,718 263,320 Accumulated deficit ............................ (125,542) (106,146) (171,131) 277,277 (125,542) Accumulated other comprehensive loss ........... -- (1,180) -- -- (1,180) --------- --------- --------- -------- ---------- Total stockholders' equity (deficit) ..... 138,060 (84,674) (212,027) 295,521 136,880 --------- --------- --------- -------- ---------- $ 145,673 $ 369,986 $ 352,767 $295,521 $1,163,947 ========= ========= ========= ======== ==========
12 15 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) Revenues: Rooms ............................................... $ -- $ 40,399 $ 43,619 $ -- $ 84,018 Food and beverage ................................... -- 12,378 12,824 -- 25,202 Other ............................................... -- 2,541 3,012 -- 5,553 --------- --------- --------- -------- ---------- -- 55,318 59,455 -- 114,773 Operating expenses: Direct: Rooms ............................................. -- 11,565 12,543 -- 24,108 Food and beverage ................................. -- 9,098 9,565 -- 18,663 Other ............................................. -- 1,487 1,717 -- 3,204 General, administrative and other ..................... -- 22,469 29,011 -- 51,480 Depreciation and amortization ......................... -- 7,269 8,388 -- 15,657 Impairment of long-lived assets ....................... -- (2,735) 3,300 -- 565 Severance expenses .................................... -- -- 750 -- 750 --------- --------- --------- -------- ---------- Total operating expenses .................. -- 49,153 65,274 -- 114,427 --------- --------- --------- -------- ---------- -- 6,165 (5,819) -- 346 Other income (expenses): Interest income and other ........................... -- -- 266 -- 266 Interest expense .................................... -- (13,034) (7,731) -- (20,765) Gain on asset dispositions .......................... -- 20 24,349 -- 24,369 Equity in income of consolidated subsidiaries ....... 844 -- -- (844) -- Minority interests: Preferred redeemable securities ..................... -- -- (3,226) -- (3,226) Other ............................................... -- -- (146) -- (146) --------- --------- --------- -------- ---------- Income (loss) before income taxes ..................... 844 (6,849) 7,693 (844) 844 Provision for income taxes ........................... 2,700 -- 2,700 (2,700) 2,700 --------- --------- --------- -------- ---------- Net (loss) income .................... $ (1,856) $ (6,849) $ 4,993 $ 1,856 $ (1,856) ========= ========= ========= ======== ==========
13 16 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) Revenues: Rooms ............................................... $ -- $ 45,301 $ 54,816 $ -- $ 100,117 Food and beverage ................................... -- 13,921 17,583 -- 31,504 Other ............................................... -- 2,788 3,948 -- 6,736 --------- --------- --------- -------- ---------- -- 62,010 76,347 -- 138,357 --------- --------- --------- -------- ---------- Operating expenses: Direct: Rooms ............................................. -- 12,992 15,609 -- 28,601 Food and beverage ................................. -- 10,111 13,107 -- 23,218 Other ............................................. -- 1,942 2,368 -- 4,310 General, administrative and other ..................... -- 22,791 32,354 -- 55,145 Depreciation and amortization ......................... -- 5,935 10,097 -- 16,032 Impairment of long-lived assets ....................... -- 8,800 813 9,613 --------- --------- --------- -------- ---------- Total operating expenses .................. -- 62,571 74,348 -- 136,919 --------- --------- --------- -------- ---------- -- (561) 1,999 -- 1,438 Other income (expenses): Interest income and other ........................... -- -- 305 -- 305 Interest expense .................................... -- (13,429) (10,558) -- (23,987) Gain on asset dispositions .......................... -- 95 -- -- 95 Equity in loss of consolidated subsidiaries ......... (25,519) -- -- 25,519 -- Minority interests: Preferred redeemable securities ..................... -- -- (3,063) (3,063) Other ............................................... -- -- (307) (307) --------- --------- --------- -------- ---------- Loss before income taxes .............................. (25,519) (13,895) (11,624) 25,519 (25,519) Benefit for income taxes .............................. (8,677) (4,724) (3,953) 8,677 (8,677) --------- --------- --------- -------- ---------- Net loss ............................... $ (16,842) $ (9,171) $ (7,671) $ 16,842 $ (16,842) ========= ========= ========= ======== ==========
14 17 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2001
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ---------- ------------- ------------ (UNAUDITED) (IN THOUSANDS) Operating activities: Net loss .................................................. $ -- $ (6,849) $ 4,993 $ (1,856) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ............................ -- 7,269 8,388 15,657 Gain on sale of assets ................................... -- (20) (24,349) (24,369) Minority interests ....................................... -- -- 3,372 3,372 Impairment of long-lived assets .......................... -- (2,735) 3,300 565 401(k) plan contributions ................................ 144 -- -- 144 Amortization of non-cash stock compensation .............. 39 -- 39 Other .................................................... 35 773 162 970 Changes in operating assets and liabilities: Accounts receivable ...................................... -- (1,620) 359 (1,261) Inventories .............................................. -- 70 (7) 63 Other assets ............................................. -- 12 (822) (810) Accounts payable ......................................... -- (1,106) (5,478) (6,584) Accrued liabilities and advance deposits ................. -- (6,703) (2,494) (9,197) ------ --------- --------- --------- Net cash provided by (used in) operating activities ........ 218 (10,909) (12,576) (23,267) Investing activities: Capital improvements, net ................................ -- (4,568) (2,756) (7,324) Proceeds from sale of assets, net ........................ -- 3,153 55,673 58,826 Net withdrawals for capital expenditures ................. -- 402 1,021 1,423 ------ --------- --------- --------- Net cash provided by (used in) investing activities ...... -- (1,013) 53,938 52,925 Financing activities: Proceeds from borrowings on working capital revolver ..... -- 16,000 -- 16,000 Proceeds received from (paid to) related parties ......... (218) 21,121 (20,903) -- Principal payments on long-term obligations .............. -- (18,775) (23,560) (42,335) Principal payments on working capital revolver ........... -- (15,000) -- (15,000) ------ --------- --------- --------- Net cash (used in) provided by financing activities ...... (218) 3,346 (44,463) (41,335) ------ --------- --------- --------- Net (decrease) increase in cash and cash equivalents ....... -- (8,576) (3,101) (11,677) Cash and cash equivalents at beginning of period ........... 6 20,653 343 21,002 ------ --------- --------- --------- Cash and cash equivalents at end of period ................. $ 6 $ 12,077 $ (2,758) $ 9,325 ====== ========= ========= =========
15 18 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2000
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ---------- ------------- ------------ (UNAUDITED) (IN THOUSANDS) Operating activities: Net loss .................................................. $ -- $ (9,171) $ (7,671) $ (16,842) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization ............................ -- 5,935 10,097 16,032 Gain on sale of assets ................................... -- (95) -- (95) Deferred income tax benefit .............................. (8,677) -- -- (8,677) Minority interests ....................................... -- -- 308 308 Impairment of long-lived assets .......................... -- 8,800 813 9,613 Other .................................................... 475 379 152 1,006 Changes in operating assets and liabilities: Accounts receivable ...................................... -- (1,423) 489 (934) Inventories .............................................. -- 193 (11) 182 Other assets ............................................. -- (311) (1,202) (1,513) Accounts payable ......................................... -- (5,716) (8,845) (14,561) Accrued liabilities and advance deposits.................. -- (3,450) 126 (3,324) ------- --------- --------- --------- Net cash used in operating activities ...................... (8,202) (4,859) (5,744) (18,805) ------- --------- --------- --------- Investing activities: Capital improvements, net ................................ -- (15,861) (8,133) (23,994) Proceeds from sale of assets ............................. -- 19,400 -- 19,400 Net deposits for capital expenditures .................... -- -- (1,978) (1,978) ------- --------- --------- --------- Net cash provided by (used in) investing activities ...... -- 3,539 (10,111) (6,572) ------- --------- --------- --------- Financing activities: Proceeds from borrowings on working capital revolver ..... -- 30,000 -- 30,000 Proceeds from issuance of long-term obligations .......... -- -- 2,085 2,085 Proceeds received from (paid to) related parties ......... 8,202 (30,267) 22,065 -- Principal payments on long-term obligations .............. -- (435) (1,680) (2,115) Principal payments on working capital revolver ........... -- (5,000) -- (5,000) Distributions to minority interests ...................... -- -- (93) (93) ------- --------- --------- --------- Net cash provided by (used in) financing activities ...... 8,202 (5,702) 22,377 24,877 ------- --------- --------- --------- Net (decrease) increase in cash and cash equivalents ....... -- (7,022) 6,522 (500) Cash and cash equivalents at beginning of period ........... 59 9,910 4,675 14,644 ------- --------- --------- --------- Cash and cash equivalents at end of period ................. $ 59 $ 2,888 $ 11,197 $ 14,144 ======= ========= ========= =========
16 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The following discussion should be read in conjunction with the Company's financial statements and related notes thereto included. The discussion below and elsewhere in this Form 10-Q includes statements that are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These include statements that describe anticipated revenues, capital expenditures and other financial items, statements that describe the Company's business plans and objectives, and statements that describe the expected impact of competition, government regulation, litigation and other factors on the Company's future financial condition and results of operations. The words "may," "should," "expect," "believe," "anticipate," "project," "estimate," and similar expressions are intended to identify forward-looking statements. Such risks and uncertainties, any one of which may cause actual results to differ materially from those described in the forward-looking statements, include or relate to, among other things. - The impact of pending or threatened litigation and/or governmental inquiries and investigation involving the Company. - The uncertainties relating to the Company's proposed strategic initiatives, including the willingness of prospective purchasers to purchase the hotels the Company has identified as divestiture candidates on terms the Company finds acceptable, the timing and terms on which such hotels may be sold, and other factors affecting the ability of prospective purchasers to consummate such transactions, including the availability of financing. - The effect of competition and the economy on the Company's ability to maintain margins on existing operations, including uncertainties relating to competition. - The Company's ability to generate sufficient cash flows from operations and asset sales to cover its cash needs or refinance certain existing debt obligations, the Company's ability to obtain additional capital if needed and the possible default under credit facilities if cash flows are lower than expected or capital expenditures are greater than expected. - The effectiveness of changes in management and the ability of the Company to retain qualified individuals to serve in senior management positions. - The potential for additional impairment charges against earnings related to long-lived assets, which may result from the Company's strategic initiatives to reduce the size of the hotel portfolio and reduce debt. STRATEGIC PLANS At the end of 1999, the Company's Board of Directors adopted a strategic plan to reduce the size of the company's non-core hotel portfolio and in 2000 adopted a strategic plan to reduce the level of overall debt of the Company and retained an investment banker to review its strategic alternatives. As part of that review, the Company was pursuing a sale of the Company. With regard to this strategic alternative, on December 26, 2000, the Company entered into an Exclusivity Agreement with Edgecliff Holdings, LLC ("Edgecliff") in which the Company granted Edgecliff an exclusive 60-day period during which the two parties attempted to negotiate a definitive merger agreement. During this period, the Company gave Edgecliff and its representatives full access to the Company's books, records, and personnel. The parties had made significant progress toward negotiating the terms of a definitive merger agreement, and the Company agreed to extend the exclusivity period. However, on February 28, 2001, Edgecliff informed the Company that it was unable to obtain the refinancing of the Company's high-yield bonds on acceptable terms from their holders and would not proceed with the acquisition. Currently, the Company is not in negotiations for the sale of the Company with any party. The Company is moving forward as an independent company and is exploring all avenues for maximization of shareholder value, including improving operations, capital structure and optimizing the value of the Company's assets. Also, as 17 20 previously reported in the Company's Form 10-K for the year ended December 31, 2000, on February 9, 2001 the Company named a new President and Chief Executive Officer. OVERVIEW Management believes that results of operations in the hotel industry are best explained by four key performance measures: occupancy, average daily rate ("ADR"), revenue per available room ("RevPAR"), and Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") margins. These measures are influenced by a variety of factors including national, regional and other local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of our hotels experience lower occupancy levels in the fall and winter months (November through February) which may result in lower revenues, lower net income and less cash flow during these months. REVENUES Revenues are composed of room, food and beverage and other revenues. Room revenues are derived from guest room rentals, whereas food and beverage revenues primarily include sales from hotel restaurants, room service and hotel catering. Other revenues include charges for guests' long-distance telephone service, laundry service and use of meeting facilities. OPERATING EXPENSES Operating expenses are composed of direct, general and administrative, other hotel operating expenses and depreciation and amortization. Direct expenses, including rooms, food and beverage and other operations, reflect expenses directly related to hotel operations. These expenses are primarily variable with available rooms and occupancy rates, but also have a small fixed component which can be leveraged with increases in revenues. General and administrative expenses represent corporate salaries and other corporate operating expenses and are generally fixed. Other expenses include primarily property level expenses related to general operations such as marketing, utilities, repairs and maintenance and other property administrative costs. These expenses are primarily fixed. RESULTS OF OPERATIONS The significant number of dispositions in 2001 and 2000 has materially impacted operating results. First Quarter 2001 In February 2001, the Company sold two hotels for a gross sale price of $66.2 million. Year Ended December 31, 2000 During 2000, the Company sold nineteen hotel properties and four other assets, including two hotel properties sold during the first quarter 2000. Gross sales price of these twenty-three properties was $208.8 million. The discussion of results of operations, income taxes, liquidity and capital resources that follows is derived from the Company's unaudited Consolidated Financial Statements set forth in "Item I. Financial Statements" included in this Form 10-Q and should be read in conjunction with such financial statements and notes thereto. 18 21 HISTORICAL RESULTS OF OPERATIONS The following table presents for the periods indicated, the percentage relationship that the various statements of operations line items bear to operating revenues:
THREE MONTHS ENDED ------------------------ MARCH 31, MARCH 31, 2001 2000 --------- --------- Revenues: Rooms .......................................... 73.2% 72.4% Food and beverage .............................. 22.0 22.8 Other .......................................... 4.8 4.8 ----- ----- 100.0 100.0 ----- ----- Operating expenses: Direct: Rooms ........................................ 21.0 20.7 Food and beverage ............................ 16.3 16.8 Other ........................................ 2.8 3.1 General, administrative and other ................ 44.8 39.9 Depreciation and amortization .................... 13.6 11.6 Impairment of long-lived assets .................. 0.5 6.9 Severance and restructuring expenses ............. 0.7 -- ----- ----- Total operating expenses ............. 99.7 99.0 ----- ----- 0.3 1.0 Other income (expenses): Interest income and other ...................... 0.2 0.2 Interest expense ............................... (18.1) (17.3) Gain on asset dispositions ...................... 21.2 0.1 Minority interests: .............................. -- -- Preferred redeemable securities ................ (2.8) (2.2) Other .......................................... (0.1) (0.2) ----- ----- Income (loss) before income taxes ................ 0.7 (18.4) Provision (benefit) for income taxes ............. 2.3 (6.3) ----- ----- Net loss ......................................... (1.6)% (12.1)% ===== =====
19 22 THREE MONTHS ENDED MARCH 31, 2001 ("FIRST QUARTER 2001") COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000 (FIRST QUARTER 2000") REVENUES At March 31, 2001, the Company owned 109 hotels and had a minority interest in one hotel compared with 129 hotels owned, a minority interest in one hotel and one hotel managed for a third party at March 31, 2000. Total revenue for the first quarter 2001 was $114.8 million, a decrease of 17.0%. This decrease is primarily due to the disposition of twenty hotels in the owned portfolio. RevPAR, however, was $45.60 for the first quarter 2001, an increase of 2.0% over 2000, primarily due to the mix of hotels owned at the end of the first quarter 2001 as compared to the first quarter 2000. The RevPAR increase comprised of an increase in average daily rates of 4.7% which was partially offset by a 2.5% reduction in occupancy levels. RevPAR for hotels owned during the first quarter 2001 declined by 0.8% compared to the first quarter 2000, primarily as a result of a decline in occupancy of 4% partially offset by an increase in average daily rates of 3%. OPERATING EXPENSES Direct operating expenses for the Company were $46.0 million (40.1% of direct revenues) for the first quarter 2001 and $56.1 million (40.6% of direct revenues) for the first quarter 2000. This $10.1 million decrease was primarily attributable to the reduction of twenty hotels in the owned portfolio, offset by improved operating margins in the food and beverage area and in other direct revenue activities. Other direct revenue comprises revenues from telephone, laundry services, use of meeting facilities and other miscellaneous activities. General, administrative and other expenses were $51.5 million (44.8% of direct revenues) for the first quarter 2001 and $55.1 million (39.9% of direct revenues) for the first quarter 2000. This $3.6 million decrease was due primarily to a reduction of twenty hotels in the owned portfolio offset by certain higher general, administrative and other expenses. The increase in general, administrative and other expenses as a percentage of revenues is primarily a result of higher costs related to utilities ($1.4 million), property insurance ($0.6 million), franchise fees ($0.6 million) and property taxes ($0.4 million). The utility costs increased 21% due to higher usage caused by extreme winter conditions in certain locations and increased energy rates. These increased utility costs were somewhat offset by utility surcharges added to room rates in selected markets. Property insurance costs increased principally due to premium increases indicative of an overall tightening global property insurance market. Franchise fees increased as a result of the prior year conversion of certain hotels to franchise arrangements that have slightly higher fee structures and certain changes in guest awards by the franchisors. Property taxes increased due to property tax increases which were not absorbed by higher levels of revenues. Included in general, administrative and other expenses are $2.4 million of unusual expenses ($4.0 million for the first quarter 2000). Of this amount, $1.8 million is related to professional fees principally related to consultants performing certain financial and accounting management responsibilities within the Company and $0.5 million related to certain legal matters. Depreciation and amortization expense was $15.7 million in the first quarter 2001 and $16.0 million in the first quarter 2000. The $0.3 million decrease is primarily a result of a decrease of $1.4 million in depreciation related to hotels sold, net of additional depreciation expense of $1.1 million relating to two hotels previously considered held for sale and that are no longer being actively marketed for sale as of March 31, 2001. Impairment charges for the first quarter 2001 and 2000 were $0.6 million and $9.6 million, respectively. The Company's first quarter 2001 charge comprises $4.3 million related to revised estimates of fair value for properties held for sale and held for investment at March 31, 2001, net of a recapture of $3.7 million of impairment charges as one hotel previously held for sale is no longer being actively marketed for sale as of March 31, 2001. The first quarter 2000 charge related to revised estimates of fair value for properties held for sale as of March 31, 2000. 20 23 OTHER INCOME AND EXPENSES Interest expense was $20.8 million in the first quarter 2001 and $24.0 million in the first quarter 2000. This decrease is primarily attributable to a reduction in the level of debt and, to a lesser extent, a decrease in the cost of debt. Gain on asset dispositions was $24.4 million for the first quarter 2001. This relates to the two hotels sold in the first quarter 2001 and represents the excess of the net proceeds of sale over the net book values of these assets. Minority interest expense was $3.4 million in the first quarter 2001 and also in the first quarter 2000. This is due to an increase in the CREST dividend as a result of the interest compounding effect on the dividend deferred which increase has been offset by a reduction in other minority interest expense due to lower net income levels for those hotels which the Company co-owns with its third-party-minority equity partners. NET INCOME After a provision for income taxes of $2.7 million in the first quarter 2001 and a benefit for income taxes of $8.7 million in the first quarter 2000, the Company had a net loss of $1.9 million ($0.07 per share) in first quarter 2001 compared with a net loss of $16.8 million ($0.60 per share) in the first quarter 2000, for the reasons discussed above. INCOME TAXES As of December 31, 2000, Lodgian had net operating loss carryforwards of approximately $194 million for federal income tax purposes, which expire in 2004 through 2020. The Company's ability to use these net operating loss carryforwards to offset future income is subject to limitations, and may be subject to additional limitations in the future. Due to these limitations, a portion or all of these net operating loss carryforwards could expire unused. The Company recognized an income tax provision of $2.7 million for the first quarter 2001. This related, primarily, to a provision for state income taxes on the gain on sale of one hotel. There were no operating losses to offset this gain. LIQUIDITY AND CAPITAL RESOURCES Lodgian's principal sources of liquidity consist of existing cash balances, cash flow from operations and financing. Additionally, the Company expects to generate cash flow from the disposition of hotels it has targeted for sale and that will be targeted for sale in the future. The majority of net proceeds from the sale of hotels is expected to be used to reduce long-term debt. The Company had earnings from operations before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted in 2001 of $19.7 million, a 36.7% decrease from the $31.1 million for the first quarter 2000. This decrease was due to a reduction of twenty hotels in the owned portfolio offset by other factors discussed below for EBITDA, as adjusted, on a same unit basis. EBITDA, as adjusted, on a same unit basis was $19.7 million in the first quarter of 2001 and $26.8 million in the first quarter 2000, a decrease of 26.5%. This decrease on a same unit basis was due to a 0.8% decline in RevPar, a 0.7% increase in direct operating expenses, higher corporate overhead costs as a percentage of revenues and increased utility costs, property insurance, franchise fees and property taxes as discussed previously under general, administrative and other operating expenses. The Company has computed EBITDA without regard to the unusual items and one-time charges. During the first quarter 2001, these items consisted of unusual costs (principally professional and legal fees and severance charges) of $3.1 million and impairment charges of $0.6 million, compared to $4.0 million and $9.6 million, respectively, for the first quarter 2000. EBITDA is a widely regarded industry measure of lodging performance used in the assessment of hotel property values, although EBITDA is not indicative of and should not be used as an alternative to net income or net cash provided by operations as specified by generally accepted accounting principles. Net cash used in operating activities in the first quarter 2001 was $23.3 million compared to $18.8 million for the first quarter 2000. 21 24 Cash flows provided by investing activities was $52.9 million for the first quarter 2001 and cash flows used in investing activities was $6.6 million in the first quarter 2000. The 2001 amount includes capital expenditures of $7.3 million, net proceeds from the sale of assets of $58.8 million and withdrawals for capital expenditure escrows of $1.4 million. The first quarter 2000 amount includes capital expenditures of $24.0 million, net proceeds from the sale of assets of $19.4 million and deposits for capital expenditure escrows of $2.0 million. Cash flows used in financing activities were $41.3 million for first quarter 2001 and net cash provided by financing activities were $24.9 million in first quarter 2000. The 2001 and 2000 amounts consist primarily of borrowings on the working capital revolver and repayments of long-term obligations and payments on the working capital revolver. At March 31, 2001, the Company had a working capital deficit of $76.4 million as compared with a working capital deficit of $99.9 million at December 31, 2000. Excluding the current portion of long-term obligations, the Company had a working capital deficit of $14.6 million at March 31, 2001 compared with a working capital deficit of $20.0 million at December 31, 2000. At March 31, 2001, long-term obligations were $650.8 million. Long-term obligations were $674.0 million at December 31, 2000. Both periods exclude the CRESTS. The Company has a capital improvement program to address the capital improvements required at the hotels related to product improvement plans specified by license agreements with franchisors, re-branding of several hotels and general renovation projects intended to ultimately improve the operations of the hotels. The Company originally anticipated capital expenditures of approximately $40 million under its 2001 capital improvement program. Effective March 31, 2001, the Company decreased its anticipated 2001 capital expenditures to $35 million, of which $7.3 million was incurred in the first quarter 2001. As discussed previously, the Company has adopted strategic plans to reduce the size of the Company's non-core hotel portfolio and reduce the overall level of debt. With regard to these strategic plans, the Company sold twenty-two hotel properties and four other assets between January 1, 2000 and May 15, 2001. Gross sales price of these twenty-six properties was $275.6 million while the reduction of debt was $207.4 million. The balance was used primarily to support capital expenditures related to major renovation projects and the construction of one new hotel, which was sold prior to completion. A breakdown of the property sales by period is as follows:
Properties Gross Sales Debt Period Sold Price Reduction ------------------------------- ---------- ----------- --------- January 1, to December 31, 2000 23 $208.8 $151.1 January 1, to March 31, 2001 2 66.2 55.8 April 1, 2001 to May 15, 2001 1 0.6 0.5 -- ------ ------ 26 $275.6 $207.4 == ====== ======
The Company's total outstanding debt as of May 15, 2001 (excluding CRESTS) was approximately $711.5 million. Of this amount, $59.8 million is due in 2001. As of May 15, 2001, the Company's held for sale properties have an estimated fair value of approximately $23.6 million. The Company may continue to explore potential property sale transactions in addition to those discussed above. Certain of these transactions may include hotels other than those identified for sale currently. The discussions with potential purchasers are in various stages, including the execution of preliminary agreements in a few situations. Those transactions where preliminary agreements have been reached are subject to, among other things, buyer due diligence and financing and the cooperation of the Company's existing lenders. Accordingly, the Company is unable to predict whether any of the transactions being considered will result in an actual sale. The majority of the net proceeds from any completed sales will be used to reduce debt. 22 25 In 2001, the Company may need to sell assets to meet its remaining $59.8 million amortization payment requirements in 2001 and its capital improvement program. Therefore, the Company may continue to identify properties to be classified as held for sale. Although the Company anticipates being able to sell sufficient assets to meet its obligations in 2001, if the Company is unable to complete a refinancing as discussed following, there can be no assurance that the sales will occur or generate sufficient net proceeds to meet these obligations. Due to, among other factors, weakness in the Company's first quarter 2001 operating results, the Company would have been in violation of certain financial covenant ratios related to its Senior Secured loan credit facility when it completed its financial statements for the period ended March 31, 2001. On May 15, 2001, the Company reached an oral agreement to amend its Senior Secured loan credit facility. The Company expects to execute the amendment within the next few days. The interest rate spread, currently LIBOR plus 4.25%, will increase 25 basis points in each month from August 2001 to February 2002 up to a maximum of LIBOR plus 6.00% and then remain in effect until maturity. If the Company's debt is downgraded by a rating agency subsequent to the amendment date the interest rate spread will increase a one time additional 25 basis points up to a maximum of LIBOR plus 6.00%. The interest rate spread will decrease 50 basis points for each aggregate $60.0 million of principal reductions made subsequent to the amendment date as long as the Company is in compliance with certain coverage ratios. Additional amortization payment requirements for tranche B term loans of $7.5 million are required on April 30, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, respectively. The amendment modifies various covenants and coverage ratios, which the Company is now in compliance with as of March 31, 2001. The Company will pay an amendment fee of $565,000 on the date of the amendment and is obligated to pay an additional 75 basis point fee on January 2, 2002 based on any outstanding borrowings and commitment on that date. In addition, on the amendment date, $25.0 million of the outstanding balance on the working capital revolver will be converted to the tranche B term loan, thereby reducing the commitment on the working capital revolver to $25.0 million. As of May 15, 2001, the Company has $22.3 million of unused availability on the working capital revolver portion of its Senior Secured loan credit facility of which $1.0 million is available for borrowings through June 30, 2001 and, subject to continued compliance, the full amount of the unused availability is available for borrowings starting July 1, 2001. The Company anticipates paying the remaining $6.7 million amortization due on June 30, 2001 on its Senior Secured loan credit facility from its existing cash and cash flow from operating activities through June 30, 2001. At May 15, 2001, the Company had $202.0 million outstanding on its Senior Secured loan credit facility. The Company is considering a variety of refinancing opportunities to completely pay off these obligations prior to January 2, 2002. However, there can be no assurances that the Company can complete a refinancing on more favorable terms. On May 20, 2001, promissory notes of approximately $3.9 million secured by the pledge of 100% of the ownership interests of Macon Hotel Associates, L.L.C. ("MHA") are due. The Company owns a 60% controlling interest in MHA. MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA and the Company do not intend to make this payment on May 20, 2001. MHA and the Company are cooperating with the note holders in marketing the hotel for sale. As of March 31, 2001, the Company has recorded an impairment charge of $2.2 million to reduce the carrying value of the hotel to the outstanding debt balance, which includes the promissory notes discussed above and a $7.8 million first mortgage. Based on the estimated sales price of the property, there will not be any remaining net proceeds available for MHA or the Company. The Company believes that the combination of its current cash position, cash flows from operations, availability on the revolving credit facility and net proceeds from property sales (both properties identified and to be identified) will provide sufficient liquidity to fund the Company's operating, capital expenditure and debt service obligations through December 31, 2001. INFLATION The rate of inflation has not had a material effect on the Company's revenues or costs and expenses in recent years and it is not anticipated that inflation will have a material effect on the Company in the near term. 23 26 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In July 1999, a contractor hired by Servico to perform work on hotels in New York, Illinois and Texas filed a complaint against the Company in the Supreme Court of the State of New York, claiming breach of contract, quantum meruit and fraud, among other claims. The contractor seeks damages totaling $80 million, including $60 million for punitive damages. The Company answered the complaint asserting counterclaims aggregating $20 million and successfully filed a motion to dismiss the claims related to two properties located in Illinois and Texas. In October 1999, a subcontractor filed a lawsuit in Texas against the above contractor and the Company. The Company has filed an answer and cross-claim against the contractor in the amount of $2.8 million. In February 2000, the contractor filed a lawsuit in Texas claiming an undisclosed amount of actual damages and punitive damages. The Company answered the complaint and asserted a counterclaim. The Company has also filed a lawsuit against the contractor in Federal District Court in Illinois, seeking $2 million. The contractor has filed an answer and counterclaim aggregating $2.8 million in actual damages and $10 million in punitive damages. On March 1, 2001, a New York court dismissed all of the contractor's claims based upon fraud, effectively reducing the plaintiff's outstanding claims by $40 million. The contractor subsequently agreed to withdraw its claims for punitive damages in the Illinois action. The Company believes that it has valid defenses and counterclaims to the contractor's remaining claims and that the outcome will not have a material adverse effect on its financial position or results of operations. On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an arbitration claim against the Company claiming breach of contract relating to a January 4, 1992 contract. WH claims entitlement to profit participation relating to the sale of certain hotel properties by an affiliate and predecessor of the Company. Although the Demand for Arbitration does not make a specific damages demand WH claimed in its preliminary statement it is owed $754,500. Management believes it has meritorious defenses to this matter and is defending it vigorously. In 1999 and 2000, a total of six class actions were filed in the Delaware Court of Chancery on behalf of all security holders of the Company. Named as defendants in each of the actions were the Company and six of the Company's directors and/or officers. The complaints alleged, among other things: (1) that the individual defendants breached their fiduciary duties in connection with an offer by Casuarina Cayman Holdings Ltd. ("Casuarina") to acquire all of the Company's outstanding common stock; (2) that the director defendants breached their fiduciary duties in connection with effecting certain changes to the size and composition of the Company's Board of Directors in connection with certain agreements entered into by the Company regarding a potential sale of the Company to Whitehall Street Real Estate Limited Partnership XIII and Whitehall Parallel Real Estate Limited Partnership XIII ("Whitehall") and (3) that the individual defendants breached their fiduciary obligations in connection with their consideration of certain conditional offers received by the Company regarding a potential sale of the Company. The complaints sought injunctive relief and compensatory damages in unspecified amounts. The Delaware court created one consolidated class action in November 2000 (the "Consolidated Action"). The defendants to the Consolidated Action are not obligated to respond to the complaint in the Consolidated Action until three weeks after the plaintiffs have requested such a response. As of this date, the plaintiffs have not requested a response from the defendants. In October 2000, a class action was filed in the Superior Court of the State of Georgia, Fulton County. Named as defendants are the Company, six of the Company's directors and/or officers, and Whitehall. The complaint alleges, among other things, that the individual defendants breached their fiduciary duties in connection with certain agreements entered into with Whitehall regarding a potential sale of the Company to those entities. The complaint also alleges that Whitehall aided and abetted the alleged breach of fiduciary duty by the individual defendants. Although the ultimate outcome of these class action litigations cannot be predicted with certainty, it is the opinion of management that the resolution of these class actions will not have a material adverse effect on the Company's financial position or results of operations. 24 27 In 2000, several actions were filed in Delaware Court of Chancery by Casuarina and Edgecliff Holdings, LLC ("Edgecliff"). Named as defendants were the Company and five of its directors and/or officers. The complaints alleged, among other things: (1) that the defendant directors breached their fiduciary duties in connection with effecting certain changes to the size and composition of the Company's Board of Directors and sought declaratory and injunctive relief; and (2) that the Company had not timely scheduled its annual meeting of shareholders in accordance with Section 211 of the Delaware General Corporation Law. The complaints also challenged the Company's decision to postpone its annual meeting from October 12 to October 20, 2000 in response to the offer received by the Company from Whitehall. The court granted plaintiff's motion for summary judgment to the limited extent that the court required the Company to hold the annual meeting on October 20, 2000, the rescheduled date on which the Company had planned to hold the meeting, All of these actions were dismissed on April 13, 2001. The Company is a party to other legal proceedings arising in the ordinary course of business, the impact of which would not, either individually or in the aggregate, in management's opinion, have a material adverse effect on its financial position or results of operations. ITEM 2. CHANGES IN SECURITIES The Company has not paid any cash dividends since the Merger and has no current plans to initiate the payment of dividends. The Company currently anticipates that it will retain any future earnings for use in its business. The Board of Directors of the Company will determine future dividend policies based on the Company's financial condition, profitability, cash flow, capital requirements and business outlook, among other factors. The Company's ability to pay dividends is restricted by the Indenture governing the Company's 12 1/4% Senior Subordinated Notes Due 2009 (the "Notes"), the Company's credit agreement dated as of July 23, 1999 among the Company, Lodgian Financing Corp., certain other of the Company's subsidiaries and the banks named therein, and the Indenture governing the Company's Convertible Redeemable Equity Structure Trust Securities ("CRESTS"). On June 30, 2000, the Company exercised its rights to begin the deferral of dividend payments on the CRESTS, effective with the interest payment due June 30, 2000. Pursuant to the terms of the instrument, the Company has the right to defer payment for up to twenty quarters (the "Extension Period"), during which Extension Period no interest shall be due and payable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits No exhibits are required to be filed as part of this Report on Form 10-Q. (b) Reports on Form 8-K A report on Form 8-K was filed on March 28, 2001 relating to proforma financial statements on the sale of ten hotels. 25 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LODGIAN, INC. Date: May 15, 2001 By: /s/ THOMAS ARASI ------------------------------------- THOMAS ARASI President and Chief Executive Officer Date: May 15, 2001 By: /s/ THOMAS R. EPPICH ------------------------------------- THOMAS R. EPPICH Chief Financial Officer 26