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