-----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, HJp9GM5oAat/jntyDDhyqYVcOhlluz5mzIX2CsJVfRKAudS0EyQU9traSgDE+t1K 7FlNuALN1AU5C+dCK2wM1w== 0000950144-01-509265.txt : 20020410 0000950144-01-509265.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950144-01-509265 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1934 Act SEC FILE NUMBER: 001-14537 FILM NUMBER: 1791435 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 g72840e10-q.txt LODGIAN, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NO. 1-14537 ------- LODGIAN, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-2093696 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3445 PEACHTREE ROAD, N.E., SUITE 700, ATLANTA, GA 30326 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (404) 364-9400 (Former name, former address and former fiscal year, if changed since last report): NOT APPLICABLE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS OUTSTANDING AS OF NOVEMBER 1, 2001 - ----------------------------- ------------------------------------- Common 28,479,837 LODGIAN, INC. AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000......................................................... 1 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000 ...................... 2 (unaudited)............. Condensed Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 2001 (unaudited) and for the Year Ended December 31, 2000.................................................. 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 (unaudited)..................... 4 Notes to Condensed Consolidated Financial Statements (unaudited).............. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................. 32 Item 2. Changes in Securities......................................................... 32 Item 6. Exhibits and Reports on Form 8-K.............................................. 33 Signatures .............................................................................. 34
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2001 2000 (UNAUDITED) ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents ................................................. $ 5,625 $ 21,002 Cash, restricted .......................................................... 2,996 2,237 Accounts receivable, net of allowances .................................... 17,598 20,624 Inventories ............................................................... 7,268 7,805 Prepaid expenses and other current assets ................................. 9,123 9,261 ----------- ----------- Total current assets ............................................... 42,610 60,929 Property and equipment, net .................................................... 992,231 1,059,048 Deposits for capital expenditures .............................................. 14,422 14,005 Other assets, net .............................................................. 23,969 29,965 ----------- ----------- $ 1,073,232 $ 1,163,947 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ......................................................... $ 18,658 $ 25,088 Accrued interest ......................................................... 8,782 16,795 Other accrued liabilities ................................................ 34,456 37,203 Advance deposits ......................................................... 2,062 1,854 Current portion of long-term obligations ................................. 701,358 79,843 Minority interests - preferred redeemable securities (including related accrued interest) ............................................... 194,198 -- ----------- ----------- Total current liabilities .......................................... 959,514 160,783 Long-term obligations, less current portion .................................... -- 674,038 Deferred income taxes .......................................................... 3,603 3,603 Minority interests: Preferred redeemable securities (including related accrued interest) ..... -- 184,349 Other .................................................................... 5,547 4,294 ----------- ----------- Total liabilities .................................................. 968,664 1,027,067 Commitments and contingencies .................................................. -- -- Stockholders' equity: Common stock, $.01 par value, 75,000,000 shares authorized; 28,479,837 and 28,139,481 issued at September 30, 2001 and December 31, 2000, respectively; 28,479,837 and 28,290,424 shares outstanding at September 30, 2001 and December 31, 2000, respectively ............................................ 284 282 Additional paid-in capital .................................................. 263,687 263,320 Accumulated deficit ......................................................... (157,533) (125,542) Accumulated other comprehensive loss ........................................ (1,870) (1,180) ----------- ----------- Total stockholders' equity ........................................... 104,568 136,880 ----------- ----------- $ 1,073,232 $ 1,163,947 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Revenues: Rooms .............................................. $ 85,161 $ 117,425 $ 261,116 $ 334,643 Food and beverage .................................. 21,777 30,772 74,778 98,721 Other .............................................. 4,436 7,007 16,150 21,262 ------------- ------------- ------------- ------------- 111,374 155,204 352,044 454,626 ------------- ------------- ------------- ------------- Operating expenses: Direct: Rooms ............................................ 23,227 32,827 71,604 93,326 Food and beverage ................................ 16,886 23,719 55,041 72,402 Other ............................................ 2,932 4,225 9,281 13,142 General, administrative and other .................... 47,554 56,178 148,716 168,037 Depreciation and amortization ........................ 14,471 16,908 44,619 49,348 Impairment of long-lived assets ...................... 2,270 (10,712) 6,835 55,450 Severance and restructuring expenses ................. 624 -- 2,091 1,502 ------------- ------------- ------------- ------------- Total operating expenses ....................... 107,964 123,145 338,187 453,207 ------------- ------------- ------------- ------------- 3,410 32,059 13,857 1,419 Other income (expenses): Interest income and other .......................... 158 467 638 1,200 Interest expense ................................... (18,464) (24,596) (57,833) (74,426) Interest hedge break fee ........................... -- (4,294) -- (4,294) Gain (loss) on asset dispositions .................. 97 (21) 24,206 (24) Minority interests: Preferred redeemable securities .................... (3,340) (3,063) (9,849) (9,190) Other .............................................. (65) 250 (181) (293) ------------- ------------- ------------- ------------- (Loss) income before income taxes .................... (18,204) 802 (29,162) (85,608) (Provision) benefit for income taxes ................ (129) (275) (2,829) 29,105 ------------- ------------- ------------- ------------- Net (loss) income .................................... $ (18,333) $ 527 $ (31,991) $ (56,503) ============= ============= ============= ============= (Loss) earnings per common share - basic and diluted . $ (0.64) $ 0.02 $ (1.12) $ (2.01) ============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL ------------------------------ PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY ------------- ------------- ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1999 .... 28,130,325 $ 281 $ 262,760 $ (37,587) $ (912) $ 224,542 401(k) Plan contribution ........ 144,131 1 504 -- -- 505 Director compensation ........... 15,968 56 -- -- 56 Net loss ........................ -- -- -- (87,955) -- (87,955) Currency translation adjustments ..................... -- -- -- -- (268) (268) ------------- Comprehensive loss .............. -- -- -- -- -- (88,223) ------------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2000 .... 28,290,424 282 263,320 (125,542) (1,180) 136,880 401(k) Plan contribution ........ 189,413 2 367 369 Net loss ........................ -- -- -- (31,991) -- (31,991) Currency translation adjustments .................. -- -- -- -- (690) (690) ------------- Comprehensive loss .............. (32,681) ------------- ------------- ------------- ------------- ------------- ------------- Balance at September 30, 2001 ... 28,479,837 $ 284 $ 263,687 $ (157,533) $ (1,870) $ 104,568 ============= ============= ============= ============= ============= =============
The comprehensive loss for the nine months ended September 30, 2000 was $56.5 million and for the three months ended September 30, 2001 was $18.8 million. The comprehensive income for the three months ended September 30, 2000 was $0.5 million. The data for the three and nine months ended September 30, 2001 and 2000 is unaudited. The accompanying notes are an integral part of these condensed consolidated financial statements. 3 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2001 2000 --------- --------- (IN THOUSANDS) (UNAUDITED) Operating activities: Net loss ........................................................... $ (31,991) $ (56,503) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization .................................... 44,619 49,348 (Gain) loss on sale of assets .................................... (24,206) 24 Deferred income tax benefit ...................................... -- (29,105) Minority interests ............................................... 10,030 9,483 Impairment of long-lived assets .................................. 6,835 55,450 401 (k) plan contributions ....................................... 369 376 Amortization of deferred loan fees ............................... 4,620 3,460 Other ............................................................ (171) (3,404) Changes in operating assets and liabilities: Accounts receivable .......................................... 3,026 (1,307) Inventories .................................................. 537 1,035 Prepaid expenses and other assets ............................ (621) (1,502) Accounts payable ............................................. (7,283) (3,834) Accrued liabilities .......................................... (10,760) (4,635) Advance deposits ............................................. 208 (278) --------- --------- Net cash (used in) provided by operating activities .................. (4,788) 18,608 Investing activities: Capital improvements, net .......................................... (21,528) (72,044) Proceeds from sale of assets, net .................................. 64,590 164,455 Net deposits for capital expenditures .............................. (417) (2,970) --------- --------- Net cash provided by investing activities ........................... 42,645 89,441 Financing activities: Proceeds from borrowings on working capital revolver ............... 16,000 30,000 Proceeds from issuance of long-term obligations .................... -- 2,326 Principal payments on long-term obligations ........................ (53,669) (131,520) Principal payments on working capital revolver ..................... (15,000) (5,000) Payments of deferred loan costs .................................... (565) (3,300) Distributions to minority interests ................................ -- (683) --------- --------- Net cash used in financing activities .............................. (53,234) (108,177) --------- --------- Net decrease in cash and cash equivalents ............................ (15,377) (128) Cash and cash equivalents at beginning of period ..................... 21,002 14,644 --------- --------- Cash and cash equivalents at end of period ........................... $ 5,625 $ 14,516 ========= ========= Supplemental cash flow information: Cash paid during the period for: Interest, net of amount capitalized ................................ $ 61,226 $ 71,767 ========= ========= Income taxes, net of refunds ....................................... $ 103 $ 584 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The condensed consolidated financial statements include the accounts of Lodgian, Inc., its wholly-owned subsidiaries and five partnerships in which Lodgian exercises control (collectively "Lodgian" or the "Company"). Lodgian believes it has control of partnerships when the Company manages and has control of the partnerships' assets and operations, has the ability and authority to enter into financing arrangements on behalf of the entity or to sell the assets of the entity within reasonable business guidelines. One unconsolidated entity (owning 1 hotel) is accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting policies followed for quarterly financial reporting are the same as those disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2001, and the results of its operations for the three and nine months ended September 30, 2001 and 2000 and its cash flows for the nine months ended September 30, 2001 and 2000. The results for interim periods are not necessarily indicative of the results for the entire year. While management believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts in the financial statements in order to conform to the current period presentation. 2. MATTERS AFFECTING BUSINESS The Company's future financial condition and results of operations are subject to a number of risks and uncertainties, some of which are set forth below and in other sections of this Form 10-Q. SUBSTANTIAL LEVERAGE The Company has indebtedness which is substantial in relation to its stockholders' equity. As of September 30, 2001, the Company had total debt of approximately $701.4 million (excluding Preferred Redeemable Securities of $194.2 million and $64.0 million of trade payables, other accrued liabilities and advance deposits). Stockholders' equity as of September 30, 2001 is approximately $104.6 million. In addition, as further discussed in Note 7, the Company has additional borrowings available under its revolving credit facility but the Company's ability to draw down on this availability is subject to the approval of the lenders. The Company's leveraged financial position exposes it to the risk of increased interest rates, may impede its ability to obtain financing in the future for working capital, capital expenditures and general corporate purposes, and may make the Company more vulnerable to economic downturns and limit its ability to withstand competitive pressures. The Company's debt instruments contain a number of covenants, which limit the ability of the Company to, among other things, incur debt and incur liens. 5 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company will need to use a large portion of its future cash flows to pay principal and interest on its debt obligations, which will reduce the amount of money available for use in its operations or for responding to potential business opportunities if these arise. The Company does not anticipate being able to generate the cash necessary to service its debt obligations and may further reduce or delay capital expenditures, sell assets, restructure its debt or seek additional equity capital. There can be no assurance that any of these actions can be effected on commercially reasonable terms, if at all, and the terms of existing or future indebtedness may restrict the Company from adopting any of these alternatives. Based on its third quarter 2001 results, the Company is not in compliance with the financial covenants related to its Senior Secured Loan Credit Facility (the senior facility), on which, as of November 14, 2001, the Company has outstanding borrowings of $196.2 million. However on November 13, 2001, the Company reached an agreement in principle with the lenders of this facility (the senior lenders) with respect to the financial covenant violations, pursuant to which the senior lenders agreed to forbear from the exercise of their default-related remedies against the Company until December 31, 2001 (unless an additional event of default occurs earlier). The Company expects to formally execute the forbearance agreement within the next few days. The forbearance agreement also reduced the commitment on the working capital revolver from $25.0 million to $13.4 million leaving the Company with $3.0 million of unused availability on the working capital revolver portion of the senior facility. The forbearance agreement also requires that the remaining $3.0 million be used only to pay the interest in respect of the senior facility due on November 15, 2001 and that the Company make semi-monthly interest payments on the senior facility. The Company also anticipates that it will not be able to make the remaining $36.0 million of required special amortization payments to its senior lenders due December 31, 2001 and is working with its senior lenders to seek an acceptable resolution of these problems. There can be no assurance that the Company will be successful in such negotiations and there is not certainty as to what actions the senior lenders may take if the Company is unable to negotiate a resolution. The Company anticipates that because of limited liquidity it will not be making the $12.3 million interest payment due January 15, 2002 to the holders of the Company's Senior Subordinated Notes. In addition, as a result of the events of default with respect to its Senior Secured Loan Facility, the Company's Senior Subordinated Notes and the CRESTS are also in default due to cross-default provisions in those agreements. The Company intends to attempt to negotiate a debt restructuring with both the holders of the Senior Subordinated Notes and the holders of the CRESTS. There can be no assurances that the Company will be successful in such negotiations and there is no certainty as to what actions the lenders may take if the Company is unable to negotiate a resolution. Any further failure of the Company to comply with the covenants contained in its debt instruments, or to adequately service its debt obligations, could result in additional defaults under its debt instruments. If a default occurs under any of the Company's debt instruments (including the CRESTS) the lenders thereunder may elect to declare all associated borrowings outstanding, together with interest and fees, to be immediately due and payable. If the Company was unable to repay any borrowings when due, the lenders thereunder would have the right to proceed against the collateral available to them to secure the debt. Certain defaults under the Company's debt instruments, particularly any default that results in acceleration of indebtedness or foreclosure on collateral, would have a material adverse effect on the Company. As a result of the events of default currently existing with respect to the Company's Senior Secured Loan Facility, the Senior Subordinated Notes and the CRESTS, the uncertainty regarding the Company's ability to generate the liquidity necessary to meet its debt obligations as they become due and payable, and the uncertainty regarding the Company's ability to comply with its debt covenants, the Company believes that future defaults with respect to its debt agreements are likely within the next twelve months. Consequently, the Company has classified all of its debt and the CRESTS as current liabilities in the accompanying financial statements. 6 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS COMPETITION The hotel industry is highly competitive, as the Company currently competes with other major hoteliers of varying sizes. Competition within the industry may also increase due to the recent economic downturn. See Item 2. Management Discussion and Analysis of financial condition for a discussion on the impact on the Company's results. DEPENDENCE ON KEY PERSONNEL The success of the Company is also dependent upon its senior management team, as well as its ability to attract and retain qualified personnel. There is no assurance that the Company will be able to retain its existing senior management or to attract additional qualified personnel. The Company has been subject to recent management changes as disclosed in Note 10 to these financial statements. LIQUIDITY Amidst the challenges of the current economic environment and the specific challenges peculiar to the Company, particularly those adversely impacting the hospitality industry and the Company since the events of September 11, 2001, management considers the restructuring of its debt obligations and the availability of additional liquidity to be critical if the Company is to have sufficient liquidity to fund its operating, capital expenditures and debt service obligations beyond December 31, 2001. The Company does not anticipate having sufficient liquidity without such a restructuring. If the Company executes a restructuring of its debt terms, it may recognize a charge to write-off all or a portion of the deferred financing costs currently capitalized. 3. GOING CONCERN The Company's independent auditors have indicated that if the Company is unsuccessful in obtaining waivers or amendments to cure existing or probable future events of default with respect to its debt agreements and is unsuccessful in restructuring its current debt obligations on terms sufficient to provide the Company with the liquidity necessary to fund its operating, capital expenditure and debt service obligations, their report on the Company's financial statements for the year ending December 31, 2001 will likely contain a modification as to the Company's ability to continue as a going concern. 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net (loss) income $ (18,333) $ 527 $ (31,991) $ (56,503) ============ ============ ============ ============ Denominator: Denominator for basic and diluted earnings per share-weighted-average shares 28,685 28,251 28,465 28,055 ============ ============ ============ ============ Basic and diluted earnings per share: Net (loss) income $ (0.64) $ 0.02 $ (1.12) $ (2.01) ============ ============ ============ ============
The computation of diluted earnings per share does not include shares associated with the assumed conversion of the Convertible Redeemable Equity Structure Trust Securities (CRESTS) or stock options because their inclusion would have been antidilutive. 7 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. ASSET DISPOSITIONS AND DEBT REDUCTIONS As discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 6 to the financial statements, at the end of 1999, the Company's Board of Directors adopted a strategic plan to reduce the size of the Company's non-core hotel portfolio and in 2000 adopted a strategic plan to reduce the level of overall debt of the Company. Pursuant to these strategic plans, the Company sold twenty-five hotel properties as well as four other assets between January 1, 2000 and November 14, 2001. Gross sales price of these twenty-nine properties was $285.2 million while the reduction of debt was $216.6 million. The balance was used primarily to support capital expenditures related to major renovation projects and the construction of one new hotel, which was sold prior to completion. A breakdown of the property sales by period is as follows:
PROPERTIES GROSS SALES DEBT PERIOD SOLD PRICE REDUCTION - -------------------------------- ----------- ----------- ----------- January 1, to December 31, 2000 23 $ 208.8 $ 151.1 January 1, to March 31, 2001 2 66.2 55.8 April 1, to June 30, 2001 3 6.0 5.7 July 1, to September 30, 2001 -- -- -- October 1, to November 14, 2001 1 4.2 4.0 ----------- ----------- ----------- 29 $ 285.2 $ 216.6 =========== =========== ===========
Included in the twenty-three properties sold in 2000 was a group of ten hotels, located in the western United States, which were sold to a single unaffiliated third party purchaser on August 31, 2000. The gross sales price was $132 million and the net proceeds of $118 million, after deducting closing costs and prorations, were used to pay down debt. The following unaudited proforma information is presented as if the Company had completed the sale of the ten hotels, located in the western United States, as of January 1, 2000. This proforma information is not necessarily indicative of what the actual results would have been for the three and nine months ended September 30, 2000, nor does it purport to represent the results for future periods and does not represent the effect of the sales of the remaining nineteen properties.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ------------------ ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues $ 144,035 $ 417,004 Net income (loss) $ 1,899 $ (17,281) Net income (loss) per common share, basic and diluted $ 0.07 $ (0.61)
The Company's total outstanding debt as of November 14, 2001 (excluding CRESTS) was approximately $701.4 million. Of this amount, $41.6 million was originally scheduled as due during the remainder of 2001. As of November 14, 2001, the Company's held for sale properties (5 properties) have an estimated fair value of approximately $22.9 million. The Company may continue to sell assets to partly fund its remaining $41.6 million amortization payment requirements in 2001 and its capital improvement program, as discussed in the Liquidity and Capital Resources section following. However, amidst the challenges of the current economic environment, the Company does not believe it will be able to sell sufficient assets, if any, to meet its obligations for the remainder of 2001 and is therefore actively pursuing a restructuring of its outstanding debt. There can be no assurance that a restructuring will occur or that if a restructuring does occur, that the 8 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Company will have sufficient liquidity to meet its continuing obligations. As previously discussed in Note 3, if the Company is unsuccessful in restructuring its debt obligations and in generating sufficient liquidity to meet its continuing operating and capital obligations, the auditors' report on the financial statements for the year ending December 31, 2001 will likely contain a modification as to the Company's ability to continue as a going concern. 6. ASSETS HELD FOR SALE As discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 5 to the financial statements, the Company had adopted strategic plans to reduce the size of the Company's non-core hotel portfolio and reduce the level of overall debt of the Company. In this regard, the Company identified properties which it classified as held for sale to meet these objectives. Impairment charges for the nine month period ended September 30, 2001 were $6.8 million. This consisted of charges of $0.5 million, $4.0 million and $2.3 million in the first, second and third quarters, respectively. The Company's first quarter charge of $0.5 million was comprised of $4.2 million related to revised estimates of fair value for properties held for sale and held for investment at March 31, 2001, net of a recapture of $3.7 million of impairment charges as one hotel previously considered held for sale was no longer being actively marketed for sale. The second quarter charge of $4.0 million related to one property which was identified as held for sale and also sold in the second quarter of 2001. The third quarter charge of $2.3 million related to revised estimates of fair value for properties held for sale at September 30, 2001, one of which was sold in the fourth quarter of 2001. Impairment charges for the nine month period ended September 30, 2000 were $55.5 million. This consisted of a first quarter charge of $9.6 million related to revised estimates of fair value for properties held for sale at December 31, 1999, a second quarter charge of $56.6 million related to the ten hotels sold to Sunstone Investors, LLC on August 31, 2000 and a third quarter impairment recapture of $10.7 million related to seven hotels previously considered held for sale which were no longer being actively marketed. The Company may incur additional impairment charges in subsequent quarters if it identifies additional properties to be disposed of or if other events occur, with respect to the Company's expected future use of its properties and the amount of estimated future undiscounted future cash flows expected thereon. Summary results of operations included in the Condensed Consolidated Statements of Operations with respect to the properties identified as held for sale at September 30, 2001 are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues $ 3,126 $ 3,720 $ 9,564 $ 10,956 =========== =========== =========== =========== (Loss) income before income taxes $ (1,675)(1) $ 870(1) $ (1,533)(2) $ (111)(2) =========== =========== =========== ===========
(1) Includes impairment charges of $2.3 million for the three months ended September 30, 2001 ($0 for the three months ended September 30, 2000). (2) Includes impairment charges of $3.3 million and $2.8 million, for the nine months ended September 30, 2001 and 2000, respectively. Included in property and equipment is $21.3 million (5 properties) and $39.8 million (10 properties) related to properties identified as held for sale at September 30, 2001 and December 31, 2000, respectively. 9 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7. FORBEARANCE, DEBT AMENDMENTS AND COVENANTS On May 15, 2001, the Company and the lenders of its Senior Secured Loan Credit Facility reached an agreement to amend that facility. Prior to the amendment, the Company would have been in violation of two financial covenant ratios based on its first quarter 2001 operating results. The amendment increased the interest rate spread (which was then LIBOR plus 4.25%) by 25 basis points in each month from August 2001 to February 2002 up to a maximum of LIBOR plus 6.00% until maturity. The amendment also provided that the interest rate spread would increase an additional 25 basis points up to a maximum of LIBOR plus 6.00% if the company's debt was downgraded by a rating agency subsequent to the amendment date (the downgrade occurred in May 2001). In addition, the interest rate spread will decrease 50 basis points for each aggregate $60.0 million of principal reductions made subsequent to the amendment date as long as the Company is in compliance with certain financial coverage ratios. The amendment also required additional amortization payments on the tranche B term loans of $7.5 million on April 30, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, respectively. The amendment also modified various covenants and financial coverage ratios. The Company paid an amendment fee of $565,000 on the date of the amendment and is obligated to pay an additional 75 basis point fee on January 2, 2002 based on any outstanding borrowings and commitments on that date. In addition, on the amendment date, $25.0 million of the outstanding balance on the working capital revolver was converted to the tranche B term loan, thereby reducing the commitment on the working capital revolver to $25.0 million as of May 15, 2001. Based on its third quarter 2001 results, the Company is not in compliance with the financial covenants related to its Senior Secured Loan Credit Facility (the senior facility), on which, as of November 14, 2001 the Company has outstanding borrowings of $196.2 million. However on November 13, 2001, the Company has reached an agreement in principle with the lenders of this facility (the senior lenders) with respect to the financial covenant violations, pursuant to which the senior lenders agreed to forbear from the exercise of their default-related remedies against the Company until December 31, 2001 (unless an additional event of default occurs earlier). The Company expects to formally execute the forbearance agreement within the next few days. The forbearance agreement also reduced the commitment on the working capital revolver from $25.0 million to $13.4 million leaving the Company with $3.0 million of unused availability on the working capital revolver portion of the senior facility. The forbearance agreement also requires that the remaining $3.0 million be used only to pay the interest in respect of the senior facility due on November 15, 2001 and that the Company make semi-monthly payments on the senior facility. The Company also anticipates that it will not be able to make the remaining $36.0 million of required special amortization payments to its senior lenders due December 31, 2001 and is working with its senior lenders to seek an acceptable resolution of these problems. There can be no assurance that the Company will be successful in such negotiations and there is no certainty as to what actions the senior lenders may take if the Company is unable to negotiate a resolution. The Company anticipates that because of limited liquidity it will not be making the $12.3 million interest payment due January 15, 2002 to the holders of the Company's Senior Subordinated Notes. In addition, as a result of the events of default with respect to its Senior Secured Loan Facility, the Company's Senior Subordinated Notes and the CRESTS are also in default due to cross-default provisions in those agreements. The Company intends to attempt to negotiate a debt restructuring with both the holders of the Senior Subordinated Notes and the holders of the CRESTS. There can be no assurances that the Company will be successful in such negotiations and there is no certainty as to what actions the lenders may take if the Company is unable to negotiate a resolution. As a result of the events of default currently existing with respect to the Company's Senior Secured Loan Facility, the Senior Subordinated Notes and the CRESTS, the uncertainty regarding the Company's ability to generate the liquidity necessary to meet its debt obligations as they become due and payable, and the uncertainty regarding the Company's ability to comply with its debt covenants, the Company believes that future defaults with respect to its debt agreements are likely within the next twelve months. Consequently, the Company has classified all of its debt and the CRESTS as current liabilities in the accompanying financial statements. 10 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company's independent auditors have indicated that if the Company is unsuccessful in obtaining waivers or amendments to cure existing or probable future events of default with respect to its debt agreements and is unsuccessful in restructuring its current debt obligations on terms sufficient to provide the Company with the liquidity necessary to fund its operating, capital expenditure and debt service obligations, their report on the Company's financial statements for the year ending December 31, 2001 will likely contain a modification as to the Company's ability to continue as a going concern. On May 20, 2001, promissory notes of approximately $3.9 million secured by the pledge of 100% of the ownership interests of Macon Hotel Associates, L.L.C. ("MHA") were due. The Company owns a 60% controlling interest in MHA. MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA and the Company did not make this payment on May 20, 2001. MHA and the Company are cooperating with the note holders in marketing the hotel for sale and entered into a Forbearance Agreement related to the debt. During the first quarter of 2001, the Company recorded an impairment charge of $2.2 million to reduce the carrying value of the hotel to the outstanding debt balance, which includes the promissory notes discussed above and a $7.8 million first mortgage. Based on the estimated sales price of the property, which approximates the amount of the debt outstanding, there will not be any remaining net proceeds available for MHA or the Company. The Company is subject to certain property maintenance and quality standard compliance requirements under its franchise agreements. The Company periodically receives notifications from its franchisors of events of noncompliance with such agreements and may continue to receive notifications if the liquidity and cash constraints of the Company limit its ability to comply with its franchise agreements. In the past, management has cured most cases of noncompliance within the applicable cure periods and the events of noncompliance did not result in events of default under the respective loan agreements. However, in selected situations, as warranted, based on economic evaluations, management may elect to not comply with the franchisor requirements. In such situations, the Company will either select an alternative franchisor or operate the property independent of any franchisor. Management has not been notified of nor does it believe it is currently in noncompliance with any of its loan agreements as a result of noncompliance with its franchise agreements as of September 30, 2001. However, given the Company's current financial condition and the current economic environment, there can be no assurance that future events of noncompliance will not occur with respect to its franchisor agreements, causing the Company to go into default with respect to the related loan agreements. 8. SEVERANCE EXPENSES On February 9, 2001, a former Chief Executive Officer and President (the Officer) and Lodgian entered into a Separation Agreement. On this date, the Officer, with the Company's consent, resigned his position and continued as a non-officer employee through March 2, 2001. The Officer received a severance payment of $750,000 in full settlement of all amounts due by reason of the termination of his employment agreement. This severance payment is included in severance and restructuring expenses on the Statement of Operations. The Company and the Officer released one another from all claims arising out of his employment with the Company. In addition, any future contingent development fee obligations arising from the Company acquiring or developing any hotels or properties identified in the Merger Agreement as Impac's acquisition land development pipeline also ceased. In addition, during 2001, the Company, in an effort to reduce expenses, instituted a plan to reduce hotel level employees and to eliminate certain positions at the corporate office. As part of this plan, the equivalent of over 1600 full time employees were expected to be terminated at the hotels while 39 employees were terminated at the Corporate office. Approximately 1800 full time equivalents were terminated under the plan. In 2001, the Company recognized a charge of approximately $0.8 million to implement this plan. All of this charge related to salary and benefits of the terminated employees. As of September 30, 2001, $0.5 million had already been paid. The corporate component of this charge ($0.1 million for the third quarter 2001 and $0.7 million for the nine months ended September 30, 2001) is reflected in severance and restructuring expenses on the Statement of Operations while the hotel level component is reflected in direct operating expenses and in general, administrative and other expenses. 11 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9. INCOME TAXES The Company recognized an income tax provision of $2.7 million for the nine months ended September 30, 2001. This related, primarily, to a provision for state income taxes on the gain on sale of one hotel. There were no operating losses to offset this gain. In addition, the Company paid Canadian federal income taxes of $0.1 million as a result of its Canadian operations. 10. MANAGEMENT STRUCTURE - On July 12, 2001, one of the Company's directors, Lewis N. Wolff resigned from his position on the Board of Directors. The resignation took effect on July 12, 2001 and was as a result of the time commitment needed to serve on the board. - On and with effect from October 1, 2001, Tom Arasi, the Company's former President and Chief Executive Officer resigned to pursue other opportunities. - On October 1, 2001, the Board of Directors named David E. Hawthorne as the Company's interim Chief Executive Officer and President. The executive was permanently appointed on November 1, 2001. - On October 11, 2001, William J. Yung resigned from the Board of Directors. The resignation took effect on October 11, 2001 and was tendered for personal reasons. - Effective October 12, 2001, Thomas Stoughton, the former Senior Vice President of Finance resigned to pursue other opportunities. - On October 12, 2001, Thomas Gryboski, the Company's Vice President of Legal Affairs and Secretary resigned to pursue other opportunities. The resignation will take effect on November 15, 2001. - On November 1, 2001, the Company's Executive Vice President and Chief Operating Officer, Karyn Marasco resigned to pursue other opportunities. The resignation will take effect on November 30, 2001. - On November 13, 2001, Richard Cartoon was appointed Executive Vice President and Chief Financial Officer, Michael Amaral was appointed Senior Vice President of Operations and Daniel Ellis was appointed Secretary and Vice President of Legal Affairs and Risk Management. 11. REGULATION The Company has been notified by the New York Stock Exchange (the "Exchange") that it is not in compliance with the Exchange's continuing listing requirements because the average closing price of Lodgian stock was less than the $1.00 per share limit over a consecutive thirty trading day period. The Company is considering actions that may be taken in order to bring itself into compliance with the Exchange's requirements. The Company believes that it has until its annual shareholders' meeting in 2002 to remedy this lack of compliance. The Company has been notified more recently by the Exchange that it is also not in compliance with the Exchange's continuing listing requirements because the Company's total market capitalization has fallen below $15 million over a consecutive thirty trading day period. Pursuant to Exchange requirements relating to this listing standard, the Company is required to promptly demonstrate to the Exchange that it has a plan to come into compliance with the minimum market capitalization requirement or be subject to suspension of trading and de-listing. The Company is considering actions that may be taken to bring itself into compliance with the Exchange's requirements, but, in particular because the Company's share price has been abnormally low, there can be no assurance that the Company's plans will be acceptable to the Exchange. 12 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. COMMITMENTS AND CONTINGENCIES The Company is contingently liable in respect to three (3) irrevocable Letters of Credit totaling $7.4 million issued as guarantees to Zurich Insurance Company and Safeco Insurance Company of America. The Letters of Credit all expire in the third quarter of 2002 but may require renewal beyond that date. The Company is a party in litigation with Hospitality Restoration and Builders, Inc. ("HRB"), a general contractor hired to perform work on six (6) of the Company's hotels. The litigation involves hotels in Texas, Illinois, and New York. In general, HRB claims that the Company breached contracts to renovate the hotels by not paying for work performed. The Company contends that it was over-billed by HRB and that a significant portion of the completed work was defective. In July 2001, the parties agreed to settle the litigation pending in Texas and Illinois. In exchange for mutual dismissals and full releases, the Company has paid HRB $750,000. With respect to the matter pending in the state of New York, HRB claims that it is owed $10.7 million. The Company asserted a counterclaim of $7 million and believes that it has valid defenses and counterclaims to the contractor's remaining claims and that the outcome will not have a material adverse effect on its financial position or results of operations. On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an arbitration claim against the Company claiming breach of contract relating to a January 4, 1992 agreement. WH claimed entitlement to profit participation relating to the Company's acquisition of AMI Operating Partners, LP. WH sought damages totaling $764,500. The Company settled this matter by paying WH $100,000 in exchange for a full release. The Company and individual directors are parties to a class action lawsuit alleging that the defendants breached certain fiduciary duties in connection with various offers to acquire the Company. Although the ultimate outcome of this class action lawsuit cannot be predicted with certainty, it is the opinion of management that the resolution of this matter will not have a material adverse effect on its financial position or results of operations. The Company is a party to other legal proceedings arising in the ordinary course of business, the impact of which would not, either individually or in the aggregate, in management's opinion, have a material adverse effect on its financial position or results of operations. 13. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts, and derivatives used for hedging purposes. SFAS No. 133 requires that entities recognize all derivative financial instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 as amended by SFAS No. 137 and 138, was adopted by the Company in the first quarter of 2001. The adoption had no impact on the Company's financial statements. In June 2001, SFAS No. 141, "Business Combinations" (effective for transactions initiated after June 30, 2001) and SFAS 142 "Goodwill and other Intangible Assets" (effective for fiscal years beginning after December 15, 2001) were issued. SFAS No. 141 prohibits pooling-of interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. SFAS No. 141 was adopted by the Company in the current fiscal quarter. The adoption had no impact on the Company's financial statements. SFAS No. 142, which will be implemented in January 2002, is also expected to have no impact on the Company's financial statements. In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" (effective for fiscal periods commencing after June 15, 2002) and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (effective for fiscal periods commencing after December 15, 2001) were 13 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS issued. SFAS No. 143 requires that entities recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and among other factors, establishes criteria beyond that previously specified in Statement 121 to determine when a long-lived asset is to be considered as held for sale. The Company believes that the adoption of SFAS No. 143 will not have a significant impact on the Company's financial statements. The Company is currently evaluating the impact of SFAS 144. 14. SUPPLEMENTAL GUARANTOR INFORMATION In connection with the Company's sale of $200 million of 12 1/4% Senior Subordinated Notes (the "Notes") in July 1999, certain of the Company's subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's obligations to pay principal and interest with respect to the Notes. Each Subsidiary Guarantor is wholly-owned and management has determined that separate financial statements for the Subsidiary Guarantors are not material to investors. The subsidiaries of the Company that are not Subsidiary Guarantors are referred to in the note as the "Non-Guarantor Subsidiaries". The following supplemental condensed consolidating financial statements present balance sheets as of September 30, 2001 and December 31, 2000, statements of operations for the three and nine months ended September 30, 2001 and 2000 and cash flows for the nine months ended September 30, 2001 and 2000. In the condensed consolidating financial statements, Lodgian, Inc. (the "Parent") accounts for its investments in wholly owned subsidiaries using the equity method. 14 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2001
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------ ------------ ------------- (UNAUDITED IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ............................$ 6 $ 3,606 $ 2,013 $ -- $ 5,625 Cash, restricted ..................................... -- -- 2,996 -- 2,996 Accounts receivable, net of allowances ............... -- 8,100 9,498 -- 17,598 Inventories .......................................... -- 3,286 3,982 -- 7,268 Prepaid expenses and other current assets ............ 3,603 138 5,382 -- 9,123 ------------ ------------ ------------ ------------ ------------ Total current assets .......................... 3,609 15,130 23,871 -- 42,610 Property and equipment, net ............................... -- 534,934 457,297 -- 992,231 Deposits for capital expenditures ......................... -- 140 14,282 -- 14,422 Investment in consolidated entities ....................... (335,505) -- -- 335,505 -- Due from (to) affiliates .................................. 446,128 (257,193) (188,935) -- -- Other assets, net ......................................... -- 13,871 10,098 -- 23,969 ------------ ------------ ------------ ------------ ------------ $ 114,232 $ 306,882 $ 316,613 $ 335,505 $ 1,073,232 ============ ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ....................................$ -- $ 9,148 $ 9,510 $ -- $ 18,658 Accrued interest .................................... -- 7,201 1,581 -- 8,782 Other accrued liabilities ........................... -- 9,848 24,608 -- 34,456 Advance deposits .................................... -- 999 1,063 -- 2,062 Current portion of long-term obligations ............ 4,191 394,756 302,411 -- 701,358 Minority interests - preferred redeemable securities (including related accrued interest) ............... -- -- 194,198 -- 194,198 ------------ ------------ ------------ ------------ ------------ Total current liabilities ..................... 4,191 421,952 533,371 -- 959,514 Deferred income taxes ..................................... 3,603 -- -- -- 3,603 Minority interests - other ................................ -- 205 5,342 -- 5,547 ------------ ------------ ------------ ------------ ------------ Total liabilities ............................. 7,794 422,157 538,713 -- 968,664 ------------ ------------ ------------ ------------ ------------ Commitments and contingencies Stockholders' equity: Common stock ....................................... 284 33 443 (476) 284 Additional paid-in capital ......................... 263,687 22,619 (40,970) 18,351 263,687 Accumulated deficit ................................ (157,533) (136,057) (181,573) 317,630 (157,533) Accumulated other comprehensive loss ............... -- (1,870) -- -- (1,870) ------------ ------------ ------------ ------------ ------------ Total stockholders' equity (deficit) .......... 106,438 (115,275) (222,100) 335,505 104,568 ------------ ------------ ------------ ------------ ------------ $ 114,232 $ 306,882 $ 316,613 $ 335,505 $ 1,073,232 ============ ============ ============ ============ ============
15 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 ============= ============= ============= ============= =============
16 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- (UNAUDITED IN THOUSANDS) Revenues: Rooms ......................................... $ -- $ 41,871 $ 43,290 $ -- $ 85,161 Food and beverage ............................. -- 10,761 11,016 -- 21,777 Other ......................................... -- 2,170 2,266 -- 4,436 ------------- ------------- ------------- ------------- ------------- -- 54,802 56,572 -- 111,374 ------------- ------------- ------------- ------------- ------------- Operating expenses: Direct: Rooms ......................................... -- 11,306 11,921 -- 23,227 Food and beverage ............................. -- 8,388 8,498 -- 16,886 Other ......................................... -- 1,479 1,453 -- 2,932 General, administrative and other ................. -- 21,270 26,284 -- 47,554 Depreciation and amortization ..................... -- 6,626 7,845 -- 14,471 Impairment of long-lived assets ................... -- 2,270 0 -- 2,270 Severance and restructuring expenses ............. -- -- 624 -- 624 ------------- ------------- ------------- ------------- ------------- Total operating expenses .............. -- 51,339 56,625 -- 107,964 ------------- ------------- ------------- ------------- ------------- -- 3,463 (53) -- 3,410 Other income (expenses): Interest income and other ....................... -- -- 158 -- 158 Interest expense ................................ -- (11,524) (6,940) -- (18,464) Gain on asset dispositions ...................... -- 62 35 -- 97 Equity in losses of consolidated subsidiaries ... (18,204) -- -- 18,204 -- Minority interests: Preferred redeemable securities ................. -- -- (3,340) -- (3,340) Other ........................................... -- (205) 140 -- (65) ------------- ------------- ------------- ------------- ------------- Loss before income taxes .......................... (18,204) (8,204) (10,000) 18,204 (18,204) Provision for income taxes ....................... (129) (129) -- 129 (129) ------------- ------------- ------------- ------------- ------------- Net loss ......................... $ (18,333) $ (8,333) $ (10,000) $ 18,333 $ (18,333) ============= ============= ============= ============= =============
17 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- (UNAUDITED IN THOUSANDS) Revenues: Rooms ......................................... $ -- $ 52,189 $ 65,236 $ -- $ 117,425 Food and beverage ............................. -- 13,033 17,739 -- 30,772 Other ......................................... -- 2,633 4,374 -- 7,007 ------------- ------------- ------------- ------------- ------------- -- 67,855 87,349 -- 155,204 ------------- ------------- ------------- ------------- ------------- Operating expenses: Direct: Rooms ....................................... -- 14,747 18,080 -- 32,827 Food and beverage ........................... -- 10,085 13,634 -- 23,719 Other ....................................... -- 1,856 2,369 -- 4,225 General, administrative and other ............... -- 23,203 32,975 -- 56,178 Depreciation and amortization ................... -- 7,244 9,664 -- 16,908 Impairment of long-lived assets ................. -- (5,396) (5,316) -- (10,712) Severance and restructuring charges ............. -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- Total operating expenses ............ -- 51,739 71,406 -- 123,145 ------------- ------------- ------------- ------------- ------------- -- 16,116 15,943 -- 32,059 Other income (expenses): Interest income and other ..................... -- -- 467 -- 467 Interest expense .............................. -- (14,547) (10,049) -- (24,596) Interest hedge break fee ...................... -- -- (4,294) -- (4,294) Gain (loss) on asset dispositions ............. -- 56 (77) -- (21) Equity in income of consolidated subsidiaries . 802 -- -- (802) -- Minority interests: Preferred redeemable securities ............... -- -- (3,063) -- (3,063) Other ......................................... -- -- 250 -- 250 ------------- ------------- ------------- ------------- ------------- Income (loss) before income taxes ............... 802 1,625 (823) (802) 802 (Provision) benefit for income taxes ............ (275) (597) 322 275 (275) ------------- ------------- ------------- ------------- ------------- Net income (loss) ............................... $ 527 $ 1,028 $ (501) $ (527) $ 527 ============= ============= ============= ============= =============
18 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------- ------------- (UNAUDITED IN THOUSANDS) Revenues: Rooms ......................................... $ -- $ 127,357 $ 133,759 $ -- $ 261,116 Food and beverage ............................. -- 36,862 37,916 -- 74,778 Other ......................................... -- 7,601 8,549 -- 16,150 ------------- ------------- ------------- ------------- ------------- -- 171,820 180,224 -- 352,044 ------------- ------------- ------------- ------------- ------------- Operating expenses: Direct: Rooms ....................................... -- 34,843 36,761 -- 71,604 Food and beverage ........................... -- 27,197 27,844 -- 55,041 Other ....................................... -- 4,503 4,778 -- 9,281 General, administrative and other ............... -- 65,967 82,749 -- 148,716 Depreciation and amortization ................... -- 20,597 24,022 -- 44,619 Impairment of long-lived assets ................. -- 3,535 3,300 -- 6,835 Severance and restructuring expenses ........... -- -- 2,091 -- 2,091 ------------- ------------- ------------- ------------- ------------- Total operating expenses ............ -- 156,642 181,545 -- 338,187 ------------- ------------- ------------- ------------- ------------- -- 15,178 (1,321) -- 13,857 Other income (expenses): Interest income and other ..................... -- -- 638 -- 638 Interest expense .............................. -- (36,215) (21,618) -- (57,833) (Loss) gain on asset dispositions ............. -- (178) 24,384 -- 24,206 Equity in losses of consolidated subsidiaries . (29,162) -- -- 29,162 -- Minority interests: Preferred redeemable securities ............... -- -- (9,849) -- (9,849) Other ......................................... -- (205) 24 -- (181) ------------- ------------- ------------- ------------- ------------- Loss before income taxes ....................... (29,162) (21,420) (7,742) 29,162 (29,162) Provision for income taxes ..................... (2,829) (129) (2,700) 2,829 (2,829) ------------- ------------- ------------- ------------- ------------- Net loss ....................... $ (31,99) $ (21,549) $ (10,442) $ 31,991 $ (31,991) ============= ============= ============= ============= =============
19 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2000
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ ------------- ------------ ------------ (UNAUDITED IN THOUSANDS) Revenues: Rooms .................................................... $ -- $ 148,723 $ 185,920 $ -- $ 334,643 Food and beverage ........................................ -- 42,219 56,502 -- 98,721 Other .................................................... -- 8,484 12,778 -- 21,262 ---------- ------------ ------------- ------------ ------------ -- 199,426 255,200 -- 454,626 ---------- ------------ ------------- ------------ ------------ Operating expenses: Direct: Rooms .................................................. -- 41,934 51,392 -- 93,326 Food and beverage ...................................... -- 30,824 41,578 -- 72,402 Other .................................................. -- 5,843 7,299 -- 13,142 General, administrative and other .......................... -- 69,410 98,627 -- 168,037 Depreciation and amortization .............................. -- 19,507 29,841 -- 49,348 Impairment of long-lived assets ............................ -- 3,404 52,046 -- 55,450 Severance and restructuring charges ........................ -- -- 1,502 -- 1,502 ---------- ------------ ------------- ------------ ------------ Total operating expenses ....................... -- 170,922 282,285 -- 453,207 ---------- ------------ ------------- ------------ ------------ -- 28,504 (27,085) -- 1,419 Other income (expenses): Interest income and other ................................ -- -- 1,200 -- 1,200 Interest expense ......................................... -- (42,120) (32,306) -- (74,426) Interest hedge break fee ................................. -- -- (4,294) -- (4,294) Gain (loss) on asset dispositions ........................ -- 53 (77) -- (24) Equity in losses of consolidated subsidiaries............. (85,608) -- -- 85,608 -- Minority interests: Preferred redeemable securities .......................... -- -- (9,190) -- (9,190) Other .................................................... -- -- (293) -- (293) ---------- ------------ ------------- ------------ ------------ Loss before income taxes ................................... (85,608) (13,563) (72,045) 85,608 (85,608) Benefit for income taxes ................................... 29,105 4,567 24,538 (29,105) 29,105 ---------- ------------ ------------- ------------ ------------ Net loss ................................................... $ (56,503) $ (8,996) $ (47,507) $ 56,503 $ (56,503) ========== ============ ============= ============ ============
20 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2001
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED ------------- ------------- ------------- ------------- (UNAUDITED IN THOUSANDS) Operating activities: Net loss ............................................................ $ -- $ (21,549) $ (10,442) $ (31,991) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ...................................... -- 20,597 24,022 44,619 Loss (gain) on sale of assets ...................................... -- 178 (24,384) (24,206) Minority interests ................................................. -- 205 9,825 10,030 Impairment of long-lived assets .................................... -- 3,535 3,300 6,835 401 (k) plan contributions ......................................... 369 -- -- 369 Amortization of deferred loan fees ................................. -- 3,046 1,574 4,620 Other .............................................................. 181 3 (355) (171) Changes in operating assets and liabilities: Accounts receivable ................................................ -- (69) 3,095 3,026 Inventories ........................................................ -- 323 214 537 Prepaid expenses and other assets ................................... -- (28) (593) (621) Accounts payable ................................................... -- 41 (7,324) (7,283) Accrued liabilities ................................................ -- (7,246) (3,514) (10,760) Advance deposits ................................................... -- 144 64 208 ------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities ................. 550 (820) (4,518) (4,788) ------------- ------------- ------------- ------------- Investing activities: Capital improvements, net .......................................... -- (14,709) (6,819) (21,528) Proceeds from sale of assets, net .................................. -- 8,862 55,728 64,590 Net withdrawals (deposits) for capital expenditures ............... -- 777 (1,194) (417) ------------- ------------- ------------- ------------- Net cash (used in) provided by investing activities ............... -- (5,070) 47,715 42,645 ------------- ------------- ------------- ------------- Financing activities: Proceeds from borrowings on working capital revolver ............... -- 16,000 -- 16,000 Proceeds (paid to) received from related parties ................... (550) 15,055 (14,505) -- Principal payments on long-term obligations ........................ -- (26,647) (27,022) (53,669) Principal payments on working capital revolver ...................... -- (15,000) -- (15,000) Payments of deferred loan costs .................................... -- (565) -- (565) ------------- ------------- ------------- ------------- Net cash used in financing activities ............................ (550) (11,157) (41,527) (53,234) ------------- ------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents ................. -- (17,047) 1,670 (15,377) Cash and cash equivalents at beginning of period ..................... 6 20,653 343 21,002 ------------- ------------- ------------- ------------- Cash and cash equivalents at end of period ........................... $ 6 $ 3,606 $ 2,013 $ 5,625 ============= ============= ============= =============
21 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED ------------- ------------- ------------- ------------- (UNAUDITED IN THOUSANDS) Operating activities: Net loss .............................................................. $ -- $ (8,996) $ (47,507) $ (56,503) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization ........................................ -- 19,507 29,841 49,348 (Gain ) loss on sale of assets ....................................... -- (53) 77 24 Deferred income tax benefits ......................................... (29,105) -- -- (29,105) Minority interests ................................................... -- -- 9,483 9,483 Impairment of long-lived assets ...................................... -- 3,404 52,046 55,450 401 (k) plan contributions .......................................... -- -- 376 376 Amortization of deferred loan fees .................................. -- 1,715 1,745 3,460 Other ................................................................ 375 (623) (3,156) (3,404) Changes in operating assets and liabilities: Accounts receivable .................................................. -- (3,916) 2,609 (1,307) Inventories .......................................................... -- 437 598 1,035 Prepaid expenses and other assets .................................... -- (77) (1,425) (1,502) Accounts payable ..................................................... -- 3,342 (7,176) (3,834) Accrued liabilities .................................................. -- 1,616 (6,251) (4,635) Advance deposits .................................................... -- 25 (303) (278) ------------- ------------- ------------- ------------- Net cash (used in) provided by operating activities .................... (28,730) 16,381 30,957 18,608 ------------- ------------- ------------- ------------- Investing activities: Capital expenditures, net ............................................ -- (43,539) (28,505) (72,044) Proceeds from sale of assets, net .................................... -- 36,105 128,350 164,455 Net (deposits) withdrawals for capital expenditures .................. -- (3,645) 675 (2,970) ------------- ------------- ------------- ------------- Net cash (used in) provided by investing activities .................. -- (11,079) 100,520 89,441 ------------- ------------- ------------- ------------- Financing activities: Proceeds from borrowings on working capital revolver ................. -- 30,000 -- 30,000 Proceeds from issuance of long-term obligations ...................... -- -- 2,326 2,326 Proceeds received from (paid to) related parties ..................... 28,730 (4,614) (24,116) -- Principal payments on long-term obligations .......................... -- (13,537) (117,983) (131,520) Principal payments on working capital revolver ....................... -- (5,000) -- (5,000) Payments of deferred loan costs ...................................... -- (1,400) (1,900) (3,300) Distributions to minority interests .................................. -- -- (683) (683) ------------- ------------- ------------- ------------- Net cash provided by (used in) financing activities .................. 28,730 5,449 (142,356) (108,177) ------------- ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents ................... -- 10,751 (10,879) (128) Cash and cash equivalents at beginning of period ....................... 59 9,910 4,675 14,644 ------------- ------------- ------------- ------------- Cash and cash equivalents at end of period ............................. $ 59 $ 20,661 $ (6,204) $ 14,516 ============= ============= ============= =============
22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The following discussion should be read in conjunction with the Company's financial statements and related notes thereto included. The discussion below and elsewhere in this Form 10-Q includes statements that are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These include statements that describe anticipated revenues, capital expenditures and other financial items, statements that describe the Company's business plans and objectives, and statements that describe the expected impact of competition, government regulation, litigation and other factors on the Company's future financial condition and results of operations. The words "may," "should," "expect," "believe," "anticipate," "project," "estimate," and similar expressions are intended to identify forward-looking statements. Such risks and uncertainties, any one of which may cause actual results to differ materially from those described in the forward-looking statements, include or relate to, among other things. - - The ability of the Company to restructure its Senior Secured Credit Facility, its Senior Subordinated Notes and the CRESTS. - - The impact of pending or threatened litigation and/or governmental inquiries and investigations involving the Company. - - The uncertainties relating to sale of assets, including the willingness of prospective purchasers to purchase the hotels the Company has identified as divestiture candidates on terms the Company finds acceptable, the timing and terms on which such hotels may be sold, and other factors affecting the ability of prospective purchasers to consummate such transactions, including the availability of financing. - - The effect of competition and the economy on the Company's ability to maintain margins on existing operations, including uncertainties relating to competition. - - The Company's ability to generate sufficient cash flows from operations and asset sales to cover its cash needs or restructure certain existing debt obligations, the Company's ability to obtain additional capital if needed and the possible additional or continuing default under credit facilities if cash flows are lower than expected or capital expenditures are greater than expected. - - The effectiveness of changes in management and the ability of the Company to retain qualified individuals to serve in senior management positions. - - The potential for additional impairment charges against earnings related to long-lived assets. - - The impact of increased expenses due to layoffs of employees. Many of these factors are not within the Company's control and readers are cautioned not to put undue reliance on these forward looking statements. STRATEGIC PLANS At the end of 1999, the Company's Board of Directors adopted a strategic plan to reduce the size of the company's non-core hotel portfolio and in 2000 adopted a strategic plan to reduce the level of overall debt of the Company and retained an investment banker to review its strategic alternatives. As part of that review, the Company was pursuing a sale of the Company. Currently, the Company is not in negotiations for the sale of the Company with any party. The Company is moving forward as an independent company and is exploring all avenues for maximization of shareholder value, including debt restructuring, improving operations, capital structure and optimizing the value of the Company's assets. The current economic environment has made the selling of hotels at acceptable prices a challenge and the Company has decided to only continue to sell hotels if acceptable prices can be achieved. 23 OVERVIEW Management believes that the results of operations in the hotel industry are best explained by four key performance measures: occupancy, average daily rate ("ADR"), revenue per available room ("RevPAR"), and Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") margins. These measures are influenced by a variety of factors including national, regional and other local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of the Company's hotels experience lower occupancy levels in the fall and winter months (November through February) which may result in lower revenues, lower net income and less cash flow during these months. REVENUES Revenues are composed of room, food and beverage and other revenues. Room revenues are derived from guest room rentals, whereas food and beverage revenues primarily include sales from hotel restaurants, room service and hotel catering. Other revenues include charges for guests' long-distance telephone service, laundry service and use of meeting facilities. OPERATING EXPENSES Operating expenses are composed of direct, general and administrative, other hotel operating expenses, depreciation and amortization, asset impairment charges and severance and restructuring expenses. Direct expenses, including rooms, food and beverage and other operations, reflect expenses directly related to hotel operations. These expenses are primarily variable with available rooms and occupancy rates, but also have a small fixed component which can be leveraged with increases in revenues. General and administrative expenses represent corporate salaries and other corporate operating expenses and are generally fixed. Other expenses include primarily property level expenses related to general operations such as marketing, utilities, repairs and maintenance and other property administrative costs. These expenses are primarily fixed. RESULTS OF OPERATIONS The significant number of dispositions in 2001 and 2000 has materially impacted operating results. Nine months ended September 30, 2001 In the first nine months of 2001, the Company sold five hotels for a gross sale price of $72.2 million. Year Ended December 31, 2000 During 2000, the Company sold nineteen hotel properties and four other assets, including sixteen hotel properties sold in the first nine months of 2000. Gross sales price of these twenty-three properties was $208.8 million. The discussion of results of operations, income taxes, liquidity and capital resources that follows is derived from the Company's unaudited Condensed Consolidated Financial Statements set forth in "Item I. Financial Statements" included in this report on Form 10-Q and should be read in conjunction with such financial statements and notes thereto. 24 HISTORICAL RESULTS OF OPERATIONS The following table presents for the periods indicated, the percentage relationship that the various statements of operations line items bear to operating revenues:
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------------- --------------------------------- SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Revenues: Rooms ..................................... 76.5% 75.7% 74.2% 73.6% Food and beverage ......................... 19.5 19.8 21.2 21.7 Other ..................................... 4.0 4.5 4.6 4.7 ------------- ------------- ------------- ------------- 100.0 100.0 100.0 100.0 ------------- ------------- ------------- ------------- Operating expenses: Direct: Rooms ................................... 20.9 21.2 20.3 20.5 Food and beverage ....................... 15.2 15.3 15.6 15.9 Other ................................... 2.6 2.7 2.6 2.9 General, administrative and other ........... 42.7 36.2 42.2 37.0 Depreciation and amortization ............... 13.0 10.9 12.7 10.9 Impairment of long-lived assets ............. 2.0 (6.9) 1.9 12.2 Severance and restructuring expenses ........ 0.6 -- 0.6 0.3 ------------- ------------- ------------- ------------- Total operating expenses ........ 97.0 79.4 95.9 99.7 ------------- ------------- ------------- ------------- 3.0 20.6 4.1 0.3 Other income (expenses): Interest income and other ................. 0.1 0.3 0.2 0.3 Interest expense .......................... (16.6) (15.8) (16.4) (16.4) Interest hedge break fee .................. -- (2.8) -- (0.9) Gain (loss) on asset dispositions ......... 0.1 (0.0) 6.9 (0.0) Minority interests: Preferred redeemable securities ........... (3.0) (2.0) (2.8) (2.0) Other ..................................... (0.1) 0.2 (0.1) (0.1) ------------- ------------- ------------- ------------- (Loss) income before income taxes ........... (16.5) 0.5 (8.1) (18.8) (Provision) benefit for income taxes ....... (0.1) (0.2) (0.8) 6.4 ------------- ------------- ------------- ------------- Net (loss) income ........................... (16.6)% 0.3% (8.9)% (12.4)% ============= ============= ============= =============
25 THREE MONTHS ENDED SEPTEMBER 30, 2001 ("THIRD QUARTER 2001") COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 ("THIRD QUARTER 2000") REVENUES At September 30, 2001, the Company owned 106 hotels and had a minority interest in one hotel compared with 115 hotels owned, a minority interest in one hotel and one hotel managed for a third party at September 30, 2000. Total revenues for the Company were $111.4 million for the third quarter 2001 and $155.2 million for the third quarter 2000. Of this $43.8 million or a 28.2% decrease, $24.9 million is due to the disposition of nine hotels in the owned portfolio. Revenues for hotels owned at the end of the third quarter 2001 were $111.4 million for the third quarter 2001 and $130.3 million for the third quarter 2000 (a decline of 14.5%). RevPAR for hotels owned at the end of the third quarter 2001 declined by 14.1% compared to the third quarter 2000, primarily as a result of a decline in occupancy of 11.3% as well as a decrease in average daily rates of 3.2%. Revenues and RevPar on the same unit basis for the third quarter 2001 was adversely impacted by a general decline in the industry, particularly in certain of the Company's markets, which factors were exacerbated by the events of September 11, 2001. OPERATING EXPENSES Direct operating expenses for the Company were $43.0 million (38.6% of direct revenues) for the third quarter 2001 and $60.8 million (39.2% of direct revenues) for the third quarter 2000. This $17.8 million decrease was primarily attributable to the reduction of nine hotels in the owned portfolio, as well as lower direct costs as a percentage of revenues. The lower percentage in direct costs was primarily due to cost reductions in the rooms department and to a lesser extent in the food and beverage department. General, administrative and other expenses were $47.6 million (42.7% of direct revenues) for the third quarter 2001 and $56.2 million (36.2% of direct revenues) for the third quarter 2000. Of this $8.6 million decrease, approximately $6.7 million is due to the reduction of nine hotels in the owned portfolio. The remaining decrease is primarily due to reduced property level expenses as a result of the reduction in revenues. Property level expenses include expenses related to general operations such as marketing, franchise fees, property repairs and maintenance and other property administrative costs. These reductions were offset by certain higher general, administrative and other expenses, utilities, property insurance and property taxes. These increased utility costs were somewhat offset by utility surcharges added to room rates in selected markets. Property insurance costs increased due to premium increases in the global property insurance market and increases in certain small claims. Property taxes increased due to higher property tax assessments in certain markets. Corporate overhead contributed to the remaining increase in general administrative and other expenses as a percentage of revenues, which though reduced, are primarily fixed expenses. Depreciation and amortization expense was $14.5 million in the third quarter 2001 and $16.9 million in the third quarter 2000. The $2.4 million decrease is primarily as a result of the reduction of nine hotels in the owned portfolio. Impairment charges for the third quarter 2001 were $2.3 million while for the third quarter 2000, there was an impairment recapture of $10.7 million. The Company's third quarter 2001 charge relates to revised estimates of fair value for properties held for sale as of September 30, 2001, one of which was sold in the fourth quarter of 2001. The third quarter 2000 impairment recapture of $10.7 million related to impairment charges recorded in 1999 and 2000 on seven hotels which were no longer being actively marketed for sale as of September 30, 2000. 26 OTHER INCOME AND EXPENSES Interest expense was $18.5 million in the third quarter 2001 and $24.6 million in the third quarter 2000. This decrease is primarily attributable to a reduction in the level of debt and, to a lesser extent, a decrease in the cost of debt. Gain on asset dispositions was $0.1 million for the third quarter 2001. This represents third quarter adjustments primarily in respect of one hotel which was sold in the second quarter of 2001. Minority interest expense was $3.4 million in the third quarter 2001 and $2.8 million in the third quarter 2000. This is due to an increase in the CREST dividend as a result of interest compounding which increase has been offset by other minority interest expense due to lower net income levels for those hotels which the Company co-owns with its third-party-minority equity partners. NET INCOME The Company provided no benefit for income taxes in the third quarter 2001 but recorded an income tax charge of $0.1 million, mainly in respect of federal income taxes paid to the Canadian Federal Authorities as a result of the Company's Canadian operations. A provision for income taxes of $0.3 million was recorded in the third quarter 2000. After accounting for these taxation provisions, the net loss was $18.3 million ($0.64 loss per share) in third quarter 2001 compared with a net income of $0.5 million ($0.02 per share) in the third quarter 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 ("THE 2001 PERIOD") COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ("THE 2000 PERIOD") REVENUES Total revenues for the Company were $352.0 million, for the 2001 period and $454.6 million for the 2000 period. Of this $102.6 million or a 22.6% decrease, $82.9 million is due to the disposition of nine hotels in the owned portfolio. Revenues for hotels owned at the end of the third quarter 2001 were $346.7 million for the 2001 period and $371.7 million for the 2000 period (a decline of 6.7%). RevPAR for hotels owned at the end of the 2001 period declined by 6.2% compared to the 2000 period, primarily as a result of a decline in occupancy of 7.0% partially offset by an increase in average daily rates of 0.8%. Revenues and RevPar on the same unit basis for the 2001 period was adversely impacted by a general decline in the industry, particularly in certain of the Company's markets, which factors were exacerbated by the events of September 11, 2001. OPERATING EXPENSES Direct operating expenses for the Company were $135.9 million (38.6% of direct revenues) for the 2001 period and $178.9 million (39.3% of direct revenues) for the 2000 period. This $43.0 million decrease was due primarily to a reduction of nine hotels in the owned portfolio. General administrative and other expenses were $148.7 million (42.2% of direct revenues) for the 2001 period and $168.0 million (37.0% of direct revenue) for the 2000 period. Of this $19.3 million decrease, approximately $24.4 million is due to the reduction of nine hotels in the owned portfolio. Reductions also resulted from reduced property level expenses related to reductions in revenues. Property level expenses include expenses related to general operations such as marketing, franchise fees, property repairs and maintenance and other property administrative costs. These reductions were, however, offset by certain higher general, administrative and other expenses, mainly utilities, property insurance, franchise fees and property taxes. The utility costs increased 21% in the first quarter 2001 due to higher usages caused by extreme winter conditions in certain locations and increased energy rates. These increased utility costs were somewhat offset by utility surcharges added to room rates in selected markets. Property insurance costs increased due to premium increases in the global property insurance market and increases in certain small claims. Franchise fees increased as a result of the prior year conversion of certain hotels to franchise arrangements that have slightly higher fee structures and certain changes in guest awards by franchisors. Property taxes increased due to higher property tax assessments in certain markets. Corporate overhead contributed to the remaining increase in general administrative and other expenses as a percentage of revenues, which though reduced, are primarily fixed expenses. 27 Depreciation and amortization expense was $44.6 million in the 2001 period and $49.3 million in the 2000 period. The $4.7 million decrease is primarily a result of a decrease of $6.2 million in depreciation related to hotels sold, net of additional depreciation expense of $1.5 million relating to two hotels previously considered held for sale and that are no longer being actively marketed for sale. Impairment charges for the 2001 and 2000 periods were $6.8 million and $55.5 million, respectively. The charge for the 2001 period consists of $0.5 million, $4.0 million and $2.3 million in the first, second and third quarters, respectively. The Company's first quarter charge of $0.5 million was comprised of $4.3 million related to revised estimates of fair value for properties held for sale and held for investment at March 31, 2001, net of a recapture of $3.7 million of impairment charges as one hotel previously considered held for sale was no longer being actively marketed for sale. The second quarter charge of $4.0 million related to one property which was identified as held for sale and also sold in the second quarter of 2001. The third quarter charge of $2.3 million related to revised estimates of fair value for properties held for sale at September 30, 2001, one of which was sold in the fourth quarter of 2001. Impairment charges for the nine month period ended September 30, 2000 were $55.5 million. This consisted of a first quarter charge of $9.6 million related to revised estimates of fair value for properties held for sale at December 31, 1999, a second quarter charge of $56.6 million related to the ten hotels sold to Sunstone Investors, LLC on August 31, 2000 and a third quarter impairment recapture of $10.7 million related to seven hotels previously considered held for sale which were no longer being actively marketed. OTHER INCOME AND EXPENSES Interest expense was $57.8 million in the 2001 period and $74.4 million in the 2000 period. This decrease is primarily attributable to a reduction in the level of debt and, to a lesser extent, a decrease in the cost of debt. Gain on asset dispositions was $24.2 million for the 2001 period. This relates primarily to the sale of one hotel in the first quarter 2001 and represents the excess of the net proceeds of sale over the net book values of assets sold. Minority interest expense was $10.0 million in the 2001 period and $9.4 million in the 2000 period. This is due to an increase in the CREST dividend as a result of the interest compounding which increase has been offset by other minority interest expense due to lower net income levels for those hotels which the Company co-owns with its third-party minority equity partners. NET INCOME After a tax charge of $2.8 million, including Canadian federal income taxes paid of $0.1 million, in the 2001 period and a benefit for income taxes of $29.1 million in the 2000 period, the Company had a net loss of $32.0 million ($1.12 loss per share) in the 2001 period compared with a net loss of $56.5 million ($2.01 loss per share) in the 2000 period. INCOME TAXES As of December 31, 2000, Lodgian had net operating loss carryforwards of approximately $194 million for federal income tax purposes, which expire in 2004 through 2020. The Company's ability to use these net operating loss carryforwards to offset future income is subject to limitations, and may be subject to additional limitations in the future. Due to these limitations, a portion or all of these net operating loss carryforwards could expire unused. The Company recognized an income tax provision of $2.7 million for the first nine months of 2001, which related primarily to a provision for state income taxes on the gain on sale of one hotel. LIQUIDITY AND CAPITAL RESOURCES Lodgian's principal sources of liquidity consist of existing cash balances, cash flows from operations and financing. The Company had earnings from operations before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted in 2001 of $72.9 million, a 37.5% decrease from the $116.6 million for the 2000 28 period. This decrease was primarily due to a reduction of nine hotels in the owned portfolio, and a general decline in the industry which was exacerbated by the events of September 11, 2001, as well as other factors discussed below. EBITDA, as adjusted, on a same unit basis was $72.5 million for the 2001 period and $93.9 million for the 2000 period, a decrease of 22.8%. This decrease on a same unit basis was due primarily to a 6.2% decline in RevPar (caused by a 7.0% decline in occupancy partially offset by a 0.8% increase in average daily rates), higher administrative and corporate overhead costs as a percentage of revenues and increased utility costs, property insurance, franchise fees and property taxes as discussed previously under general, administrative and other operating expenses. These contributory factors were offset by a 0.3% decrease in direct operating expenses as a percentage of revenues. The Company has computed EBITDA without regard to the unusual items and one-time charges. For the 2001 period, these items consisted of unusual costs (principally professional and legal fees, severance, one-time bonus charges account write-offs and provisions) of $7.6 million and impairment charges of $6.8 million, compared to $10.3 million and $55.5 million, respectively, for the 2000 period. EBITDA is a widely regarded industry measure of lodging performance used in the assessment of hotel property values, although EBITDA is not indicative of and should not be used as an alternative to net income or net cash provided by operations as specified by generally accepted accounting principles. Net cash used in operating activities for the 2001 period was $4.8 million compared to net cash provided by operations of $18.6 million for the 2000 period. Cash flows provided by investing activities was $42.6 million for the 2001 period and $89.4 million for the 2000 period. The 2001 amount includes capital expenditures of $21.5 million, net proceeds from the sale of assets of $64.6 million and withdrawals for capital expenditure escrows of $0.4 million. The 2000 period includes capital expenditures of $72.0 million, net proceeds from the sale of assets of $164.5 million and withdrawals for capital expenditure escrows of $3.0 million. Cash flows used in financing activities were $53.2 million for the 2001 period and $108.2 million for the 2000 period. The 2001 and 2000 amounts consist primarily of borrowings on the working capital revolver, payments of deferred loan costs as well as repayments of long-term and working capital revolver obligations. The 2000 amounts also consisted of distributions to minority interests of $0.7 million. As previously discussed in Note 7 and further discussed below, the Company is not in compliance with the financial covenants related to its Senior Secured Loan Credit Facility based on its third quarter 2001 results. As a result of the events of default currently existing with respect to the Company's Senior Secured Loan Facility, the Senior Subordinated Notes and the CRESTS, the uncertainty regarding the Company's ability to generate the liquidity necessary to meet its debt obligations as they become due and payable, and the uncertainty regarding the Company's ability to comply with its debt covenants, the Company believes that future defaults with respect to its debt agreements are likely within the next twelve months. Consequently, the Company has classified all of its debt and the CRESTS as current liabilities in the accompanying financial statements. Primarily as a result of this third quarter reclassification, at September 30, 2001, the Company had a working capital deficit of $916.9 million as compared with a working capital deficit of $99.9 million at December 31, 2000. Excluding the current portion of long-term obligations, and the CRESTS, the Company had a working capital deficit of $21.3 million at September 30, 2001 compared with a working capital deficit of $20.0 million at December 31, 2000. After the third quarter reclassification discussed above, there were no long-term obligations at September 30, 2001 and $674.0 million at December 31, 2000. Both periods exclude the CRESTS. The Company has a capital improvement program to address the capital improvements required at the hotels related to product improvement plans specified by license agreements with franchisors, re-branding of several hotels and general renovation projects intended to ultimately improve the operations of the hotels. The Company originally anticipated capital expenditures of approximately $32.0 million under its 2001 capital improvement program, but has subsequently ceased all but emergency capital expenditures. An aggregate $22.4 million was spent in the first, second and third quarters of 2001. As discussed previously, the Company had adopted strategic plans to reduce the size of the Company's non-core hotel portfolio and reduce the overall level of debt. With regard to these strategic plans, the Company sold twenty-five hotel properties and four other assets between January 1, 2000 and November 14, 2001. Gross sales price of these twenty-nine properties was $285.2 million while the reduction of debt was $216.6 million. The balance was used primarily to support capital expenditures related to major renovation projects and the construction of one new hotel, which was sold prior to completion. A breakdown of the property sales by period is as follows: 29
Properties Gross Sales Debt Period Sold Price Reduction - ------------------------------- ------------ ------------ ------------ January 1, to December 31, 2000 23 $ 208.8 $ 151.1 January 1, to March 31, 2001 2 66.2 55.8 April 1, to June 30, 2001 3 6.0 5.7 July 1, to September 30, 2001 -- -- -- October 1, to November 14, 2001 1 4.2 4.0 ------------ ------------ ------------ 29 $ 285.2 $ 216.6 ============ ============ ============
The Company's total outstanding debt as of November 14, 2001 (excluding CRESTS) was approximately $701.4 million. Of this amount, $41.6 million was originally scheduled as due during the remainder of 2001. As of November 14, 2001, the Company's held for sale properties (5 properties) have an estimated fair value of approximately $22.9 million. The Company may continue to sell assets to partly fund its remaining $41.6 million amortization payment requirements in 2001 and its capital improvement program. However, amidst the challenges of the current economic environment, the Company does not believe it will be able to sell sufficient assets, if any, to meet its obligations for the remainder of 2001 and is therefore actively pursuing a restructuring of its outstanding debt. There can be no assurance that a restructuring will occur, or that if a restructuring does occur, that the Company will have sufficient liquidity to meet its obligations. On May 15, 2001, the Company and the lenders of its Senior Secured loan credit facility reached an agreement to amend that facility. Prior to the amendment, the Company would have been in violation of two financial covenant ratios based on its first quarter 2001 operating results. The amendment increased the interest rate spread (which was then LIBOR plus 4.25%) by 25 basis points in each month from August 2001 to February 2002 up to a maximum of LIBOR plus 6.00% until maturity. The amendment also provided that the interest rate spread would increase an additional 25 basis points up to a maximum of LIBOR plus 6.00% if the company's debt was downgraded by a rating agency subsequent to the amendment date (the downgrade occurred in May 2001). In addition, the interest rate spread will decrease 50 basis points for each aggregate $60.0 million of principal reductions made subsequent to the amendment date as long as the Company is in compliance with certain financial coverage ratios. The amendment also required additional amortization payments on the tranche B term loans of $7.5 million on April 30, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, respectively. The amendment also modified various covenants and financial coverage ratios. The Company paid an amendment fee of $565,000 on the date of the amendment and is obligated to pay an additional 75 basis point fee on January 2, 2002 based on any outstanding borrowings and commitments on that date. In addition, on the amendment date, $25.0 million of the outstanding balance on the working capital revolver was converted to the tranche B term loan, thereby reducing the commitment on the working capital revolver to $25.0 million as of May 15, 2001. Based on its third quarter 2001 results, the Company is not in compliance with the financial covenants related to its Senior Secured Loan Credit Facility (the senior facility), on which, as of November 14, 2001 the Company has outstanding borrowings of $196.2 million. However on November 13, 2001, the Company reached an agreement in principle with the lenders of this facility (the senior lenders) with respect to the financial covenant violations, pursuant to which the senior lenders agreed to forbear from the exercise of their default-related remedies against the Company until December 31, 2001 (unless an additional event of default occurs earlier). The Company expects to formally execute the forbearance agreement within the next few days. The forbearance agreement also reduced the commitment on the working capital revolver from $25.0 million to $13.4 million leaving the Company with $3.0 million of unused availability on the working capital revolver portion of the senior facility. The forbearance agreement also requires that the remaining $3.0 million be used only to pay the interest in respect of the senior facility due on November 15, 2001 and that the Company make semi-monthly interest payments on the senior facility. The Company also anticipates that it will not be able to make the remaining $36.0 million of required special amortization payments to its senior lenders due December 31, 2001 and is working with its senior lenders to seek an acceptable resolution of these problems. There can be no assurance that the Company will be successful in such negotiations and there is no certainty as to what actions the senior lenders may take if the Company is unable to negotiate a resolution. 30 The Company anticipates that because of limited liquidity it will not be making the $12.3 million interest payment due January 15, 2002 to the holders of the Company's Senior Subordinated Notes. In addition, as a result of the events of default with respect to its Senior Secured Loan Facility, the Company's Senior Subordinated Notes and the CRESTS are also in default due to cross-default provisions in those agreements. The Company intends to attempt to negotiate a debt restructuring with both the holders of the Senior Subordinated Notes and the holders of the CRESTS. There can be no assurances that the Company will be successful in such negotiations and there is no certainty as to what actions the lenders may take if the Company is unable to negotiate a resolution. The Company's independent auditors have indicated that if the Company is unsuccessful in obtaining waivers or amendments to cure existing or probable future events of default with respect to its debt agreements and is unsuccessful in restructuring its current debt obligations on terms sufficient to provide the Company with the liquidity necessary to fund its operating, capital expenditure and debt service obligations, their report on the Company's financial statements for the year ending December 31, 2001 will likely contain a modification as to the Company's ability to continue as a going concern. On May 20, 2001, promissory notes of approximately $3.9 million secured by the pledge of 100% of the ownership interests of Macon Hotel Associates, L.L.C. ("MHA") were due. The Company owns a 60% controlling interest in MHA. MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA and the Company did not make this payment on May 20, 2001. MHA and the Company are cooperating with the note holders in marketing the hotel for sale and entered into a Forbearance Agreement related to the debt. During the first quarter of 2001, the Company recorded an impairment charge of $2.2 million to reduce the carrying value of the hotel to the outstanding debt balance, which includes the promissory notes discussed above and a $7.8 million first mortgage. Based on the estimated sales price of the property, there will not be any remaining net proceeds available for MHA or the Company. Amidst the challenges of the current economic environment and the specific challenges peculiar to the Company, particularly those adversely impacting the hospitality industry and the Company since the events of September 11, 2001, management considers the restructuring of its debt obligations to be critical if the Company is to have sufficient liquidity to fund its operating, capital expenditure and debt service obligations beyond December 31, 2001. The Company has been notified by the New York Stock Exchange that it is not in compliance with the Exchange's continuing listing requirements because the average closing price of Lodgian stock was less than the $1.00 per share limit over a consecutive thirty trading day period. The Company is considering actions that may be taken in order to bring itself into compliance with the Exchange's requirements. The Company believes that it has until its annual shareholders' meeting in 2002 to remedy this lack of compliance. The Company has been notified more recently by the Exchange that it is also not in compliance with the Exchange's continuing listing requirements because the Company's total market capitalization has fallen below $15 million over a consecutive thirty trading day period. Pursuant to Exchange requirements relating to this listing standard, the Company is required to promptly demonstrate to the Exchange that it has a plan to come into compliance with the minimum market capitalization requirement or be subject to suspension of trading and de-listing. The Company is considering actions that may be taken to bring itself into compliance with the Exchange's requirements, but, in particular because the Company's share price has been abnormally low, there can be no assurance that the Company's plans will be acceptable to the Exchange. 31 INFLATION The rate of inflation has not had a material effect on the Company's revenues or costs and expenses in recent years and it is not anticipated that inflation will have a material effect on the Company in the near term. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party in litigation with Hospitality Restoration and Builders, Inc. ("HRB"), a general contractor hired to perform work on six (6) of the Company's hotels. The litigation involves hotels in Texas, Illinois, and New York. In general, HRB claims that the Company breached contracts to renovate the hotels by not paying for work performed. The Company contends that it was over-billed by HRB and that a significant portion of the completed work was defective. In July 2001, the parties agreed to settle the litigation pending in Texas and Illinois. In exchange for mutual dismissals and full releases, the Company has paid HRB $750,000. With respect to the matter pending in the state of New York, HRB claims that it is owed $10.7 million. The Company asserted a counterclaim of $7 million and believes that it has valid defenses and counterclaims to the contractor's remaining claims and that the outcome will not have a material adverse effect on its financial position or results of operations. On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an arbitration claim against the Company claiming breach of contract relating to a January 4, 1992 agreement. WH claimed entitlement to profit participation relating to the Company's acquisition of AMI Operating Partners, LP. WH sought damages totaling $754,500. The Company settled this matter by paying WH $100,000 in exchange for a full release. In October 2000, a class action was filed in the Superior Court of the State of Georgia, Fulton County. Named as defendants are the Company and its directors, and Whitehall. The complaint alleges, among other things, that the individual defendants breached their fiduciary duties in connection with certain agreements entered into with Whitehall regarding a potential sale of the Company to those entities. The complaint also alleges that Whitehall aided and abetted the alleged breach of fiduciary duty by the individual defendants. The case remains pending but it is the opinion of management that the resolution of this matter will not have a material adverse effect on the Company's financial position or results of operations. The Company is a party to other legal proceedings arising in the ordinary course of business, the impact of which would not, either individually or in the aggregate, in management's opinion, have a material adverse effect on its financial position or results of operations. ITEM 2. CHANGES IN SECURITIES The Company has not paid any cash dividends since the Merger and has no current plans to initiate the payment of dividends. The Company currently anticipates that it will retain any future earnings for use in its business. The Board of Directors of the Company will determine future dividend policies based on the Company's financial condition, profitability, cash flow, capital requirements and business outlook, among other factors. The Company's ability to pay dividends is restricted by the Indenture governing the Company's 12 1/4% Senior Subordinated Notes Due 2009 (the "Notes"), the Company's credit agreement dated as of July 23, 1999 among the Company, Lodgian Financing Corp., certain other of the Company's subsidiaries and the banks named therein, and the Indenture governing the Company's Convertible Redeemable Equity Structure Trust Securities ("CRESTS"). On June 30, 2000, the Company exercised its rights to begin the deferral of dividend payments on the CRESTS, effective with the interest payment due June 30, 2000. Pursuant to the terms of the instrument, the Company has the right to defer payment for up to twenty quarters (the "Extension Period"), during which Extension Period no interest shall be due and payable. 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits A list of the exhibits required to be filed as part of this Report on Form 10-Q is set forth in the "Exhibit Index" which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed during the third quarter of 2001. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LODGIAN, INC. Date: November 14, 2001 By: /s/ DAVID E. HAWTHORNE --------------------------------------- DAVID E. HAWTHORNE President and Chief Executive Officer Date: November 14, 2001 By: /s/ CHARLES E. MILLER, JR. --------------------------------------- CHARLES E. MILLER, JR. Chief Accounting Officer Date: November 14, 2001 By: /s/ RICHARD D. CARTOON --------------------------------------- RICHARD D. CARTOON Executive Vice President and Chief Financial Officer 34 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 - Employment Agreement dated November 1, 2001, between Lodgian, Inc. and David E. Hawthorne.
35 EX-10.1 3 g72840ex10-1.txt EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT AGREEMENT (this "Agreement"), by and between Lodgian, Inc., a Delaware corporation (the "Company"), and David Hawthorne (the "Executive"), dated as of November 1, 2001. Capitalized terms used in this Agreement that are not defined in the operative provisions of this Agreement shall have the meanings ascribed to them on Exhibit B hereto. 1. EMPLOYMENT PERIOD. The Company agrees to employ the Executive and the Executive agrees to be employed by the Company for the Employment Period, subject to the terms and conditions of this Agreement. The term "Employment Period" means the period commencing on the date hereof and ending on the third anniversary of such date. 2. POSITION AND DUTIES. (a) Commencing on the date hereof and for the remainder of the Employment Period, the Executive shall serve as the President and Chief Executive Officer of the Company. The Executive shall report directly to the Board of Directors of the Company (the "Board") and shall have such duties and authority, consistent with his position as the President and Chief Executive Officer of the Company, as shall be reasonably assigned to him from time to time by the Board. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote his entire working time, attention and energies to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently such responsibilities. The Executive shall be entitled to not less than four (4) weeks of paid vacation during each calendar year of the Employment Period. 3. PLACE OF PERFORMANCE. The Executive shall perform his duties and conduct his business at the principal executive offices of the Company, except for required travel on the Company's business. 4. COMPENSATION. As full and complete compensation for all services performed by the Executive and subject to the performance of the Executive's obligations in this Agreement the Executive shall be entitled to the compensation set forth in this Section 4: (a) Signing Bonus. Within thirty (30) days after the date hereof, the Company shall pay to the Executive a signing bonus in the amount of $150,000. (b) Base Salary. During the Employment Period, the Company shall pay the Executive a minimum annual base salary of $400,000 ("Base Salary"). Base Salary shall be payable in accordance with the usual payment practices of the Company with respect to the payment of regular compensation to its other executive officers. The Board shall review Executive's Base Salary annually, and in its sole discretion, may increase Executive's Base Salary from year to year. (c) Annual Bonus. The Executive shall be eligible, for each fiscal year ending during the Employment Period, to receive an annual cash bonus of up to 100% of Base Salary; provided, however, that the Executive shall only be eligible for a cash bonus of up to 50% of Base Salary for any fiscal year in which the Executive is paid a Reorganization Bonus pursuant to Section 4(e). The annual bonus for each year of the Employment Period will be determined based on the Company's achievement of performance objectives that are mutually agreed to by the Board or a committee thereof and the Executive. The annual bonus shall be paid in a lump sum payment following the end of the calendar year with respect to which such bonus is payable (such payment to be made at or within the same time or times that performance bonuses are paid to the other executive officers of the Company). (d) Equity Incentives. As further inducement for the Executive to enter into this Agreement and to continue in the employ of the Company, the Company will grant to the Executive options to acquire 1,000,000 shares of the Company's common stock. Unless the Company shall have theretofore commenced a proceeding (whether voluntary or involuntary) under the U.S. Bankruptcy Code, 333,334 of such options shall vest upon the first anniversary of the date hereof, 333,333 of such options shall vest upon the second anniversary of the date hereof, and 333,333 of such options shall vest upon the third anniversary of the date hereof. The exercise price per share of the options will equal the fair market value of the Company's Common Stock on the date of this Agreement. The options described in this Section 4(d) shall be evidenced by a stock option agreement to be entered between the Company and the Executive substantially in the form the Company uses for similar option grants. All such options will terminate automatically upon the Company's commencement of a bankruptcy proceeding (whether voluntary or involuntary) under the U.S. Bankruptcy Code. (e) Reorganization Bonus. If, during the Employment Period and for a period of 180 days following the Date of Termination, the Company consummates a Successful Restructuring, the Company shall pay Executive a cash bonus as provided in this Section 4(e). For purposes of this Agreement, a "Successful Restructuring" shall mean a restructuring or refinancing of substantially all of the Company's funded debt and other debt obligations reflected as liabilities on the Company's balance sheet in a bankruptcy proceeding or out of court proceeding, in either case in which a majority of the members of the Company's Board of Directors approve such refinancing or restructuring and (A) which has the effect of reducing the outstanding principal balance of such debt and debt obligations or reducing the Company's cash debt service requirements in respect of such debt and debt obligations and (B) in which all of the holders of the Company's outstanding equity immediately prior to such restructuring or refinancing receive (i) an aggregate equity interest, or other debt or equity security or other right that is convertible or exchangeable into an aggregate equity interest, in the Company following such restructuring or refinancing or (ii) cash or non-convertible debt securities with a value equivalent to such equity interest (the "Post Restructuring Equity Percentage"). The Reorganization Bonus will be (i) $900,000 if the Post Restructuring Equity Percentage is greater than 1% but less than 10% on a fully diluted basis and (ii) $1,200,000 if the Post Restructuring Equity Percentage is 10% or more on a fully diluted basis. (f) Benefits. Except as modified by this Agreement, throughout the Employment Period, the Executive shall be entitled (i) to participate in Plans, (ii) to receive all benefits, perquisites and emoluments for which other executive officers of the Company are -2- eligible under any Plan now or hereafter established and maintained by the Company to the fullest extent permissible under the general terms or provisions of such Plans and in accordance with the provisions thereof and (iii) to use of the leased automobile used by the Company's former chief executive officer or other comparable vehicle (including automobile insurance). Nothing in this Agreement shall preclude the Company from terminating or amending, from time to time, any Plan. (g) Expenses. During the Employment Period, the Company shall reimburse the Executive in accordance with the Company's policy for all reasonable expenses and other disbursements incurred by the Executive for or on behalf of the Company in connection with the performance of the Executive's duties hereunder upon presentation of appropriate receipts or other documentation therefore. (h) Temporary Housing; Relocation Expenses. The Company shall pay or reimburse the Executive for temporary housing and living expenses for a period of six (6) months from the date of this Agreement. During the Employment Period, in the event the Executive relocates his residence to Atlanta, Georgia or the surrounding areas, the Company shall pay or reimburse the Executive for all costs and expenses incurred in connection with such relocation. (i) No Other Compensation or Benefits. The Executive agrees that, except for the payments and benefits outlined in Sections 4, 5, 6 and 10, the Executive is not entitled to any other payments or benefits. 5. TERMINATION OF EMPLOYMENT. (a) Termination for Death, Disability or Retirement. The Executive's employment shall terminate upon his death, Disability or Retirement during the Employment Period. In the event of such termination: (i) the Company shall make a lump sum cash payment to the Executive (or, in the event that termination results from the death of the Executive, to his estate) within thirty (30) days after the Date of Termination in an amount equal to the sum of: (A) the Executive's Base Salary payable through the Date of Termination to the extent not already paid; (B) the Executive's actual earned annual bonus for any completed fiscal year or period not theretofore paid; (C) reimbursement for any expenses for which the Executive shall not have theretofore been reimbursed, as provided in Section 4; and (D) the unpaid portion of any amounts earned by the Executive prior to the date of such termination pursuant to any benefit program in which the executive participated during the Employment Period, including without limitation any accrued vacation pay to the extent not theretofore paid; -3- (ii) the Executive shall retain options which shall have been vested as of the Date of Termination and shall forfeit options which have not been vested; and (iii) the Executive (and his spouse and dependent children) will be entitled to continuation of health, life and disability benefits under the Plans for a period of one year from the Date of Termination on terms and conditions no less favorable than those in effect on the Date of Termination; provided, that the obligations of the Company under this clause (iii) shall be terminated if, at any time after the Date of Termination, the Executive is employed by or is otherwise affiliated with a party that offers comparable health, life and disability benefits to the Executive. (b) Resignation by the Executive. If the Executive shall resign his employment with the Company, the Executive shall provide the Company with a written notice of termination at least sixty (60) days prior to the Date of Termination. In the event of such resignation: (i) the Company shall make a lump sum cash payment to the Executive within thirty (30) days after the Date of Termination in an amount equal to the sum of: (A) the Executive's Base Salary payable through the Date of Termination to the extent not already paid; (B) the Executive's actual earned annual bonus for any completed fiscal year or period not theretofore paid; (C) reimbursement for any expenses for which the Executive shall not have theretofore been reimbursed, as provided in Section 4; and (D) the unpaid portion of any amounts earned by the Executive prior to the date of such termination pursuant to any benefit program in which the executive participated during the Employment Period, including without limitation any accrued vacation pay to the extent not theretofore paid; (ii) upon providing the Company with a Notice of Termination and until the Date of Termination, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company; and (iii) the Executive shall retain only the options which shall have already vested as of the Date of Termination and shall forfeit the options which have not been vested. (c) Termination by the Company for Cause. If the Executive's employment shall be terminated for Cause during the Employment Period, the Employment Period shall terminate without further obligations to the Executive other than the obligation to pay him all payments and benefits due, in accordance with the Company's Plans through the Date of Termination. Upon a termination for Cause, the Executive shall retain all vested options and shall forfeit all unvested options. -4- 6. OBLIGATIONS OF THE COMPANY RELATING TO A CHANGE OF CONTROL. Upon consummation of a Change of Control, then, notwithstanding anything to the contrary in this Agreement: (a) All unvested options held by the Executive shall vest upon consummation of a Change of Control unless the Company shall have theretofore commenced a proceeding (whether voluntary or involuntary) under the U.S. Bankruptcy Code in which case all such options shall have terminated. (b) In the event the Company (i) terminates the Executive's employment or (ii) there is a material diminution of the position, duties, benefits and other terms of Executive's employment with the Company, as in effect immediately prior to a Change of Control, within one year of a Change of Control (other than a termination by the Company for Cause), the Company shall make a lump sum cash payment to the Executive in the amount equal to the sum of: (A) the greater of (x) one and one-half times the Base Salary in effect upon consummation of the Change of Control and (y) the Base Salary in effect upon consummation of the Change of Control multiplied by the number of years remaining in the Employment Period (plus, if the remaining Employment Period includes a period of less than a full year, a pro rated amount of the Base Salary for the number of full months remaining in the Employment Period); (B) the Executive's Base Salary payable through the Date of Termination to the extent not already paid; (C) the Executive's actual earned annual bonus for any completed fiscal year or period not theretofore paid; (D) reimbursement for any expenses for which the Executive shall not have theretofore been reimbursed, as provided in Section 4; and (E) the unpaid portion of any amounts earned by the Executive prior to the date of such termination pursuant to any benefit program in which the executive participated during the Employment Period, including without limitation any accrued vacation pay to the extent not theretofore paid; (c) The Executive, his spouse and dependent children will be entitled to continuation of the health, life and disability benefits set forth in Section 5(a)(iii) for one year following consummation of a Change of Control on terms and conditions no less favorable than those in effect on the date of the Change of Control. 7. OFFSET. The Company shall have the right to offset the amounts required to be paid to the Executive under this Agreement against any amounts owed by the Executive to the Company, and nothing in this Agreement shall prevent the Company from pursuing any other available remedies against the Executive. -5- 8. NONEXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any Plan for which the Executive may qualify. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any Plan, contract or agreement with the Company at or subsequent to the Date of Termination shall be payable in accordance with such Plan, or contract or agreement except as explicitly modified by this Agreement. 9. FULL SETTLEMENT; LEGAL FEES. (a) Release. The Executive agrees that, as a condition to receiving the payments and benefits provided under Sections 5, 6 and 10 the Executive will execute, deliver and not revoke (within the time period permitted by applicable law) a Separation and Release Agreement substantially in the form of Exhibit A hereto. (b) Resignation. Upon the Date of Termination, Executive shall automatically be deemed to have resigned as an officer and director of the Company, any subsidiary and any affiliate and as a fiduciary of any benefit plan of any of the foregoing. The Executive shall execute any further documentation of such resignation as is reasonably requested by the Company. 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Anything in this Agreement to the contrary notwithstanding, in the event that any actual or constructive benefit payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement) (a "Payment') would be subject to the excise tax imposed by Section 4999 of the Code or any successor provision of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall make the payments described on Exhibit C hereto. 11. RESTRICTIONS AND OBLIGATIONS OF THE EXECUTIVE. (a) Consideration for Restrictions and Covenants. The parties hereto acknowledge and agree that the principal consideration for the agreement to make the payments provided in Sections 4, 5, 6 and 10 hereof from the Company to the Executive and the grant to the Executive of the options of the Company as set forth herein is the Executive's compliance with the undertakings set forth in this Section 11. Specifically, the Executive agrees to comply with the provisions of this Section 11 irrespective of whether the Executive is entitled to receive any payments under Sections 4, 5, 6 or 10 of this Agreement. (b) Confidentiality. All Confidential Information and Trade Secrets (as defined below) and all physical embodiments thereof received or developed by the Executive while employed by the Company are confidential to and are and will remain the sole and exclusive property of the Company. Except to the extent necessary to perform the duties assigned to him by the Company, or as otherwise required by law, the Executive will hold such Confidential Information and Trade Secrets in trust and strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Confidential Information and Trade -6- Secrets or any physical embodiments thereof nor take any action causing or fail to take the action necessary in order to prevent, any Confidential Information and Trade Secrets disclosed to or developed by the Executive to lose its character or cease to qualify as Confidential Information or Trade Secrets. As used herein, "Confidential Information" means data and information relating to the business of the Company (which does not rise to the status of a Trade Secret) which is or has been disclosed to the Executive or of which the Executive became aware as a consequence of or through its relationship to the Company and which has value to the Company and is not generally known to its competitors. Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by the Company (except where public disclosure has been made by the Executive without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means. The provisions in this Agreement restricting the use of Confidential Information shall survive for a period of two (2) years following termination of this Agreement. As used herein, "Trade Secrets" means information including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The provisions of this Agreement restricting the use of Trade Secrets shall survive termination of this Agreement for so long as is permitted by the Georgia Trade Secrets Act of 1990, O.C.G.A. Sections 10-1-760-10-1-767. (c) Return of Property. Upon request by the Company, and in any event upon termination of the employment of the Executive with the Company for any reason, the Executive will promptly deliver to the Company all property belonging to the Company, including, without limitation, all Confidential Information and Trade Secrets (and all embodiments thereof) then in the Executive's custody, control or possession. (d) Non-Solicitation. (i) During the Employment Period and for a two-year period following the Date of Termination, the Executive shall not, directly or indirectly solicit, encourage, cause or induce any officer of the Company or any of its subsidiaries to terminate such officer's employment with the Company or such subsidiary for the employment of another company without the prior written consent of the Board. (ii) The Executive acknowledges that the provisions of this Agreement are reasonable and necessary for the protection of the businesses of the Company and that part of the compensation paid under this Agreement and the agreement to pay severance in certain instances is in consideration for the agreements in this Section 11(d). (e) Litigation Assistance. At the request and expense of the Company, the Executive agrees to cooperate with the Company and its counsel in regard to any litigation presently pending or subsequently initiated involving matters of which the Executive has particular knowledge as a result of employment with the Company. Such cooperation shall consist of the Executive making himself available at reasonable times for consultation with -7- officers of the Company and its counsel and for depositions or other similar activity should the occasion arise; provided, however, Executive shall cooperate only to the extent that the Executive can do so without materially affecting the Executive's other business obligations to his employers or other third parties. Payment, based on the Executive's last per diem earnings, for the Executive's time involved, reasonable travel costs and out-of-pocket expenses in connection with such cooperation shall be reimbursed by the Company. (f) Equitable Relief; Severability; Survival. Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 11, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 11, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 4, Section 5, Section 6 and Section 11 shall survive the conclusion of the Executive's employment by the Company to the extent specified herein. 12. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinafter defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise. 13. MISCELLANEOUS. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia, without reference to principles of conflict of laws. (b) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. -8- (c) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (i) If to the Executive, to the address on file with the Company; and (ii) If to the Company, to it at Lodgian, Inc., 3445 Peachtree Road, N.E., Suite 700, Atlanta, Georgia, 30326, Attention: General Counsel; or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (e) Severability of Provisions. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. The Executive acknowledges that the restrictive covenants contained in Section 11 are a condition of this Agreement and are reasonable and valid in geographical and temporal scope and in all other respects. If any court or arbitrator determines that any of the covenants in Section 11, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court or arbitrator determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court or arbitrator shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. (f) Withholding. All payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law. (g) Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (h) Dispute Resolution. (i) In the event of disputes between the parties with respect to the terms and conditions of this Agreement, such disputes shall be resolved by and through an arbitration proceeding to be conducted under the auspices of the American Arbitration Association ("AAA") (or any like organization successor thereto) in Atlanta, Georgia. Such arbitration proceeding shall be conducted pursuant to the commercial arbitration rules (formal or informal) of the AAA in as expedited a manner as is then permitted by such rules (the "Arbitration"). Both the foregoing agreement of the parties to arbitrate -9- any and all such claims, and the results, determination, finding, judgment and/or award rendered through such Arbitration, shall be final and binding on the parties hereto and may be specifically enforced by legal proceedings. (ii) Such Arbitration may be initiated by written notice from either party to the other which shall be a compulsory and binding proceeding on each party. The Arbitration shall be conducted by an arbitrator selected in accordance with the procedures of the AAA. Time is of the essence of this arbitration procedure, and the arbitrator shall be instructed and required to render his or her decision within thirty (30) days following completion of the Arbitration. (iii) The costs of any such Arbitration, whether initiated by the Company or the Executive, shall be borne by the Company unless otherwise ordered by the Arbitrator. (iv) Any action to compel arbitration hereunder shall be brought in the State Court of Georgia. -10- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. LODGIAN, INC. By: ------------------------------------ Name: Title: DAVID HAWTHORNE --------------------------------------- -11- EXHIBIT A SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into as of this __ day of ___________________________, 20___, between LODGIAN, INC., a Delaware corporation, and any successor thereto (collectively, the "Company") and David Hawthorne (the "Executive"). The Executive and the Company agree as follows: 1. The employment relationship between the Executive and the Company terminated on __________________________________ (the "Termination Date"). 2. In accordance with the Executive's Employment Agreement (the "Employment Agreement"), the Company has agreed to pay the Executive certain payments and to make certain benefits available after the Date of Termination. 3. In consideration of the above, the sufficiency of which the Executive hereby acknowledges, the Executive, on behalf of the Executive and the Executive's heirs, executors and assigns, hereby releases and forever discharges the Company and its stockholders, parents, affiliates, subsidiaries, divisions, any and all current and former directors, officers, employees, agents, and contractors and their heirs and assigns, from all claims, charges, or demands, in law or in equity, whether known or unknown, which may have existed or which may now exist from the beginning of time to the date of this agreement arising from or relating to the Executive's employment or termination from employment with the Company, including a release of any rights or claims the Executive may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion, and national origin); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); any other federal, state or local laws against discrimination; or any other federal, state, or local statute, or common law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by the Executive of any claims for wrongful discharge, breach of contract, torts or any other claims in any way related to the Executive's employment with or resignation or termination from the Company. This release also includes a release of any claims for age discrimination under the Age Discrimination in Employment Act, as amended ("ADEA"). The ADEA requires that the Executive be advised to consult with an attorney before the Executive waives any claim under ADEA. In addition, the ADEA provides the Executive with at least twenty-one (21) days to decide whether to waive claims under ADEA and seven days after the Executive signs the Agreement to revoke that waiver. 4. This Agreement is not an admission by either the Executive or the Company of any wrongdoing or liability. A-1 5. The Executive waives any right to reinstatement or future employment with the Company following the Executive's separation from the Company on the Date of Termination. 6. This Agreement shall not release any claim or right the Executive, his spouse, dependent children, executor or assigns have or has to (i) compensation or benefits under the Employment Agreement, (ii) any other rights the Executive may have under the terms of the Employment Agreement, (iii) any claims under any employee pension benefit plan, or any employee welfare benefit plan, as those terms are defined in Section 3 of the Employee Retirement Income Security Act of 1974, as amended, (iv) retirement, welfare or fringe benefits following termination of employment, (v) any claims the Executive may have for workers' compensation benefits, (vi) any claims that Executive may have for personal injury (other than for defamation) caused by the negligent or willful act of or on behalf of the Company or any other released party, and (vii) indemnification and/or contribution from the Company. 7. The Executive agrees not to engage in any act after execution of this Separation and Release Agreement that is intended to harm the reputation of the Company, its officers, directors, stockholders or employees. The Executive will take no action which would reasonably be expected to lead to unwanted or unfavorable publicity to the Company. 8. The Executive shall continue to be bound by Section 11 of the Executive's Employment Agreement. 9. The Executive shall promptly return all the Company property in the Executive's possession, including, but not limited to, the Company keys, credit cards, cellular phones, computer equipment, software and peripherals and originals or copies of books, records, or other information pertaining to the Company business. The Executive shall return any leased or Company automobile. 10. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia, without reference to the principles of conflict of laws. Exclusive jurisdiction with respect to any legal proceeding brought concerning any subject matter contained in this Agreement shall be settled by arbitration as provided in the Executive's Employment Agreement. 11. This Agreement represents the complete agreement between the Executive and the Company concerning the subject matter in this Agreement and supersedes all prior agreements or understandings, written or oral. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 12. Each of the sections contained in this Agreement shall be enforceable independently of every other section in this Agreement, and the invalidity or nonenforceability of any section shall not invalidate or render unenforceable any other section contained in this Agreement. 13. It is further understood that for a period of seven (7) days following the execution of this Agreement in duplicate originals, the Executive may revoke this Agreement, A-2 and this Agreement shall not become effective or enforceable until the revocation period has expired. No revocation of this Agreement by the Executive shall be effective unless the Company has received within the seven (7) day revocation period, written notice of any revocation, all monies received by the Executive under this Agreement and all originals and copies of this Agreement. 14. This Agreement has been entered into voluntarily and not as a result of coercion, duress, or undue influence. The Executive acknowledges that the Executive has read and fully understands the terms of this Agreement and has been advised to consult with an attorney before executing this Agreement. Additionally, the Executive acknowledges that the Executive has been afforded the opportunity of at least twenty-one (21) days to consider this Agreement. The parties to this Agreement have executed this Agreement as of the day and year first written above. LODGIAN, INC. By: ------------------------------------ Name: Title: DAVID HAWTHORNE --------------------------------------- A-3 EXHIBIT B Capitalized terms used in the Agreement that are not elsewhere defined in the Agreement have the definitions set forth below: "Cause" means (i) the Executive's willful misconduct with respect to the business and affairs of the Company; (ii) a failure to comply with a written lawful and reasonable order of the Board; (iii) the Executive being convicted of a felony or the entering by the Executive of a plea of nolo contendere with respect to a charged felony; (iv) a material breach of Employee's duties and obligations under this Agreement and if such breach is capable of being cured, the Executive's failure to cure such breach within thirty (30) days of receipt thereof from the Company; or (iv) the Executive's commission of an act of fraud or financial dishonesty with regard to the Company. "Change of Control" means, after the date hereof: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company or any of its subsidiaries, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, (iii) any acquisition by any Person pursuant to a transaction that complies with clauses (i), (ii), (iii) and (iv) of subsection (c) below, or (iv) any acquisition by any entity in which the Executive has a material direct or indirect equity interest; (b) The cessation of the "Incumbent Board" for any reason to constitute at least a majority of the Board. "Incumbent Board" means the members of the Board on the date hereof and any member of the Board subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board, except that the Incumbent Board shall not include any member of the Board whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) The consummation of a merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless immediately following such Business Combination each of the following would be correct: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and B-1 Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Person resulting from such Business Combination (including, without limitation, a Person which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, and (ii) no Person (excluding (A) any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, or such corporation resulting from such Business Combination or any Affiliate of such corporation, or (B) any entity in which the Executive has a material equity interest, or any "Affiliate" (as defined in Rule 405 under the Securities Act of 1933, as amended) of such entity) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; and (iv) Executive is the President and Chief Executive Officer of the corporation resulting from such Business Combination. Executive has duties and authorities, and compensation and benefits commensurate with the position of President and Chief Executive Officer of a corporation comparable to that resulting from the Business Combination, but no less favorable than those in effect immediately before such Business Combination, and the corporation resulting from such Business Combination is a publicly traded corporation; or (d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, the date of receipt of the Notice of Termination or any later date specified therein, (ii) if the Executive's employment is terminated by reason of death or Disability, retirement, the Date of Termination shall be the date of death or retirement of the Executive or the effective date of the Disability, as the case may be, (iii) if the Executive's Employment is terminated because Executive resigns, the Date of Termination shall be the last day on which the Executive is employed by the Company as a regular employee, or (iv) the last day of the Employment Period. B-2 "Disability" means (i) the inability of the Executive to perform his duties under this Agreement for (x) a period of one hundred twenty (120) calendar days within any three hundred sixty-five (365) calendar day period, or (y) ninety (90) consecutive calendar days, and if within thirty (30) calendar days after a notice of termination is provided to the Executive, he shall not have returned to the performance of the Executive's duties hereunder, or (ii) a disability of the Executive within the meaning of Section 72(m)(7) of the Internal Revenue Code, that is, the Executive is unable to engage in any substantial gainful activity with the Company or any other employer, by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long, continued and indefinite duration, or (iii) the Executive becomes entitled to disability retirement benefits under the Federal Social Security Act or receive benefits under any long-term disability plan or policy maintained by the Company. "Notice of Termination" means a written notice that (i) indicates that this Agreement is terminated and (ii) if the Date of Termination is other than the date of such notice, specifies the termination date. "Plans" means all employee compensation, benefit and welfare plans, policies and programs of the Company, including, without limitation, incentive, savings, retirement, stock option, restricted stock, supplemental executive retirement, pension, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans, vacation practices, fringe benefit practices and policies relating to the reimbursement of business expenses. "Retirement" shall have the meaning ascribed to that term in the Plan under which benefits are being sought by the Executive or, if such meaning is inapplicable, the term shall mean a termination of employment with the Company or a subsidiary on a voluntary basis after to the age of sixty. The term "Retirement" shall also include "early" retirement prior to the age of sixty provided that the Committee, in its sole discretion, consents in writing to accept such early retirement. B-3 EXHIBIT C TAX GROSS-UP (a) If required by Section 10 of the Agreement, the Company shall pay to the Executive an additional amount (the "Gross-up") such that the portion of the Gross-up retained by the Executive, after deduction of any Excise Tax on the Gross-up and any Federal, state and local income taxes on the Gross-up, is sufficient to pay the Excise Tax imposed with respect to the Payments. In addition, the Company shall indemnify and hold the Executive harmless on an after-tax basis from any Excise Tax imposed on or with respect to any such Payment (including, without limitation, any interest, penalties and additions to tax payable in connection with any such Excise Tax). For purposes of determining the amount of any Gross-up or the amount required to make an indemnity payment on an after-tax basis, it shall be assumed that the Executive is subject to Federal, state and local income tax at the highest marginal statutory rates in effect for the relevant period after taking into account any deduction available in respect of any such tax (e.g., if state and local taxes are deductible for Federal income tax purposes in the relevant period, it shall be assumed that such taxes offset income that would otherwise be subject to Federal income tax at the highest marginal statutory rate in effect for such period) provided that the extent of any such deduction shall take into account, as determined by the accounting firm described in (b) below, any applicable limitation on itemized deductions imposed by federal law, calculated on the assumption that any such limitation applies proportionately to all itemized deductions on the Executive's federal tax return for the year in question. (b) Subject to the provisions of paragraph (c) of this Exhibit C, the determination of (i) whether a Gross-up is required and the amount of such Gross-up and (ii) the amount necessary to make any payment on an after-tax basis, shall be made in accordance with the assumptions set forth in paragraph (a) of this Exhibit C by a mutually agreed upon accounting firm, or, absent agreement, by whichever of Ernst & Young LLP or PricewaterhouseCoopers LLP is independent of the Company, in each case, at the Company's expense. (c) The Executive shall notify the Company as soon as practicable in writing of any claim by the Internal Revenue Service that, if successful, would require any additional Gross-up or indemnity payment beyond that initially calculated under (b) above. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company. If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall take all actions necessary to permit the Company to control all proceedings taken in connection with such contest. In that connection, the Company may, at its sole option, pursue or forgo any and all administrative appeals, proceedings, hearings and conferences in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; provided, however, that the Company shall pay and indemnify the Executive from and against all costs and expenses incurred in connection with such contest; provided further, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and at no net after-tax cost to the Executive. If the Executive C-1 becomes entitled to receive any refund or credit with respect to such claim (or would be entitled to a refund or credit but for a counterclaim for taxes not indemnified hereunder), the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon) plus the amount of any tax benefit available to the Executive as a result of making such payment (any such benefit calculated based on the assumption that any deduction available to the Executive offsets income that would otherwise be taxed at the highest marginal statutory rates of Federal, state and local income tax for the relevant periods) provided that the extent of any such deduction shall take into account, as determined by the accounting firm described in (b) above, any applicable limitation on itemized deductions imposed by federal law, calculated on the assumption that any such limitation applies proportionately to all itemized deductions on the Executive's federal tax return for the year in question. 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