-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CHx9TqUXtU2u+g5CqfvvzcD9qfoAO1XVPt+KhttmQEz/nebGmybXpArhq15s7pZe 0ByL2sWQJuehEgP61dwN4A== 0000950144-02-005639.txt : 20020515 0000950144-02-005639.hdr.sgml : 20020515 20020515162458 ACCESSION NUMBER: 0000950144-02-005639 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LODGIAN INC CENTRAL INDEX KEY: 0001066138 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 522093696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14537 FILM NUMBER: 02652835 BUSINESS ADDRESS: STREET 1: 3445 PEACHTREE ROAD N E SUITE 700 CITY: ATLANTA STATE: CA ZIP: 30326 BUSINESS PHONE: 4043649400 MAIL ADDRESS: STREET 1: 3445 PEACHTREE ROAD N E SUITE 700 CITY: ATLANTA STATE: CA ZIP: 30326 10-Q 1 g76435e10-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 MARCH 31, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-14537 LODGIAN, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-2093696 -------- ---------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 3445 PEACHTREE ROAD, N.E., SUITE 700, ATLANTA, GA 30326 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 364-9400 (Former name, former address and former fiscal year, if changed since last report): NOT APPLICABLE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS OUTSTANDING AS OF MAY 7, 2002 - ----------------------------- --------------------------------------- Common 28,479,837 This filing includes unaudited condensed consolidated financial statements which have not been reviewed by an independent public accountant in accordance with professional standards for conducting such reviews since the Company was unable to obtain these services from its previous auditors, Arthur Andersen LLP. The unaudited condensed consolidated financial statements, included herein, will be reviewed by independent public accountants consecutively with the Form 10-Q for the quarter ended June 30, 2002 (due to be released on August 14, 2002). LODGIAN, INC. AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 .................................................... 1 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001 (unaudited) ................... 2 Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2002 (unaudited) and for the Year Ended December 31, 2001 ............................................. 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 (unaudited) ................... 4 Notes to Condensed Consolidated Financial Statements (unaudited) ......... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................ 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk ............... 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings ........................................................ 28 Item 2. Changes in Securities .................................................... 28 Item 6. Exhibits and Reports on Form 8-K ......................................... 29 Signatures ....................................................................... 30
i PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001 (UNAUDITED) -------------- ----------------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents .............................................. $ 18,337 $ 14,007 Cash, restricted ....................................................... 6,341 3,218 Accounts receivable, net of allowances ................................. 16,289 12,489 Inventories ............................................................ 7,235 7,223 Prepaid expenses and other current assets .............................. 6,444 6,284 --------- --------- Total current assets ............................................... 54,646 43,221 Property and equipment, net .............................................. 903,379 913,968 Deposits for capital expenditures ........................................ 17,059 15,813 Other assets, net ........................................................ 2,353 2,360 --------- --------- $ 977,437 $ 975,362 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Liabilities Not Subject to Compromise Current liabilities: Accounts payable ..................................................... $ 10,916 $ 2,706 Accrued interest ..................................................... 3,586 1,192 Other accrued liabilities ............................................ 34,703 29,785 Advance deposits ..................................................... 3,189 1,771 Current portion of long-term debt and capital lease obligations ...... 3,951 7,717 --------- --------- Total current liabilities ............................................ 56,345 43,171 Other long-term debt and capital lease obligations ..................... 7,770 7,652 Liabilities Subject to Compromise ........................................ 928,671 925,894 Minority interests ....................................................... 5,796 5,326 Commitments and contingencies ............................................ -- -- Stockholders' deficit: Common stock, $.01 par value, 75,000,000 shares authorized; 28,479,837 issued and outstanding at March 31, 2002 and December 31, 2001 ...... 284 284 Additional paid-in capital ............................................. 263,320 263,320 Accumulated deficit .................................................... (282,736) (268,306) Accumulated other comprehensive loss ................................... (2,013) (1,979) --------- --------- Total stockholders' deficit ........................................ (21,145) (6,681) --------- --------- $ 977,437 $ 975,362 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months ended March 31, ----------------------------- 2002 2001 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) Revenues: Rooms ...................................................... $ 69,785 $ 84,018 Food and beverage .......................................... 20,531 25,202 Other ...................................................... 4,046 5,553 --------- --------- 94,362 114,773 --------- --------- Operating expenses: Direct: Rooms .................................................... 19,800 24,108 Food and beverage ........................................ 15,374 18,663 Other .................................................... 2,668 3,204 --------- --------- 37,842 45,975 --------- --------- Gross contribution ..................................... 56,520 68,798 General, administrative and other ............................ 41,815 51,480 Depreciation and amortization ................................ 14,263 15,657 Impairment of long-lived assets .............................. -- 565 Severance and restructuring expenses ......................... 122 750 --------- --------- Other operating expenses ............................... 56,200 68,452 --------- --------- 320 346 Other income (expenses): Interest income and other .................................. 181 266 Interest expense ........................................... (8,556) (20,765) Gain on asset dispositions .................................. -- 24,369 Minority interests: Preferred redeemable securities ............................ -- (3,226) Other ...................................................... (473) (146) --------- --------- (Loss) income before income taxes and reorganization items ... (8,528) 844 Reorganization items ........................................ (5,827) -- --------- --------- (Loss) income before income taxes ........................... (14,355) 844 Provision for income taxes .................................. (75) (2,700) --------- --------- Net loss ..................................................... $ (14,430) $ (1,856) ========= ========= Loss per common share - basic and diluted ..................... $ (0.51) $ (0.07) ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL ------------------------- PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY ----------- -------- ---------- ----------- ------------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 2000 . 28,290,424 $ 282 $ 263,320 $(125,542) $(1,180) $ 136,880 401(k) Plan contribution ..... 189,413 2 2 Net loss ..................... -- -- -- (142,764) -- (142,764) Currency translation adjustments ............... -- -- -- -- (799) (799) --------- Comprehensive loss ........... (143,563) ----------- -------- --------- --------- ------- --------- Balance at December 31, 2001 . 28,479,837 284 263,320 (268,306) (1,979) (6,681) 401(k) Plan contribution ..... -- -- -- -- Net loss ..................... -- (14,430) (14,430) Currency translation adjustments ............... -- (34) (34) --------- Comprehensive loss ........... (14,464) ----------- -------- --------- --------- ------- --------- Balance at March 31, 2002 .... 28,479,837 $ 284 $ 263,320 $(282,736) $(2,013) $ (21,145) =========== ======== ========= ========= ======= =========
The comprehensive loss for the three months ended March 31, 2001 was $2.5 million. The data for the three months ended March 31, 2002 and 2001 is unaudited. The accompanying notes are an integral part of these condensed consolidated financial statements. 3 LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, --------------------------------- 2002 2001 ------------- --------------- (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) Operating activities: Net loss ............................................... $(14,430) $ (1,856) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ........................ 14,263 15,657 Impairment of long-lived assets ...................... -- 565 Minority interests ................................... 473 3,372 Gain on sale of assets ............................... -- (24,369) Other ................................................ 103 1,153 Changes in operating assets and liabilities: Accounts receivable .............................. (3,800) (1,261) Inventories ...................................... (12) 63 Prepaid expenses and other assets ................ (3,283) (810) Accounts payable ................................. 8,054 (6,584) Accrued liabilities .............................. 6,429 (10,542) Advance deposits ................................. 1,418 1,345 -------- -------- Net cash provided by (used in) operating activities ...... 9,215 (23,267) -------- -------- Investing activities: Capital improvements, net .............................. (2,961) (7,324) Proceeds from sale of assets, net ...................... -- 58,826 (Deposits) withdrawals for capital expenditures ........ (1,246) 1,423 -------- -------- Net cash (used in) provided by investing activities ...... (4,207) 52,925 -------- -------- Financing activities: Proceeds from borrowings on working capital revolver ... -- 16,000 Principal payments on long-term obligations ............ (678) (42,335) Principal payments on working capital revolver ......... -- (15,000) -------- -------- Net cash used in financing activities .................... (678) (41,335) -------- -------- Net increase (decrease) in cash and cash equivalents ..... 4,330 (11,677) Cash and cash equivalents at beginning of period ......... 14,007 21,002 -------- -------- Cash and cash equivalents at end of period ............... $ 18,337 $ 9,325 ======== ======== Supplemental cash flow information: Cash paid during the period for: Interest, net of amount capitalized .................... $ 6,162 $ 26,057 ======== ======== Income taxes, net of refunds ........................... $ -- $ -- ======== ======== Deferred stock compensation ............................ $ -- $ 940 ======== ======== Operating cash receipts and payments resulting from Chapter 11 proceedings: Interest received ....................................... $ 39 $ -- Professional fees paid .................................. (2,690) -- Other reorganization payments ........................... (163) -- -------- -------- $ (2,814) $ -- ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SAS 71 REVIEW The accompanying unaudited condensed consolidated financial statements have not been reviewed by an independent public accountant in accordance with professional standards for conducting such reviews since the Company was unable to obtain these services from its previous auditors, Arthur Andersen LLP. The unaudited condensed consolidated financial statements, included herein, will be reviewed by independent public accountants consecutively with the Form 10-Q for the quarter ended June 30, 2002 (due to be released on August 14, 2002). 2. GENERAL The condensed consolidated financial statements include the accounts of Lodgian, Inc., its wholly-owned subsidiaries and four joint ventures in which Lodgian exercises control (collectively "Lodgian" or the "Company"). Lodgian believes it has control of the joint ventures when the Company manages and has control of the partnerships' assets and operations, has the ability and authority to enter into financing arrangements on behalf of the entity or to sell the assets of the entity within reasonable business guidelines. One unconsolidated entity (owning 1 hotel) is accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting policies followed for quarterly financial reporting are the same as those disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company's Form 10-K for the year ended December 31, 2001. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 2002, and the results of its operations and its cash flows for the three months ended March 31, 2002 and 2001. The results for interim periods are not necessarily indicative of the results for the entire year. While management believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K for the year ended December 31, 2001. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts in the financial statements in order to conform to the current period presentation. 3. BANKRUPTCY FILING AND GOING CONCERN MATTERS On December 20, 2001, the Company and eighty-one of its subsidiaries filed for voluntary reorganization with the United States Bankruptcy Court for the Southern District of New York under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Cases"). The Chapter 11 Cases have been consolidated for purposes of administration under case number 01-16345. The filing was precipitated by the weaker US economy, the decline in travel since the events of September 11 and the Company's heavy debt load. The Debtors are currently operating their businesses as debtors-in-possession and are subject to the jurisdiction of the Bankruptcy Court while a reorganization plan is being formulated. As of March 31, 2002, all operating subsidiaries of the Company were included in the Chapter 11 Cases except for two subsidiaries each owning one hotel. However, on April 17, 2002, one additional 5 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED) (UNAUDITED) operating subsidiary, New Orleans Airport Motel Associates, LP filed for voluntary reorganization with the United States Bankruptcy Court for the Southern District of New York under Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has also been consolidated with the previously filed Chapter 11 Cases, for purposes of administration, under case number 01-16345. The Chapter 11 Cases also exclude 65 non-operating subsidiaries of the Company. At March 31, 2002 and December 31, 2001, the assets and liabilities of the operating and non-operating subsidiaries excluded from the Chapter 11 cases are as follows (amounts in thousands):
March 31, 2002 December 31, 2001 -------------- ----------------- Assets $ 13,341 (1) $ 13,357 (1) Liabilities $ (28,275)(1) $ (28,107)(1)
As a result of the Chapter 11 filing, the Company is prohibited from paying pre-petition claims (unless these are approved by the courts) and creditors are prohibited from attempting to collect loans or debts arising prior to December 20, 2001. The Company, at its option, may assume or reject contracts entered into prior to the date of filing. Rejected contracts entered into prior to the date of the petition would be treated as unsecured claims. The Company has received approval from the Bankruptcy Court to pay pre and post petition employee wages, salaries, benefits and other employee obligations. The Bankruptcy Court also approved orders granting the debtors authority to pay, among other things, certain pre-petition claims of its critical service vendors. The Company has been and intends to continue to pay its post-petition obligations arising in the ordinary course of business. The Debtors have received debtor-in-possession financing (the "DIP Facility") of $25 million from a group of lenders led by Morgan Stanley Funding Inc. and Lehman Brothers Inc. The DIP Facility, along with the rights of the Debtor to use the cash collateral of these lenders expires one year from the date of filing or on the effective date of the reorganization plan, whichever is earlier. As of May 14, 2002, the Debtors had not yet filed a plan of reorganization with the Bankruptcy courts but management believes that the Plan will result in most unsecured claims being settled for less than 100% of their face value and that the interests of the common stock holders will be significantly diluted. Going Concern The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect adjustments that might result if the Company is unable to continue as a going concern. The Company's recent losses and the Chapter 11 Cases, raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern and the appropriateness of using the going concern basis is dependent upon, among other things: (i) the Company's ability to comply with the debtor-in-possession financing (DIP Facility) agreements, (ii) the Company's ability to obtain financing upon expiration of the DIP Facility, (iii) confirmation of a plan of reorganization under the Bankruptcy Code, (iv) the Company's ability to achieve profitable operations after such confirmation, and (v) the Company's ability to generate sufficient cash from operations to meet its obligations. In addition, the Company's debtor-in-possession financing agreements expire in December 2002; there can be no assurance that the Company will be successful in obtaining confirmation of a plan of - ------------------- 1 Figures exclude New Orleans Airport Motel Associates LP which petitioned under Chapter 11 on April 17, 2002. 6 reorganization by December 2002 and, if not, there can be no assurance that the existing debtor-in-possession lenders will agree to continue to provide debtor-in-possession financing. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company not be able to continue as a going concern. A plan of reorganization could materially change the amounts currently recorded in the consolidated financial statements. The consolidated financial statements do not give effect to any adjustments to the carrying value of assets or amounts and classifications of liabilities that might be necessary as a result of the Chapter 11 Cases. 4. ACCOUNTING DURING REORGANIZATION PROCEEDINGS The Company continues to apply generally accepted accounting principles in the preparation of its consolidated financial statements while in Chapter 11. However, in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7 - "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7): 1) the consolidated financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business; 2) the Company's consolidated balance sheets segregate liabilities subject to compromise from liabilities not subject to compromise; and 3) where the underlying collateral in respect of certain debt is considered to be less than the debt obligation, the Company ceased accruing interest on those debts. Management believes that 29 of its hotels are significantly overleveraged in that the estimated fair value of these hotels does not exceed the outstanding debt on these hotels. Therefore, with the approval of the Bankruptcy Court, the Company ceased paying interest to the secured lenders of these properties from the date of the bankruptcy petition. With respect to the remaining 76 hotels that are currently in Chapter 11, management presently believes the value of these hotels exceeds the outstanding debt on these properties. Accordingly, with the approval of the Bankruptcy Court, the Company agreed to pay interest on these debts. However, while the Company is in Chapter 11, the value of these properties may be adversely affected by changes in the economy, changes in the hospitality industry, actions taken or that may be taken by the franchisors, and the Company's ability to obtain exit financing and achieve a consensual plan of reorganization. Furthermore, management believes the significant terms of these debts could also be compromised as a result of the Chapter 11 Cases. Accordingly, management classifies all of its secured debt as liabilities subject to compromise in the accompanying balance sheets at March 31, 2002 and December 31, 2001. Liabilities subject to compromise Liabilities subject to compromise refers to known liabilities incurred prior to the commencement of the Chapter 11 Cases, including those considered by the Bankruptcy Court to be pre-petition claims. These liabilities consist primarily of amounts outstanding under long-term debt and also include accounts payable, accrued interest, and other accrued expenses. These amounts represent the Company's estimate of known or potential claims to be resolved in the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further development with respect to disputed claims; (4) proofs of claim; or (5) other events. Payment terms for these amounts will be established under a plan of reorganization. The principal categories of claims classified as liabilities subject to compromise in the Chapter 11 Cases as of March 31, 2002 and December 31, 2001, are identified below: (amounts in thousands) 7
March 31, December 31, 2002 2001 --------- ------------ Long-term debt and capital lease obligations $488,948 $485,774 Senior subordinated Notes (including related accrued interest) 210,549 210,549 Minority interest - preferred redeemable securities (including related accrued 197,218 197,218 interest) - CRESTS Accounts payable 23,185 22,698 Accrued liabilities (including accrued interest of $1,027 at March 31, 2002 and 8,771 9,655 -------- -------- December 31, 2001) $928,671 $925,894 ======== ========
Summary of Reorganization Items The results for the year ended March 31, 2002 include charges which relate to the reorganization process and the Chapter 11 Cases. The table below summarizes these reorganization charges (amounts in thousands): Legal and professional fees $5,664 Other 163 ------ $5,827 ======
5. CASH, RESTRICTED Restricted cash as of March 31, 2002 comprises utility deposits of $1.0 million, property tax escrows of $2.5 million and cash generated from certain high leveraged properties of $2.8 million (restricted to expenditures on properties in the same lender pool). 6. PROPERTY AND EQUIPMENT, NET The Company evaluates the recoverability of its long-lived assets in accordance with SFAS 144 and records impairment losses for assets held for use, where the estimated future undiscounted cash flows are insufficient to recover the carrying value of those assets. However, as a result of the filing of the Chapter 11 Cases, the Company may ultimately sell or otherwise dispose of its hotel assets for amounts less than the carrying value of these assets and future actions by the Company, its creditors or the Bankruptcy Court could adversely impact the Company's ability to hold its assets for periods sufficient for it to recover the carrying value of its assets on an undiscounted cash flow basis. As a result, the Company could recognize impairment losses in future periods. Based on this evaluation, the Company recorded no impairment losses for the first quarter of 2002 ($0.6 million for the first quarter of 2001). Also, as previously reported in the Company's Form 10-K for the year ended December 31, 2001, in connection with its bankruptcy petition on December 20, 2001, the Company determined that 29 of its hotels were significantly overleveraged in that the estimated fair value of these hotels did not exceed the outstanding debt on these hotels. Therefore, with the approval of the Bankruptcy Court, the Company ceased paying interest to the secured lenders of these properties from the date of the bankruptcy petition. The Company also concluded that it no longer had the ability to hold these hotels for a period sufficient for their estimated future undiscounted cash flows to cover their carrying values. Therefore in accordance with the provisions of FAS 121 (superceded on January 1, 2001 by SFAS 144) the Company determined that an impairment charge of $69 million was necessary to reduce the carrying value of these assets. Also, during the fourth quarter of 2001, in connection with the bankruptcy petition, the Company also ceased marketing for sale, four operating properties that were previously classified as held for sale. Since these assets were not considered impaired as the estimated future cash 8 flows from the use of these properties exceeded their carrying values, the Company recaptured $8.5 million of impairment reserves previously recorded in 1999, 2000 and 2001. 7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED MARCH 31, ----------------------------------- 2002 2001 --------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net loss $ (14,430) $ (1,856) ========= ======== Denominator: Denominator for basic and diluted earnings per share-weighted-average shares 28,480 28,290 ========= ======== Basic and diluted earnings per share: Net loss $ (0.51) $ (0.07) ========= ========
The computation of diluted earnings per share did not include shares associated with the assumed conversion of the Convertible Redeemable Equity Structure Trust Securities (CRESTS) or stock options because their inclusion would have been antidilutive. 8. OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS AND PREFERRED REDEEMABLE SECURITIES The Company received debtor-in-possession financing of $25 million from a group of lenders led by Morgan Stanley Funding Inc. and Lehman Brothers Inc. The DIP Facility along with the rights of the debtors to use the cash collateral of these lenders expires one year from the filing or on the effective date of the reorganization plan, whichever is earlier. Under the DIP Facility, the Company has the option to borrow at either base rate plus 2.5% or at LIBOR plus 3.5%. As of May 14, 2002, the Company had not borrowed from the facility but had issued one letter of credit totaling $750,000 against it. In addition, the Company believes that the underlying collateral on certain of its debts is less than the principal obligation outstanding. Therefore, in accordance with SOP 90-7, the Company ceased accruing interest on these debts as well as the Senior Subordinated Notes and the CRESTS. Contractual interest not accrued between December 20, 2001 and March 31, 2002 amounted to $12.8 million ($11.4 million for the first quarter of 2002) including interest on the Senior Subordinated Notes and the CRESTS. Substantially, all the Company's property and equipment are pledged as collateral for long-term obligations of which approximately $497 million has been guaranteed by Lodgian, Inc. Certain of the mortgage notes are subject to a prepayment penalty if repaid prior to their maturity. On May 20, 2001, promissory notes of approximately $3.9 million secured by the pledge of 100% of the ownership interests of Macon Hotel Associates, L.L.C. ("MHA") were due. The Company owns a 9 60% controlling interest in MHA. MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA did not make this payment on May 20, 2001. During the first quarter of 2001, the Company recorded an impairment charge of $2.2 million to reduce the carrying value of the hotel to the outstanding debt balance, which included the promissory notes discussed above and a $7.8 million first mortgage. MHA was not included in the entities that filed for reorganization under Chapter 11. On April 19, 2002, MHA and the lenders entered into a Satisfaction and Release Agreement whereby the lenders agreed to fully discharge the indebtedness under the promissory note of $3.9 million plus related accrued interest approximating $0.8 million in exchange for payment by MHA of $0.2 million. As a result of the Chapter 11 Cases, the Company is technically in default of its debt agreements with the exception of Macon Hotel Associates, L.L.C. which was not included in the bankruptcy petition. All of the Company's pre-petition debts, with the exception of the debt of Macon Hotel Associates, L.L.C., are recorded in liabilities subject to compromise in the balance sheets as of March 31, 2002 and December 31, 2001. The Company is subject to certain property maintenance and quality standard compliance requirements under its franchise agreements. The Company periodically receives notifications from its franchisors of events of noncompliance with such agreements and may continue to receive notifications if the liquidity and cash constraints of the Company limit its ability to comply with its franchise agreements. In the past, management has cured most cases of noncompliance within the applicable cure periods and the events of noncompliance did not result in events of default under the respective loan agreements. However, in selected situations, as warranted, based on economic evaluations, management may elect to not comply with the franchisor requirements. In such situations, the Company will either select an alternative franchisor or operate the property independent of any franchisor. As a result of the Company's petition for bankruptcy, the Company is technically in default of its franchise agreements. However, due to the automatic stay of proceedings, the franchisors are prohibited from proceeding with certain actions absent approval from the Bankruptcy Courts. Were the automatic stay, in respect of these franchise agreements, to be lifted, this could negatively impact operating results and the value of the Company's hotels. See Note 10 below. 9. INCOME TAXES The Company recognized an income tax provision of $0.1 million for the first quarter 2002. This related primarily to provisions for state income taxes. 10. COMMITMENTS AND CONTINGENCIES On March 7, 2002, Hilton Hotel Corporation, Promus Hotels, Inc., Doubletree Hotel Systems, Inc. and Hilton Inns, Inc. filed a Motion for Relief from the automatic stay of proceedings (which arose as a result of the Debtor's petition under Chapter 11) to terminate certain license agreements or alternatively to compel the Debtors to reject the license agreements. The Company has responded to this motion and believes it has valid defenses to this matter. The Company is contingently liable in respect to three pre-petition irrevocable letters of credit totaling $7.4 million issued as guarantees to Zurich Insurance Company and Safeco Insurance Company of America. The letters of credit expire in the third and fourth quarters of 2002 but may require renewal beyond those dates. Additionally, one letter of credit for $750,000 (expiring in the fourth quarter of 2002) was issued against the DIP Facility. The Company is a party in litigation with Hospitality Restoration and Builders, Inc. ("HRB"), a general contractor hired to perform work on six of the Company's hotels. The litigation involves hotels in Texas, Illinois, and New York. In general, HRB claims that the Company breached contracts to renovate the hotels by not paying for work performed. The Company contends that it was over-billed by HRB and that a significant portion of the completed work was defective. In August 2001, the parties agreed to settle the litigation pending in Texas and Illinois. In exchange for mutual dismissals and full releases, the Company paid HRB $750,000. With respect to the matter pending in the state of New York, HRB claims 10 that it is owed $10.7 million. The Company asserted a counterclaim of $7 million and believes that it has valid defenses and counterclaims to the contractor's remaining claims. Thomas Arasi, the Company's former President and Chief Executive Officer, has asserted a claim against the Company under his employment agreement. Mr. Arasi alleges that he was terminated without cause and claims damages in the amount of $3.3 million plus other unspecified amounts. The Company disputes Mr. Arasi's claims and believes it has valid defenses to this matter. The Company and individual directors are parties to a lawsuit alleging violations of federal securities laws and breach of fiduciary duty in connection with certain investments made in affiliates of Impac Hotel Group, LLC, a predecessor of the Company. The Company believes that it has valid defenses to this matter. The Company is a party to other legal proceedings arising in the ordinary course of business, the impact of which would not, either individually or in the aggregate, in management's opinion, have a material adverse effect on its financial position or results of operations. 11. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, SFAS 142 "Goodwill and other Intangible Assets" (effective for fiscal years beginning after December 15, 2001) was issued. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. SFAS No.142 was adopted by the Company in the first quarter of 2002. The adoption had no impact on the Company's financial statements. In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations," (effective for fiscal periods commencing after June 15, 2002) was issued. SFAS No. 143 requires that entities recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company believes that the adoption of SFAS No. 143 will not have a significant impact on its financial statements. In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," (effective for fiscal periods commencing December 15, 2001) was issued. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and among other factors, establishes criteria beyond that previously specified in SFAS No. 121 to determine when long-lived assets are to be considered as held for sale. The Company adopted SFAS 144 in the first quarter of 2002 and believes that the impairment provisions of SFAS No. 144 are similar to SFAS No. 121. The adoption did not have a significant impact on the Company's financial statements. However, with the adoption of SFAS No. 144, the operating results of any real estate assets sold will now be included in discontinued operations in the statement of operations. In April 2002, SFAS 145 "Rescission of SFAS No. 4, 44, 64 and Amendment of SFAS No. 13 and Technical Corrections" was issued. SFAS 145, among other factors, prevents treatment as extraordinary, gains or losses on extinguishment of debt not meeting the criteria of APB 30. SFAS 145 is effective for fiscal years beginning after May 15, 2002 and is not expected to have an impact on previously issued financial statements of the Company. However, the adoption could impact the financial statements of subsequent periods. 12. RELATED PARTY TRANSACTIONS On December 15, 2000, the Company sold a partially constructed hotel located in Richmond, Virginia to an entity controlled by a shareholder who is a 10.9% beneficial owner of the Company's common stock. The Company received net proceeds of approximately $12.3 million from the sale and recorded a loss on the sale of approximately $0.5 million. In addition, the Company entered into a separate management contract with the purchaser to provide construction management oversight until completion of 11 the project. The project was completed in May 2001 and the final outstanding amount due under the Project ($1.2 million) was paid on May 3, 2002. Richard Cartoon, the Company's Executive Vice President and Chief Financial Officer, is a principal in a business that the Company retained in November 2001 to provide Richard Cartoon's services as Chief Financial Officer and other restructuring support and services. In addition to amounts paid for Richard Cartoon's services, the Company was billed $185,000 for other support and services provided by associates of Richard Cartoon, LLC for the period January 1, 2002 to March 31, 2002. The Company expects to continue to utilize such support and services as needed through the restructuring process. 13. SUPPLEMENTAL GUARANTOR INFORMATION In connection with the Company's sale of $200 million of 12 1/4% Senior Subordinated Notes (the "Notes") in July 1999, certain of the Company's subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's obligations to pay principal and interest with respect to the Notes. Each Subsidiary Guarantor is wholly-owned and management has determined that separate financial statements for the Subsidiary Guarantors are not material to investors. The subsidiaries of the Company that are not Subsidiary Guarantors are referred to in the note as the "Non-Guarantor Subsidiaries". The following supplemental condensed consolidating financial statements present balance sheets as of March 31, 2002 and December 31, 2001 and statements of operations and cash flows for the three months ended March 31, 2002 and 2001. In the condensed consolidating financial statements, Lodgian, Inc. (the "Parent") accounts for its investments in wholly owned subsidiaries using the equity method. 12 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2002
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- -------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ......................... $ 6 $ 14,055 $ 4,276 $ -- $ 18,337 Cash, restricted .................................. -- -- 6,341 -- 6,341 Accounts receivable, net of allowances ............ -- 7,783 8,506 -- 16,289 Inventories ....................................... -- 3,318 3,917 -- 7,235 Prepaid expenses and other current assets ......... -- 182 6,262 -- 6,444 --------- --------- --------- --------- --------- Total current assets ........................... 6 25,338 29,302 -- 54,646 Property and equipment, net ......................... -- 526,183 377,196 -- 903,379 Deposits for capital expenditures ................... -- 79 16,980 -- 17,059 Investment in consolidated entities ................. (375,365) -- -- 375,365 -- Due from (to) affiliates ............................ 555,483 (248,663) (306,820) -- -- Other assets, net ................................... -- 1,104 1,249 -- 2,353 --------- --------- --------- --------- --------- $ 180,124 $ 304,041 $ 117,907 $ 375,365 $ 977,437 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable .................................. $ -- -$4,937 $ 5,979 $ -- $ 10,916 Accrued interest .................................. -- -- 3,586 -- 3,586 Other accrued liabilities ......................... -- 4,604 30,099 -- 34,703 Advance deposits .................................. -- 1,211 1,978 -- 3,189 Current portion of long-term debt and capital lease obligations ............................... -- -- 3,951 -- 3,951 --------- --------- --------- --------- --------- Total current liabilities ....................... -- 10,752 45,593 -- 56,345 Other long-term debt and capital lease obligations . -- -- 7,770 7,770 Liabilities Subject to Compromise ................... 199,256 427,764 301,651 928,671 Minority interests .................................. -- 554 5,242 -- 5,796 Commitments and contingencies Stockholders' (deficit) equity: Common stock ...................................... 284 33 448 (481) 284 Additional paid-in capital ........................ 263,320 22,619 (46,924) 24,305 263,320 Accumulated deficit ............................... (282,736) (155,668) (195,873) 351,541 (282,736) Accumulated other comprehensive loss .............. -- (2,013) -- -- (2,013) --------- --------- --------- --------- --------- Total stockholders' (deficit) equity ........... (19,132) (135,029) (242,349) 375,365 (21,145) --------- --------- --------- --------- --------- $ 180,124 $ 304,041 $ 117,907 $ 375,365 $ 977,437 ========= ========= ========= ========= =========
13 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ------------- ------------ ------------ IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ......................... $ 6 $ 6,550 $ 7,451 $ -- $ 14,007 Cash, restricted .................................. -- -- 3,218 -- 3,218 Accounts receivable, net of allowances ............ -- 5,921 6,568 -- 12,489 Inventories ....................................... -- 3,320 3,903 -- 7,223 Prepaid expenses and other current assets ......... -- 143 6,141 -- 6,284 --------- --------- --------- --------- --------- Total current assets ........................... 6 15,934 27,281 -- 43,221 Property and equipment, net ......................... -- 532,163 381,805 -- 913,968 Deposits for capital expenditures ................... -- 91 15,722 -- 15,813 Investment in consolidated entities ................. (361,752) -- -- 361,752 -- Due from (to) affiliates ............................ 556,300 (247,346) (308,954) -- -- Other assets, net ................................... -- 1,122 1,238 -- 2,360 --------- --------- --------- --------- --------- $ 194,554 $ 301,964 $ 117,092 $ 361,752 $ 975,362 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities Not Subject to Compromise: Current liabilities: Accounts payable .................................. $ -- $ 280 $ 2,426 $ -- $ 2,706 Accrued interest .................................. -- -- 1,192 -- 1,192 Other accrued liabilities ......................... -- 4,837 24,948 -- 29,785 Advance deposits .................................. -- 896 875 -- 1,771 Current portion of long-term debt and capital lease obligations ................................ -- -- 7,717 -- 7,717 --------- --------- --------- --------- --------- Total current liabilities ....................... -- 6,013 37,158 -- 43,171 Other long-term debt and capital lease obligations . -- -- 7,652 -- 7,652 Liabilities Subject to Compromise ................... 199,256 428,528 298,110 -- 925,894 Minority interests - other .......................... -- -- 5,326 -- 5,326 Commitments and contingencies Stockholders' (deficit) equity: Common stock ...................................... 284 33 448 (481) 284 Additional paid-in capital ........................ 263,320 22,619 (46,924) 24,305 263,320 Accumulated deficit ............................... (268,306) (153,250) (184,678) 337,928 (268,306) Accumulated other comprehensive loss .............. -- (1,979) -- -- (1,979) --------- --------- --------- --------- --------- Total stockholders' (deficit) equity ............ (4,702) (132,577) (231,154) 361,752 (6,681) --------- --------- --------- --------- --------- $ 194,554 $ 301,964 $ 117,092 $ 361,752 $ 975,362 ========= ========= ========= ========= =========
14 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) Revenues: Rooms ............................................. $ -- $ 33,972 $ 35,813 $ -- $ 69,785 Food and beverage ................................. -- 10,270 10,261 -- 20,531 Other ............................................. -- 1,945 2,101 -- 4,046 -------- -------- -------- ------- -------- Total revenue ....................................... -- 46,187 48,175 -- 94,362 -------- -------- -------- ------- -------- Operating expenses: Direct: Rooms ........................................... -- 9,650 10,150 -- 19,800 Food and beverage ............................... -- 7,769 7,605 -- 15,374 Other ........................................... -- 1,213 1,455 -- 2,668 -------- -------- -------- ------- -------- -- 18,632 19,210 -- 37,842 -------- -------- -------- ------- -------- Gross contribution ........................... -- 27,555 28,965 -- 56,520 General, administrative and other ................... -- 19,276 22,539 -- 41,815 Depreciation and amortization ....................... -- 6,604 7,659 -- 14,263 Severance and restructuring expenses ............... -- -- 122 -- 122 -------- -------- -------- ------- -------- Other operating expenses ................ -- 25,880 30,320 -- 56,200 -------- -------- -------- ------- -------- -- 1,675 (1,355) -- 320 Other income (expenses): Interest income and other ......................... -- -- 181 -- 181 Interest expense .................................. -- (4,508) (4,048) -- (8,556) Equity in losses of consolidated subsidiaries ..... (14,355) -- -- 14,355 -- Minority interests .................................. -- (402) (71) -- (473) -------- -------- -------- ------- -------- Loss before income taxes and reorganization items ... (14,355) (3,235) (5,293) 14,355 (8,528) Reorganization items ................................ -- -- (5,827) -- (5,827) -------- -------- -------- ------- -------- Loss before income taxes ........................... (14,355) (3,235) (11,120) 14,355 (14,355) Provision for income taxes ......................... (75) -- (75) 75 (75) -------- -------- -------- ------- -------- Net loss ............................................ $(14,430) $ (3,235) $(11,195) $14,430 $(14,430) ======== ======== ======== ======= ========
15 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Three Months Ended March 31, 2001
SUBSIDIARY NON-GUARANTOR TOTAL PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ---------- ------------- ------------ ------------ (UNAUDITED) (IN THOUSANDS) Revenues: Rooms .......................................... $ -- $ 40,399- $ 43,619 $ -- $ 84,018 Food and beverage .............................. -- 12,378 12,824 -- 25,202 Other .......................................... -- 2,541 3,012 -- 5,553 -------- -------- -------- --------- --------- -- 55,318 59,455 -- 114,773 -------- -------- -------- --------- --------- Operating expenses: Direct: Rooms ........................................ -- 11,565 12,543 -- 24,108 Food and beverage ............................ -- 9,098 9,565 -- 18,663 Other ........................................ -- 1,487 1,717 -- 3,204 -------- -------- -------- --------- --------- -- 22,150 23,825 -- 45,975 -------- -------- -------- --------- --------- Gross contribution ......................... -- 33,168 35,630 -- 68,798 General, administrative and other ................ -- 22,469 29,011 -- 51,480 Depreciation and amortization .................... -- 7,269 8,388 -- 15,657 Impairment of long-lived assets .................. -- (2,735) 3,300 -- 565 Severance expenses ............................... -- -- 750 -- 750 -------- -------- -------- --------- --------- Other operating expenses ................. -- 27,003 41,449 -- 68,452 -------- -------- -------- --------- --------- -- 6,165 (5,819) -- 346 Other income (expenses): Interest income and other ...................... -- -- 266 -- 266 Interest expense ............................... -- (13,034) (7,731) -- (20,765) Gain on asset dispositions ..................... -- 20 24,349 -- 24,369 Equity in income of consolidated subsidiaries .. 844 -- -- (844) -- Minority interests: Preferred redeemable securities ................ -- -- (3,226) -- (3,226) Other .......................................... -- -- (146) -- (146) -------- -------- -------- --------- --------- Income (loss) before income taxes ................ 844 (6,849) 7,693 (844) 844 Provision for income taxes ....................... (2,700) -- (2,700) 2,700 (2,700) -------- -------- -------- --------- --------- Net (loss) income ........................ $ (1,856) $ (6,849) $ 4,993 $ 1,856 $ (1,856) ======== ======== ======== ========= =========
16 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2002
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ---------- ------------- ------------ (UNAUDITED) (IN THOUSANDS) Operating activities: Net loss ................................................ $ - $ (3,235) $ (11,195) $ (14,430) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization .......................... - 6,604 7,659 14,263 Minority interests ..................................... - 402 71 473 Other .................................................. - 166 (64) 103 Changes in operating assets and liabilities: Accounts receivable .................................... - (1,862) (1,938) (3,800) Inventories ............................................ - 2 (14) (12) Prepaid expenses and other assets ...................... - (39) (3,244) (3,283) Accounts payable ....................................... - 4,657 3,397 8,054 Accrued liabilities .................................... - (913) 7,342 6,429 Advance deposits ....................................... - 315 1,103 1,418 ------- ------- --------- ---------- Net cash provided by operating activities ................ - 6,098 3,117 9,215 ------- ------- --------- ---------- Investing activities: Capital improvements, net .............................. - (738) (2,222) (2,961) Net withdrawals (deposits) for capital expenditures ... - 12 (1,258) (1,246) ------- ------- ---------- ---------- Net cash used in investing activities ................. - (726) (3,480) (4,207) ------- ------- --------- ---------- Financing activities: Proceeds received from (paid to) related parties ....... - 2,134 (2,134) -- Principal payments on long-term obligations ............ - -- (678) (678) ------- ------- --------- ---------- Net cash provided by (used in) financing activities .. - 2,134 (2,812) (678) ------- ------- --------- ---------- Net increase (decrease) in cash and cash equivalents .... - 7,505 (3,175) 4,330 Cash and cash equivalents at beginning of period ......... 6 6,550 7,451 14,007 ------- ------- --------- ---------- Cash and cash equivalents at end of period ............... $ 6 $ 14,055 $ 4,276 $ 18,337 ======= ======= ========= ==========
17 LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2001
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ---------- ------------- ------------ (UNAUDITED) (IN THOUSANDS) Operating activities: Net loss ................................................ $ -- $ (6,849) $ 4,993 $ (1,856) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .......................... -- 7,269 8,388 15,657 Impairment of long-lived assets ........................ -- (2,735) 3,300 565 Minority interests ..................................... -- -- 3,372 3,372 Gain on sale of assets ................................. -- (20) (24,349) (24,369) Other .................................................. 218 773 162 1,153 Changes in operating assets and liabilities: Accounts receivable .................................... -- (1,620) 359 (1,261) Inventories ............................................ -- 70 (7) 63 Other assets ........................................... -- 12 (822) (810) Accounts payable ....................................... -- (1,106) (5,478) (6,584) Accrued liabilities .................................... -- 571 (11,113) (10,542) Advance deposits ....................................... -- (7,274) 8,619 1,345 ----- -------- -------- -------- Net cash provided by (used in) operating activities ..... 218 (10,909) (12,576) (23,267) Investing activities: Capital improvements, net .............................. -- (4,568) (2,756) (7,324) Proceeds from sale of assets, net ...................... -- 3,153 55,673 58,826 Net withdrawals for capital expenditures .............. -- 402 1,021 1,423 ----- -------- -------- -------- Net cash provided by (used in) investing activities .... -- (1,013) 53,938 52,925 Financing activities: Proceeds from borrowings on working capital revolver ... -- 16,000 -- 16,000 Proceeds received from (paid to) related parties ....... (218) 21,121 (20,903) -- Principal payments on long-term obligations ............ -- (18,775) (23,560) (42,335) Principal payments on working capital revolver ......... -- (15,000) -- (15,000) ----- -------- -------- -------- Net cash (used in) provided by financing activities .. (218) 3,346 (44,463) (41,335) ----- -------- -------- -------- Net (decrease) increase in cash and cash equivalents ..... -- (8,576) (3,101) (11,677) Cash and cash equivalents at beginning of period ......... 6 20,653 343 21,002 ----- -------- -------- -------- Cash and cash equivalents at end of period ............... $ 6 $ 12,077 $ (2,758) $ 9,325 ===== ======== ======== ========
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHAPTER 11 PROCEEDINGS As previously discussed in Note 3 to the Condensed Consolidated Financial Statements, on December 20, 2001, the Company and eighty-one of its subsidiaries filed for voluntary reorganization with the Bankruptcy Court. The Chapter 11 Cases have been consolidated for purposes of administration under case number 01-16345. The filing was precipitated by the weaker US economy, the decline in travel since the events of September 11 and the Company's heavy debt load. The Debtors are currently operating their businesses as debtors-in-possession and are subject to the jurisdiction of the Bankruptcy Court while a reorganization plan is being formulated. As of March 31, 2002, all operating subsidiaries of the Company were included in the Chapter 11 Cases except for two subsidiaries each owning one hotel. However, on April 17, 2002, one additional operating subsidiary, New Orleans Airport Motel Associates, LP filed for voluntary reorganization with the United States Bankruptcy Court for the Southern District of New York under Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has also been consolidated with the previously filed Chapter 11 Cases, for purposes of administration, under case number 01-16345. CONSOLIDATED FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements have not been reviewed by an independent public accountant in accordance with professional standards for conducting such reviews since the Company was unable to obtain these services from its previous auditors, Arthur Andersen LLP. The unaudited condensed consolidated financial statements, included herein, will be reviewed by independent public accountants consecutively with the Form 10-Q for the quarter ended June 30, 2002 (due to be released on August 14, 2002). The Company's Consolidated Financial Statements have been prepared on the going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's recent losses, and the Chapter 11 Cases, raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern and the appropriateness of using the going concern basis is dependent upon, among other factors, the Company's ability (i) to comply with the debtor-in-possession financing agreements, (ii) to obtain exit financing to enable it to exit Chapter 11, (iii) to obtain confirmation of a plan of reorganization under the Bankruptcy Code, (iv) to achieve profitable operations after such confirmation, and (v) to generate sufficient cash from operations to meet its obligations. As a result of the filing of the Chapter 11 Cases and related circumstances, book values of assets may not be realized and liquidation of liabilities is subject to substantial doubt. While under the protection of Chapter 11, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities, for amounts other than those reflected in the Condensed Consolidated Financial Statements. Further, the confirmation of a plan of reorganization could materially change the amounts reported in the accompanying Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements do not include any adjustments relating to recoverability of the value of the recorded asset amounts or the amounts and classification of liabilities that might be necessary as a consequence of a plan of reorganization. FORWARD-LOOKING STATEMENTS/RISK FACTORS The following discussion should be read in conjunction with the Company's financial statements and related notes thereto included elsewhere herein. The discussion below and elsewhere in this Form 10-Q includes statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These include management's expectations with respect to the Chapter 11 filing, statements that describe anticipated revenues, capital expenditures and other financial items, statements that describe the Company's business plans and objectives, and statements that describe the expected impact of competition, government regulation, litigation and other factors on the Company's future financial 19 condition and results of operations. The words "may", "should", "expect", "believe", "anticipate", "project", "estimate", and similar expressions are intended to identify forward-looking statements. Such risks and uncertainties, any one of which may cause actual results to differ materially from those described in the forward-looking statements, include or relate to, among other things: - The impact of the Chapter 11 Cases and related circumstances which could materially reduce the reported amounts of assets and liabilities included in these condensed consolidated financial statements. Liabilities subject to compromise could increase as a result of negotiations, actions of the bankruptcy court, changes in the reported amounts of disputed claims, proof of claims and other events. - Risks associated with the Company's ability to maintain its existing franchise affiliations. - Risks associated with the Company's ability to obtain approval for its plan of reorganization. - Risks associated with the Company's ability to obtain exit financing to replace the DIP Facility. - The impact of pending or threatened litigation and/or governmental inquiries and investigation involving the Company. - The effect of competition and the economy on the Company's ability to maintain margins on existing operations, including uncertainties relating to competition. - The Company's ability to generate sufficient cash flows from operations to meet its obligations. - The effectiveness of changes in management and the ability of the Company to retain qualified individuals to serve in senior management positions. - The potential for additional impairment charges against earnings related to long-lived assets. - The impact of increased expenses due to layoffs of employees. Many of these factors are not within the Company's control and readers are cautioned not to put undue reliance on these forward looking statements. GENERAL OVERVIEW Management believes that results of operations in the hotel industry are best explained by four key performance measures: occupancy, average daily rate ("ADR"), revenue per available room ("RevPAR") levels and EBITDA margins. These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of the Company's hotels experience lower occupancy levels in the fall and winter months (November through February) which may result in lower revenues, lower net income and less cash flow during these months. Revenues. Revenues are composed of rooms revenues, food and beverage revenues and other revenues. Room revenues are derived from guest room rentals, whereas food and beverage revenues primarily include sales from hotel restaurants, room service and hotel catering. Other revenues include charges for guests' long-distance telephone service, laundry service and use of meeting facilities. Operating Expenses. Operating expenses are composed of direct, general and administrative, other hotel operating expenses and depreciation and amortization. Direct expenses, including rooms, food and beverage and other operations, reflect expenses directly related to hotel operations. These expenses are primarily variable with available rooms and occupancy rates, but also have a small fixed component, which can be leveraged with increases in revenues. General and administrative expenses represent corporate salaries and other corporate operating expenses and are generally fixed. Other expenses include primarily property level expenses related to general operations such as marketing, utilities, repairs and maintenance and other property administrative costs. 20 RESULTS OF OPERATIONS The downturn in the US economy, the lodging industry and the events of September 11, 2001 have adversely impacted the Company's results of operations. In addition, operating results for the first quarter of 2002 have been impacted by hotel dispositions. During the first quarter of 2001, the Company sold two hotel properties. Gross sales price of these two properties was $66.2 million. The discussion of results of operations, income taxes, liquidity and capital resources that follows is derived from the Company's unaudited Condensed Consolidated Financial Statements set forth in "Item I. Financial Statements" included in this Form 10-Q and should be read in conjunction with such financial statements and notes thereto. 21 THREE MONTHS ENDED MARCH 31, 2002 ("FIRST QUARTER 2002") COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2001 ("FIRST QUARTER 2001") REVENUES At March 31, 2002, the Company owned 105 hotels and had a minority interest in one hotel compared with 109 hotels owned and a minority interest in one hotel at March 31, 2001. Revenues for the Company were $94.4 million for the first quarter 2002, a 17.8% decrease compared to revenues of $114.8 million for the first quarter 2001. Of this $20.4 million decrease, approximately $4.6 million is a result of the sale of hotels. Revenues on a same unit basis, for hotels owned at the end of the first quarter 2002 were $94.4 million for the first quarter 2002 and $110.2 million for the first quarter 2001 (a decline of 14.3%). RevPAR, on a same unit basis, for hotels owned at the end of the first quarter 2002 declined by 13.9% compared with the first quarter 2001 as a result of a decline in occupancy of 7.4% as well as a decrease in average daily rates of 7.0%. Revenues and RevPar on the same unit basis for the first quarter 2002 were adversely impacted by a general decline in the industry, particularly in certain of the Company's markets. These factors were exacerbated by the events of September 11, 2001. OPERATING EXPENSES Direct operating expenses for the Company were $37.8 million (40.1% of direct revenues) for the first quarter 2002 and $46.0 million (40.1% of direct revenues) for the first quarter 2001. This $8.2 million decrease was primarily attributable to the reduction in revenues offset by reduced operating margins in other direct revenue activities. Other direct revenues are comprised of revenues from telephone, laundry services, use of meeting facilities and other miscellaneous activities. General, administrative and other expenses (which excludes reorganization items) were $41.8 million (44.3% of direct revenues) for the first quarter 2002 and $51.5 million (44.9% of direct revenues) for the first quarter 2001. The decrease in general administrative and other expenses is partially due to reduced property level expenses related to reductions in revenues. Property level expenses include expenses related to general operations such as marketing, franchise fees, property repairs and maintenance and other property administrative costs. The reductions were, however, offset by increases in certain property level expenses primarily property taxes. Property taxes increased due to higher property tax assessments in certain markets. General, administrative and other expenses also declined as a result of significant reductions in corporate overhead (excluding reorganization items). Corporate overhead (excluding reorganization items) decreased as a result of certain cost-reduction initiatives that were implemented at the corporate office. In addition, certain costs incurred during the first quarter of 2001 were eliminated during the latter part of 2001. These related mainly to professional fees principally related to consultants performing certain financial and accounting management responsibilities within the Company as well as to certain legal matters. Depreciation and amortization expense was $14.3 million in the first quarter 2002 and $15.7 million in the first quarter 2001. The $1.4 million decrease is primarily a result of a decrease in depreciation related to hotels sold and the asset impairment adjustments recorded in the fourth quarter of 2001. The company recorded no impairment charges for the first quarter 2002 and $0.6 million for the first quarter 2001. The Company's first quarter 2001 charge comprised $4.3 million related to revised estimates of fair value for properties held for sale and held for investment at March 31, 2001, net of a recapture of $3.7 million of impairment charges as one hotel previously held for sale was no longer being actively marketed for sale as of March 31, 2001. Severance and restructuring charges were $0.1 million for the first quarter 2002 and $0.8 million for the first quarter 2001. Both the first quarter 2002 and 2001 charges related to senior level management changes. As previously reported in the Company's Form 10-K for the year ended December 31, 2001, significant management changes occurred during 2001 and to a lesser extent during the first quarter of 2002. 22 OTHER INCOME AND EXPENSES Interest expense was $8.6 million in the first quarter 2002 and $20.8 million in the first quarter 2001. This decrease is partially attributable to a reduction in the level of debt and also to a decrease in the cost of debt. In addition, as previously reported in the Company's Form 10-K for the year ended December 31, 2001, where the underlying collateral in respect of certain debt is considered to be less than the debt obligation, the Company ceased accruing interest on those debts. Contractual interest expense in respect of these debts that was not recorded for the first quarter of 2002 (excluding interest on the CRESTs) approximated $8.0 million. Gain on asset dispositions was $24.4 million for the first quarter 2001. This related to the two hotels sold in the first quarter 2001 and represented the excess of the net proceeds of sale over the net book values of those assets. Minority interest expense was $0.5 million in the first quarter 2002 and $3.4 million in the first quarter 2001. This $2.9 million decrease is primarily due to the non-accrual of the CREST dividend. The Company ceased accruing interest on the CRESTs as these are considered to be unsecured debts of the Company. This reduction has been offset by an increase in other minority interests due to higher net income levels for those hotels which the Company co-owns with its third-party-minority equity partners. Reorganization items (mainly professional fees) were $5.8 million for the first quarter of 2002. NET INCOME After a provision for income taxes of $0.1 million in the first quarter 2002 and $2.7 million in the first quarter 2001, the Company had a net loss of $14.4 million ($0.51 loss per share) in first quarter 2002 compared with a net loss of $1.9 million ($0.07 loss per share) in the first quarter 2001, for the reasons discussed above. INCOME TAXES As of December 31, 2001, Lodgian had net operating loss carryforwards of approximately $235 million for federal income tax purposes, which expire in 2004 through 2021. It is likely that under the plan of reorganization, substantial amounts of net operating losses will be utilized relating to debt cancellations. The Company's ability to use any remaining net operating loss carryforwards to offset future income is subject to other limitations, and may be subject to additional limitations in the future. Due to these limitations, a portion or all of these net operating loss carryforwards could expire unused. In addition, the Company recognized an income tax provision of $0.1 million during the first quarter of 2002, which related primarily to a provision for state income taxes. LIQUIDITY AND CAPITAL RESOURCES Lodgian's principal sources of liquidity consist of existing cash balances, cash flow from operations and financing. On December 20, 2001, the Company and eighty-one of its subsidiaries filed for voluntary reorganization with the United States Bankruptcy Court for the Southern District of New York under Chapter 11 of the Bankruptcy Code. The Chapter 11 Cases have been consolidated for purposes of administration under case number 01-16345. The filing was precipitated by the weaker US economy, the decline in travel since the events of September 11 and the Company's heavy debt load. The Debtors are currently operating their businesses as debtors-in-possession and are subject to the jurisdiction of the Bankruptcy Court while a reorganization plan is being formulated. Also, on April 17, 2002, one additional operating subsidiary, New Orleans Airport Motel Associates, LP filed for voluntary reorganization with the United States Bankruptcy Court for the Southern 23 District of New York under Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has also been consolidated with the previously filed Chapter 11 Cases, for purposes of administration, under case number 01-16345. As a result of the Chapter 11 filing, the Company is prohibited from paying pre-petition claims (unless these are approved by the courts) and creditors are prohibited from attempting to collect loans or debts arising prior to December 20, 2001. The Company, at its option, may assume or reject contracts entered into prior to the date of filing. Claims related to rejected contracts entered into prior to the date of the petition would be treated as unsecured claims. The Company received approval from the Bankruptcy Court to pay pre and post petition employee wages, salaries, benefits and other employee obligations. The Bankruptcy Court also approved orders granting the debtors authority to pay, among other things, certain pre-petition claims of its critical service vendors. The Company has been and intends to continue to pay its post-petition obligations arising in the ordinary course of business. The Debtors received debtor-in-possession financing of $25 million from a group of lenders led by Morgan Stanley Funding Inc. and Lehman Brothers Inc. The DIP Facility, along with the rights of the Debtors to use the cash collateral of these lenders expires, one year from the date of filing or on the effective date of the reorganization plan, whichever is earlier. This financing will allow the Company to operate in the normal course during the bankruptcy proceedings. In addition, the Company received approval from the courts to pay the post-petition interest on debts relating to 76 of its properties. The Company has not paid any post-petition interest in relation to the Senior Subordinated Notes, CRESTS and the other 29 properties. Contractual interest not accrued between December 20, 2001 and March 31, 2002 amounted to $12.8 million ($11.4 million for the first quarter 2002) including interest on the Senior Subordinated Notes and the CRESTS. As of May 14, 2002, the Debtor had not yet filed its plan of reorganization with the Bankruptcy courts but management believes that the Plan will result in most unsecured claims being settled for less than 100% of their face value and that the interests of the common stock holders will be significantly diluted. Under the DIP Facility, the Company has the option to borrow at either base rate plus 2.5% or at LIBOR plus 3.5%. The Company is currently in compliance with the terms of the DIP Facility. As of May 14, 2002, the Company had not borrowed from the facility but had issued one letter of credit totaling $750,000 against it. The Company had earnings from operations before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted in the first quarter of 2002 of $14.7 million, a 15.0% decrease from the $17.3 million in the first quarter of 2001. The EBITDA margins for the first quarter 2002 and the first quarter 2001 were 15.6% and 15.1%, respectively. The Company has computed EBITDA without regard to the unusual items. During the first quarter of 2002, these items consisted of reorganization costs of $5.8 million and severance and restructuring costs of $0.1 million. The unusual charges for the first quarter of 2001 consisted of severance and restructuring costs of $0.8 million and impairment charges of $0.6 million. EBITDA is a widely regarded industry measure of lodging performance used in the assessment of hotel property values, although EBITDA is not indicative of and should not be used as an alternative to net income or net cash provided by operations as specified by generally accepted accounting principles. Net cash provided by operating activities for the first quarter of 2002 was $9.2 million compared with net cash used in operating activities of $23.3 million for the first quarter of 2001. Cash flows used in investing activities was $4.2 million for the first quarter 2002 and cash flows provided by investing activities was $52.9 million in the first quarter 2001. The 2002 amount includes capital expenditures of $3.0 million and deposits for capital expenditure escrows of $1.2 million. The first quarter 2001 amount includes capital expenditures of $7.3 million, net proceeds from the sale of assets of $58.8 million and withdrawals for capital expenditure escrows of $1.4 million. Cash flows used in financing activities were $0.7 million for first quarter 2002 and $41.3 million in first quarter 2001. The 2002 amount consists of principal payments in respect of capital leases and 24 payments on long-term obligations for debts not included in the Chapter 11 filing. The 2001 amount consists primarily of borrowings on the working capital revolver and repayments of long-term obligations. At March 31, 2002, the Company had a working capital deficit of $1.7 million as compared with a working capital surplus of $50,000 at December 31, 2001. The Company has a capital improvement program to address the capital improvements required at the hotels related to product improvement plans specified by license agreements with franchisors, re-branding of several hotels and general renovation projects intended to ultimately improve the operations of the hotels. The Company's capital improvement plan for its properties for 2002 and 2003 is estimated at $75.0 million. Of the $75.0 million, $4.3 million was spent through April 30, 2002 and an additional $36.5 million is expected to be spent before the end of December 31, 2002. The Company expects to fund its capital expenditures from a combination of amounts escrowed for such expenditures, its current cash position, cash from operations and if needed, from its DIP Facility or financing obtained on exiting Chapter 11. On May 20, 2001, promissory notes of approximately $3.9 million secured by the pledge of 100% of the ownership interests of Macon Hotel Associates, L.L.C. ("MHA") were due. The Company owns a 60% controlling interest in MHA. MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA did not make this payment on May 20, 2001. During the first quarter of 2001, the Company recorded an impairment charge of $2.2 million to reduce the carrying value of the hotel to the outstanding debt balance, which included the promissory notes discussed above and a $7.8 million first mortgage. MHA was not included in the entities that filed for reorganization under Chapter 11. On April 19, 2002, MHA and the lenders entered into a Satisfaction and Release Agreement whereby the lenders agreed to fully discharge the indebtedness under the promissory note of $3.9 million plus related accrued interest approximating $0.8 million in exchange for payment by MHA of $0.2 million. As a result of the Chapter 11 Cases, the Company is technically in default of its debt agreements with the exception of Macon Hotel Associates, L.L.C which was not included in the bankruptcy petition. All of the Company's pre-petition debts, with the exception of the debt of Macon Hotel Associates, L.L.C, are recorded in liabilities subject to compromise in the balance sheets as of March 31, 2002 and December 31, 2001. The Company is subject to certain property maintenance and quality standard compliance requirements under its franchise agreements. The Company periodically receives notifications from its franchisors of events of noncompliance with such agreements and may continue to receive notifications if the liquidity and cash constraints of the Company limit its ability to comply with its franchise agreements. In the past, management has cured most cases of noncompliance within the applicable cure periods and the events of noncompliance did not result in events of default under the respective loan agreements. However, in selected situations, as warranted, based on economic evaluations, management may elect to not comply with the franchisor requirements. In such situations, the Company will either select an alternative franchisor or operate the property independent of any franchisor. As a result of the Company's petition for bankruptcy, the Company is technically in default of its franchise agreements. However, due to the automatic stay of proceedings, the franchisors are prohibited from proceeding with certain actions absent approval from the Bankruptcy Courts. Were the automatic stay, in respect of these franchise agreements, to be lifted, this could negatively impact operating results and the value of the Company's hotels. See Note 10 to the Condensed Consolidated Financial Statements. Management believes that the combination of its current cash position, cash flow from operations, and the DIP Facility will provide sufficient liquidity to fund the Company's operating, capital expenditure and debt service obligations during the Chapter 11 proceedings. However, there can be no assurance that this will be achieved. The Company's recent losses and the Chapter 11 cases raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern and the appropriateness of using the going concern basis is dependent upon, among other factors, the Company's ability (i) to comply with the debtor-in-possession financing agreements, (ii) to obtain exit financing to enable it to exit Chapter 11, (iii) to obtain confirmation of a plan of reorganization under the Bankruptcy Code, (iv) to achieve profitable operations after such confirmation, and (v) to generate sufficient cash from operations to meet its obligations. In addition, the Company's debtor-in-possession financing agreements expire in December 2002; there can be no assurance that the Company will be successful in obtaining confirmation of a plan of reorganization by December 2002 and, if not, there can be 25 no assurance that the existing debtor-in-possession lenders will agree to continue to provide debtor-in-possession financing. Management believes that the DIP Facility, along with its current cash and cash provided by operations, will provide sufficient liquidity to fund its operations in the foreseeable future; however, there can be no assurance that the sources of liquidity will be available or sufficient to meet the Company's needs. INFLATION The rate of inflation has not had a material effect on the Company's revenues or costs and expenses in recent years and it is not anticipated that inflation will have a material effect on the Company in the near term. CRITICAL ACCOUNTING POLICIES The Company's financial statements are prepared in accordance with the United States generally accepted accounting principles (GAAP). The accounting policies followed for quarterly reporting are the same as those disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company's Form 10-K for the year ended December 31, 2001. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from these estimates. The critical accounting policies adopted by the Company relate to capitalization, useful/depreciable lives of fixed assets, revenue recognition, impairment evaluations, income taxes and liabilities subject to compromise. Capitalization and depreciable lives of assets Capital improvements are capitalized when they extend the useful lives of the related asset. Management estimates the depreciable lives of the Company's fixed assets. All items considered to be repair and maintenance items are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (buildings and improvements 10-40 years; furnishings and equipment 3-10 years). Property under capital leases is amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. Revenue recognition Revenues are recognized when the services are rendered. Revenues are composed of rooms, food and beverage and other revenues. Room revenues are derived from guest room rentals, whereas food and beverage revenues primarily include sales from hotel restaurants, room service and hotel catering. Other revenues include charges for guests' long-distance telephone service, laundry service and use of meeting facilities. Asset impairment evaluation Under GAAP, real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. As required by GAAP, the Company periodically evaluates its real estate assets to determine if there has been any impairment in carrying value and records impairment losses if there are indicators of impairment and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. The Company recorded no impairment losses for the first quarter of 2002 ($0.6 million for the first quarter of 2001). As a result of the filing of the Chapter 11 Cases and related circumstances, the Company may ultimately sell or otherwise dispose of its hotel assets for amounts less than the carrying value of such assets and future actions by the Company, its creditors or the Bankruptcy Court could adversely impact the Company's ability to hold its assets for periods sufficient for it to recover the carrying value of its assets on an undiscounted cash flow basis. As a result, the Company could recognize additional impairment losses in future periods. Also, as previously reported in the Company's Form 10-K for the year ended December 31, 2001, in connection with its bankruptcy petition on December 20, 2001, the Company determined that 29 of its hotels were significantly overleveraged in that the estimated fair value of these hotels did not exceed the outstanding debt on these hotels. Therefore, with the approval of the Bankruptcy Court, the Company 26 ceased paying interest to the secured lenders of these properties from the date of the bankruptcy petition. The Company also concluded that it no longer had the ability to hold these hotels for a period sufficient for their estimated future undiscounted cash flows to cover their carrying values. Therefore in accordance with the provisions of FAS 121 (superceded on January 1, 2001 by SFAS 144), the Company determined that an impairment charge of $69 million was necessary to reduce the carrying value of these assets. Also, during the fourth quarter of 2001, in connection with the bankruptcy petition, the Company also ceased marketing for sale, four operating properties that were previously classified as held for sale. Since these assets were not considered impaired as the estimated future cash flows from the use of these properties exceeded their carrying values, the Company recaptured $8.5 million of impairment reserves previously recorded in 1999, 2000 and 2001. Income taxes The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS 109) "Accounting for Income Taxes", which requires the use of the liability method of accounting for deferred income taxes. As a result of the Company's financial condition, continued losses and the Chapter 11 Cases, the Company has provided a full valuation allowance against its deferred tax asset as it is more likely than not that the deferred tax asset will not be realized. Liabilities subject to compromise Liabilities subject to compromise refers to known liabilities incurred prior to the commencement of the Chapter 11 Cases, including those considered by the Bankruptcy Court to be pre-petition claims. These liabilities consist primarily of amounts outstanding under long-term debt and also include accounts payable, accrued interest and other accrued expenses. These amounts represent the Company's estimate of known or potential claims to be resolved in the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from (1) negotiations, (2) actions of the Bankruptcy Court, (3) further development with respect to disputed claims, (4) proofs of claim, or (5) other events. Payment terms for these amounts will be established under a plan of reorganization. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The risk inherent in the Company's market risk sensitive instruments is the potential loss arising from adverse changes in interest rates. There have been no significant changes in the Company's market risk sensitive instruments since the filing of the Company's Form 10-K for the year ended December 31, 2001. 27 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 20, 2001, the Company and eighty-one of its subsidiaries filed for voluntary reorganization with the United States Bankruptcy Court for the Southern District of New York under Chapter 11 of the Bankruptcy Code. The Chapter 11 Cases have been consolidated for purposes of administration under case number 01-16345. The filing was precipitated by the weaker US economy, the decline in travel since the events of September 11 and the Company's heavy debt load. The Debtors are currently operating their businesses as debtors-in-possession and are subject to the jurisdiction of the Bankruptcy Court while a reorganization plan is being formulated. Also, on April 17, 2002, one additional operating subsidiary, New Orleans Airport Motel Associates, LP filed for voluntary reorganization with the United States Bankruptcy Court for the Southern District of New York under Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has also been consolidated with the previously filed Chapter 11 Cases, for purposes of administration, under case number 01-16345. As of May 14, 2002, the Debtors had not yet filed a plan of reorganization with the Bankruptcy courts but management believes that the plan of reorganization will result in most unsecured claims being settled for less than 100% of their face value and that the interests of the common stock holders will be significantly diluted. On March 7, 2002, Hilton Hotel Corporation, Promus Hotels, Inc., Doubletree Hotel Systems, Inc. and Hilton Inns, Inc. filed a Motion for Relief from the automatic stay of proceedings (which arose as a result of the Debtor's petition under Chapter 11) to terminate certain license agreements or alternatively to compel the Debtors to reject the license agreements. The Company has responded to this motion and believes it has valid defenses to this matter. The Company is a party in litigation with Hospitality Restoration and Builders, Inc. ("HRB"), a general contractor hired to perform work on six of the Company's hotels. The litigation involves hotels in Texas, Illinois, and New York. In general, HRB claims that the Company breached contracts to renovate the hotels by not paying for work performed. The Company contends that it was over-billed by HRB and that a significant portion of the completed work was defective. In July 2001, the parties agreed to settle the litigation pending in Texas and Illinois. In exchange for mutual dismissals and full releases, the Company paid HRB $750,000. With respect to the matter pending in the state of New York, HRB claims that it is owed $10.7 million. The Company asserted a counterclaim of $7 million and believes that it has valid defenses and counterclaims to the contractor's remaining claims and that the outcome will not have a material adverse effect on its financial position or results of operations. Thomas Arasi, the Company's former President and Chief Executive Officer, has asserted a claim against the Company under his employment agreement. Mr. Arasi alleges that he was terminated without cause and claims damages in the amount of $3.3 million plus other unspecified amounts. The Company disputes Mr. Arasi's claims and believes it has valid defenses to this matter. The Company and individual directors are parties to a lawsuit alleging violations of federal securities laws and breach of fiduciary duty in connection with certain investments made in affiliates of Impac Hotel Group, LLC, a predecessor of the Company. The Company believes that it has valid defenses to this matter. The Company is a party to other legal proceedings arising in the ordinary course of business, the impact of which would not, either individually or in the aggregate, in management's opinion, have a material adverse effect on its financial position or results of operations. ITEM 2. CHANGES IN SECURITIES The Company has not paid any cash dividends since the Merger and has no current plans to initiate the payment of dividends and is currently prohibited under various credit agreements from paying 28 any dividends. The Company currently anticipates that it will retain any future earnings for use in its business. On exiting Chapter 11, the Board of Directors of the Company will determine future dividend policies based on the Company's financial condition, profitability, cash flow, capital requirements and business outlook, among other factors. The Company's ability to pay dividends was previously restricted by the Indenture governing the Company's 12 1/4 % Senior Subordinated Notes Due 2009 (the "Notes"), the Company's credit agreement dated as of July 23, 1999 among the Company, Lodgian Financing Corp., certain other of the Company's subsidiaries and the banks named therein, and the Indenture governing the Company's Convertible Redeemable Equity Structured Trust Securities ("CRESTS"). Payment restrictions contained in the Company's Notes allowed the Company to defer dividend payments on the CRESTS beginning June 30, 2000. Pursuant to the terms of the instrument, the Company had the right to defer payment for up to twenty quarters (the "Extension Period"), during which Extension Period no interest was due and payable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits A list of the exhibits required to be filed as part of this Report on Form 10-Q, is set forth in the "Exhibit Index" which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K A report on Form 8-K was filed on January 2, 2002 relating to the Chapter 11 filing of the Company and eighty-one of its subsidiaries. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LODGIAN, INC. Date: May 15, 2002 By: /s/ DAVID E. HAWTHORNE ------------------------------------------- DAVID E. HAWTHORNE President and Chief Executive Officer Date: May 15, 2002 By: /s/ RICHARD CARTOON ------------------------------------------- RICHARD CARTOON Executive Vice President and Chief Financial Officer 30 EXHIBIT INDEX
EXHIBIT DESCRIPTION NO ----------- 10.1 - Form of Voluntary Petition under Chapter 11 of the U. S. Bankruptcy Code filed with the United States Bankruptcy Court Southern District of New York by New Orleans Airport Motel Associates LP.
31 EX-10.1 3 g76435ex10-1.txt FORM OF VOLUNTARY PETITION UNDER CHAPTER 11 EXHIBIT 10.1 (OFFICIAL FORM 1) (9/97) FORM B1 - ----------------------------------------------------------------------------------------------------------- ---------------------- UNITED STATES BANKRUPTCY COURT VOLUNTARY PETITION SOUTHERN DISTRICT OF NEW YORK - ---------------------------------------------------------------------- ----------------------------------------------------------- Name of Debtor (if individual, enter Last, First, Middle) Name of Joint Debtor (Spouse) (Last, First, Middle): NEW ORLEANS AIRPORT MOTEL ASSOCIATES, L.P. - ---------------------------------------------------------------------- ----------------------------------------------------------- All Other Names used by the Debtor in the last 6 years All Other Names used by the Joint Debtor in the last 6 (include married, maiden, and trade names): years (include married, maiden, and trade names): RADISSON AIRPORT HOTEL; NEW ORLEANS AIRPORT HOTEL & CONFERENCE CENTER - ---------------------------------------------------------------------- ----------------------------------------------------------- Soc. Sec./Tax ID. No. (if more than one, state all) Soc. Sec./Tax I.D. No. (if more than one, state all) 59-1935178 - ---------------------------------------------------------------------- ----------------------------------------------------------- Street Address of Debtor (No. & Street, City, State & Zip Code): Street Address of Joint Debtor (No. & Street, City, State 3445 PEACHTREE ROAD, NE, SUITE 700 & Zip Code): ATLANTA, GEORGIA 30326 - ---------------------------------------------------------------------- ----------------------------------------------------------- County of Residence or of the County of Residence or of the Principal Place of Business: Principal Place of Business: FULTON, GEORGIA - ---------------------------------------------------------------------- ----------------------------------------------------------- Mailing Address of Debtor (if different from street address): Mailing Address of Debtor (if different from street address): - ---------------------------------------------------------------------- ----------------------------------------------------------- Location of Principal Assets of Business Debtor (if different from street address above): OWNS AND OPERATES THE NEW ORLEANS AIRPORT HOTEL & CONFERENCE CENTER, NEW ORLEANS, LA - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- INFORMATION REGARDING THE DEBTOR (CHECK APPLICABLE BOXES) VENUE (Check any applicable box) [ ] Debtor has been domiciled or has had a residence, principal place of business, or principal assets in this District for 180 days immediately preceding the date of this petition or for a longer part of such 180 days than in any other District. [X] There is a bankruptcy case concerning debtor's affiliate, general partner or partnership pending in this District. - ---------------------------------------------------------------------------------------------------------------------------------- TYPE OF DEBTOR (Check all boxes that apply) CHAPTER OR SECTION OF BANKRUPTCY CODE UNDER WHICH [ ] Individual(s) [ ] Railroad THE PETITION IS FILED (Check one box) [ ] Corporation [ ] Stockbroker [ ] Chapter 7 [X] Chapter 11 [ ] Chapter 13 [X] Partnership [ ] Commodity Broker [ ] Chapter 9 [ ] Chapter 12 [ ] Other____________________________ [ ] Sec. 304 - Case ancillary to foreign proceeding - ----------------------------------------------------------- ----------------------------------------------------------- NATURE OF DEBTS (Check one box) FILING FEE (Check one box) [ ] Consumer/Non-Business [X] Business [X] Full Filing Fee attached - --------------------------------------------------------------------- [ ] Filing fee to be paid in installments (Applicable to CHAPTER 11 SMALL BUSINESS (Check all boxes that apply) individuals only). Must attach signed application for the [ ] Debtor is a small business as defined in 11 U.S.C.ss.101 court's consideration [ ] Debtor is and elects to be considered a small business under certifying that the debtor is unable to pay the fee except 11 U.S.C.ss. 1121(e)(Optional) in installments. Rule 1006(b). See Official Form No. 3. - ---------------------------------------------------------------------- ----------------------------------------------------------- - --------------------------------------------------------------------------------------------------- This Space For Court Use Only STATISTICAL/ADMINISTRATIVE INFORMATION (Estimates only)* [ ] Debtor estimates that funds will be available for distribution to unsecured creditors. [ ] Debtor estimates that, after any exempt property is excluded and administrative expenses paid, there will be no funds available for distribution to creditors. - ---------------------------------------------------------------------------------------------------- ----------------------------- Estimated Number of Creditors* 1-15 16-49 50-99 100-199 200-999 1000-over [ ] [ ] [ ] [ ] [X] - ---------------------------------------------------------------------------------------------------- ----------------------------- Estimated Assets* $0 to $50,001 to $100,001 to $500,001 to $1,000,001 to $10,000,001 to $50,000,001 to More than $50,000 $100,000 $500,000 $1 million $10 million $50 million $100 million $100 Million [ ] [ ] [ ] [ ] [ ] [ ] [ ] [X] - ---------------------------------------------------------------------------------------------------- ----------------------------- Estimated Debts* $0 to $50,001 to $100,001 to $500,001 to $1,000,001 to $10,000,001 to $50,000,001 to More than $50,000 $100,000 $500,000 $1 million $10 million $50 million $100 million $100 Million [ ] [ ] [ ] [ ] [ ] [ ] [ ] [X] - ---------------------------------------------------------------------------------------------------- -----------------------------
* Consolidated with Affiliates. (OFFICIAL FORM 1) (9/97) - ----------------------------------------------------------------- ---------------------------------------------------------------- VOLUNTARY PETITION Name of Debtor(s): FORM B1, Page 2 (This page must be completed and filed in every case) - ----------------------------------------------------------------- ------------------------------------------------------------------ PRIOR BANKRUPTCY CASE FILED WITHIN LAST 6 YEARS (IF MORE THAN ONE, ATTACH ADDITIONAL SHEET) - ----------------------------------------------------------------- -------------------------------------- --------------------------- Location Case Number: Date Filed: Where Filed: - ----------------------------------------------------------------- -------------------------------------- --------------------------- PENDING BANKRUPTCY CASE FILED BY ANY SPOUSE, PARTNER OR AFFILIATE OF THIS DEBTOR (IF MORE THAN ONE, ATTACH ADDITIONAL SHEET) - ----------------------------------------------------------------- -------------------------------------- --------------------------- Name of Debtor: Case Number: Date Filed: SEE ATTACHED SCHEDULE 1 - ----------------------------------------------------------------- -------------------------------------- --------------------------- District: Relationship: Judge: - ----------------------------------------------------------------- -------------------------------------- --------------------------- SIGNATURES - ------------------------------------------------------------------------------------------------------------------------------------ SIGNATURE(S) OF DEBTOR(S) (INDIVIDUAL/JOINT) SIGNATURE OF DEBTOR (CORPORATION/PARTNERSHIP) I declare under penalty of perjury that the information I declare under penalty of perjury that the information provided provided in this petition is true and correct. in this petition is true and correct, and that I have been [If petitioner is an individual whose debts are primarily authorized to file this petition on behalf of the debtor. consumer debts and has chosen to file under chapter 7] I am aware that I may proceed under chapter 7, 11, 12 or 13 of title The debtor requests relief in accordance with the chapter of 11, United States Code, understand the relief available under title 11, United States Code, specified in this petition. each such chapter, and choose to proceed under chapter 7. I request relief in accordance with the chapter of title 11, X/s/ Daniel Ellis United States Code, specified in this petition. ----------------------------------------------------------- Signature of Authorized Individual X Daniel Ellis - --------------------------------------------------------- ----------------------------------------------------------- Signature of Debtor Printed Name of Authorized Individual X - --------------------------------------------------------- Signature of Joint Debtor As Vice President of the General Partner of the Partnership ----------------------------------------------------------- Title of Authorized Individual - --------------------------------------------------------- Telephone Number (If not represented by attorney) April 17, 2002 - --------------------------------------------------------- -------------- Date Date - ----------------------------------------------------------------- ------------------------------------------------------------------ SIGNATURE OF ATTORNEY SIGNATURE OF NON-ATTORNEY PETITION PREPARER X /S/ Adam Rogoff I certify that I am a bankruptcy petition preparer as defined in - --------------------------------------------------------- 11 U.S.C.ss. 110, that I prepared this document for compensation, Signature of Attorney for Debtor(s) and that I have provided the debtor with a copy of this document. Adam Rogoff AR 0820 - --------------------------------------------------------- Printed Name of Attorney for Debtor(s) Bar ID Number -------------------------------------------------------- Cadwalader, Wickersham & Taft Printed Name of Bankruptcy Petition Preparer - --------------------------------------------------------- Firm Name 100 Maiden Lane - --------------------------------------------------------- -------------------------------------------------------- Address Social Security Number New York, New York 10038 -------------------------------------------------------- (212) 504-6000 Address ------------------------------------------------------- Telephone Number -------------------------------------------------------- April 17, 2002 Names and Social Security numbers of all other individuals who ------------------------------------------------------- prepared or assisted in preparing this document. Date - ---------------------------------------------------------- EXHIBIT A If more than one person prepared this document, attach sheets (To be completed if debtor is required to file additional conforming to the appropriate official form for each person. periodic reports (e.g., forms 10K and 10Q) with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act X of 1934 and is X ------------------------------------------------------ requesting relief under chapter 11) Signature of Bankruptcy Petition Preparer Exhibit A is attached and made a part of this petition. - ---------------------------------------------------------- -------------------------------------------------------- EXHIBIT B Date (To be completed if debtor is an individual whose debts are primarily consumer debts) I, the attorney for the petitioner named in the foregoing A bankruptcy petition preparer's failure to comply with the petition, declare that I have informed the petitioner that the provisions of title 11 and the Federal Rules [he or she] may proceed under chapter 7, 11, 12, or 13 of Procedure may result in fines or imprisonment or both 11 U.S.C. title 11, United States Code, and have explained the ss.110; 18 U.S.C. ss.156. relief available under each such chapter. X /S/ Adam Rogoff April 17, 2002 -------------------------------------------------------- Signature of Attorney for Debtor(s) Date - ----------------------------------------------------------------- ------------------------------------------------------------------
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