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AS FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-85235
PROSPECTUS
[LOGO]
LODGIAN FINANCING CORP.
EXCHANGE OFFER FOR
12 1/4% SENIOR SUBORDINATED NOTES DUE 2009
GUARANTEED BY: LODGIAN, INC. AND SUBSIDIARIES OF LODGIAN FINANCING CORP.
INVESTMENT IN THE EXCHANGE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 18.
TERMS OF THE EXCHANGE OFFER
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/ / The Exchange Offer expires at 5:00 p.m.,
New York City time, on October 19, 1999,
unless extended.
/ / The Exchange Offer is not subject to any
condition other than that the exchange
notes be freely tradeable and that the
interests of holders of outstanding notes
not be materially adversely affected by
consummation of the Exchange Offer.
/ / All outstanding notes that are validly
tendered and not validly withdrawn will
be exchanged.
/ / Tenders of outstanding notes may be
withdrawn at any time prior to the
expiration of the Exchange Offer.
/ / The exchange of outstanding notes for
exchange notes will not be a taxable
event for federal income tax purposes.
/ / We will not receive any proceeds from the
Exchange Offer.
/ / The terms of the exchange notes are
substantially identical to the
outstanding notes, except that the
exchange notes will be freely tradeable.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is September 21, 1999.
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FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements, including our "belief,"
"anticipation" or "expectation," within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. We have based these statements on our beliefs and assumptions, based on
information currently available to us. These forward-looking statements are
subject to risks and uncertainties. Forward-looking statements include the
information concerning our possible or assumed future results of operations set
forth under the sections entitled "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Forward-looking statements are not guarantees of performance. Our future
results and requirements may differ materially from those described in the
forward-looking statements. Many of the factors that will determine these
results and requirements are beyond our control. In addition to the risks and
uncertainties discussed in "Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," you should
consider those discussed under "Risk Factors" and, among others, the following:
- general and local economic conditions;
- risks relating to the acquisition, operation and renovation of hotels;
- government legislation and regulation;
- competition in the lodging industry;
- changes in interest rates;
- the impact of rapid growth;
- the availability of capital to finance growth;
- the historical cyclicality of the lodging industry;
- year 2000 matters; and
- other factors described at various times in our filings with the
Securities and Exchange Commission.
These forward-looking statements speak only as of the date of this
memorandum. We do not intend to update or revise any forward-looking statements
to reflect events or circumstances after the date of this memorandum, including
changes in our business strategy or planned capital expenditures, or to reflect
the occurrence of unanticipated events.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549,
7 World Trade Center, 13(th) Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
website at "http://www.sec.gov." Copies of these reports, proxy statements and
other information can also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
We have filed with the SEC a Registration Statement on Form S-4 (together
with all amendments and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the securities offered by this Prospectus.
This Prospectus does not contain all of the information set forth or
incorporated by reference in the Registration Statement and the exhibits and
schedules related thereto, certain portions of which have been omitted as
permitted by the rules and regulations of the SEC. For
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further information with respect to us and the securities offered by this
Prospectus, reference is made to the Registration Statement and the exhibits
filed or incorporated as a part thereof. Statements contained in this Prospectus
as to the contents of any documents referred to are not necessarily complete
and, in each such instance, are qualified in all respects by reference to the
applicable documents filed with the SEC.
All documents that we have filed pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of all securities to which this Prospectus
relates shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document which is
also incorporated herein by reference, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed to constitute a
part of this Prospectus except as so modified or superseded.
Copies of all documents which are incorporated herein by reference (not
including exhibits, unless such exhibits are specifically incorporated by
reference in such documents) will be provided without charge to each person,
including any beneficial owner, to whom this Prospectus is delivered, upon
written or oral request of any such person,. Requests for such copies should be
directed to Kenneth R. Posner, Chief Financial Officer, Lodgian, Inc., 3445
Peachtree Road N.E., Suite 700, Atlanta, Georgia 30326; telephone: (404)
364-9400.
No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in this
Prospectus or a Prospectus Supplement, in connection with the offering
contemplated thereby, and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or any
underwriter, dealer or agent. This Prospectus and a Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the securities to which they relate and do not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this Prospectus or a Prospectus
Supplement, nor any sale made thereunder, shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or thereof or that the information contained or
incorporated by reference herein or therein is correct as of any time subsequent
to such date.
CERTAIN DEFINITIONS
Unless otherwise stated in this Prospectus:
- the "Company" refers to Lodgian, Inc. and its subsidiaries;
- the "Exchange Notes" refer to the 12 1/4% Senior Subordinated Notes due
2009, Series B;
- the "Indenture" refers the Indenture, dated as of July 23, 1999, among
Lodgian Financing, Lodgian, Inc., the guarantors named therein and Bankers
Trust Company, as trustee;
- the "Notes" refer to the 12 1/4% Senior Subordinated Notes due 2009,
Series A and Series B;
- the "Old Notes" refer to the 12 1/4% Senior Subordinated Notes due 2009,
Series A; and
- "we" or "our" refers to Lodgian, Inc. and its subsidiaries.
EACH OF THE OTHER CAPITALIZED TERMS USED IN THIS PROSPECTUS AND NOT
OTHERWISE DEFINED IN THIS PROSPECTUS HAS THE MEANING SET FORTH IN THE INDENTURE.
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SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY, THE EXCHANGE NOTES BEING OFFERED HEREBY AND
OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. LODGIAN, INC. IS A SUCCESSOR TO SERVICO, INC. ("SERVICO") AS
A RESULT OF SERVICO'S MERGER (THE "MERGER") WITH IMPAC HOTEL GROUP, LLC
("IMPAC"), A PRIVATELY OWNED HOTEL OWNERSHIP, MANAGEMENT AND DEVELOPMENT
COMPANY. THE MERGER WAS COMPLETED ON DECEMBER 11, 1998. BECAUSE THE MERGER WAS
ACCOUNTED FOR UNDER THE PURCHASE ACCOUNTING METHOD, LODGIAN'S RESULTS FOR THE
YEAR ENDED 1998 REFLECT IMPAC'S CONTRIBUTIONS ONLY SINCE DECEMBER 11, 1998
UNLESS STATED OTHERWISE. REFERENCES TO THE TERMS "WE," "US," "OUR," AND "OURS"
MEAN LODGIAN, INC. ("LODGIAN") AND OUR SUBSIDIARIES, INCLUDING LODGIAN FINANCING
CORP. ("LODGIAN FINANCING"), COLLECTIVELY, AND, FOR PERIODS PRIOR TO THE MERGER,
SERVICO, INC. AND ITS SUBSIDIARIES AND IMPAC HOTEL GROUP, LLC AND ITS
SUBSIDIARIES COMBINED, EXCEPT WHERE IT IS MADE CLEAR THAT THE MEANING IS
OTHERWISE.
LODGIAN
GENERAL
We are one of the largest owners and operators of full-service hotels in the
United States, with 134 hotels containing approximately 25,375 rooms located in
35 states and Canada. Our hotels include 121 wholly-owned hotels (including
three under construction), 11 hotels in which we have a 50% or greater equity
interest, one hotel in which we have a minority equity interest and one hotel
managed for a third party. Our hotels are primarily full-service properties
which offer food and beverage services, meeting space and banquet facilities and
compete in the mid-price and upscale segments of the lodging industry. We
believe that these segments have more consistent demand generators than other
segments of the lodging industry and that they have recently experienced less
development of new properties than other lodging segments, such as the limited
service, economy and budget segments. Substantially all of our hotels are
affiliated with nationally recognized hospitality franchises. We own and operate
hotels under franchise agreements with Marriott International, Bass Hotels and
Resorts, the franchisor for the Holiday Inn and Crowne Plaza brands, and the
franchisors of the Doubletree, Hilton, Omni, Radisson and Sheraton brands, among
others. We are one of the largest Holiday Inn franchisees and one of the largest
Marriott franchisees nationally.
Our success in managing, developing, renovating and repositioning our hotels
has resulted in strong relationships with our franchisors. We pride ourselves on
the recognition and awards we have received from our franchisors. These awards
include, among others:
- Seven Modernization Awards during the last four consecutive years from
Bass Hotels and Resorts;
- Torchbearer Award for quality for several hotels from Bass Hotels and
Resorts;
- President's Award for quality for three hotels in 1998 from Marriott
International;
- Best New Hotel Opening in 1997 for the Courtyard by Marriott, Tulsa and in
1998 for the Denver Airport Marriott, in each case from Marriott
International;
- Hotel of the Year for the Club Hotel by Doubletree in Philadelphia from
Promus Hotels; and
- "Best New Franchisee" in 1995 from Marriott International.
Lodgian was formed by Servico's merger with Impac in December 1998. We
believe that the Merger enhances our growth potential and provides significant
opportunities for operating synergies, due to the complementary nature of the
two companies' property portfolios, strategies and core competencies. Both
companies had portfolios consisting of full-service properties in the mid-price
and upscale segments with leading franchise brands, such as Holiday Inn,
Sheraton, Hilton and Doubletree. Both companies pursued a strategy of renovating
and repositioning their hotel properties to achieve growth in revenue per
available
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room and profitability and strong returns on capital. Impac developed
significant in-house development and construction management capabilities and
expertise, while Servico generally relied on others, including Impac, for
renovation and redevelopment services. We believe that the addition of Impac's
in-house development capabilities and relationships with high quality
franchisors, such as Marriott, will enable us to take advantage of more
opportunities to reposition our existing hotels, as well as to selectively
acquire and develop new hotels. We also believe that we have opportunities to
improve the operating performance of Impac's hotels by applying Servico's
operating expertise and "best practices." In addition, we believe that we will
be able to generate greater value from our portfolio through operating synergies
(including opportunities for cost savings in overhead, purchasing, insurance and
related activities) achieved as a result of, among other things, national
purchasing contracts.
GROWTH STRATEGY
We have developed a strategy designed to increase our revenues, cash flow
and profitability while focusing on return on investment as the primary
criterion for growth. Our growth strategy consists primarily of (1) realizing
the built-in growth of our existing portfolio, (2) acquiring existing
full-service, mid-price and upscale hotels that are in need of substantial
renovation and repositioning and (3) developing new full-service, mid-price and
upscale hotels, primarily franchised under Marriott brands.
REALIZE BUILT-IN GROWTH. We intend to capitalize on the substantial
investments we have made in the development and renovation of the hotels in our
portfolio. From January 1, 1996 through June 30, 1999, we grew from 65 owned
hotels with approximately 12,533 rooms to 135 owned hotels (including three
under construction) with approximately 25,525 rooms, largely through
acquisitions. In that time, we acquired 65 hotels with 12,643 rooms at an
average purchase price of $37,900 per room. In that time, we have spent
approximately $11,800 per room in our acquired hotels in renovations and other
capital assets and expect to spend an additional $26.1 million for planned
renovations, for a total expected cost per room of $51,800. From January 1, 1996
through June 30, 1999, we completed development of 11 hotels, initiated
development of three hotels and completed renovations on 60 hotels. Through the
implementation of our operating strategies, we expect to be well-positioned to
realize the built-in growth of our recently renovated and developed properties.
We expect to realize significant EBITDA contribution from four newly developed
hotels which were completed in 1998, including the Marriott at the Denver
Airport in Denver, Colorado, the Residence Inn Little Rock in Little Rock,
Arkansas, the Hilton Garden Rio Rancho in Rio Rancho, New Mexico and the
Residence Inn Dedham in Boston, Massachusetts. Furthermore, we expect
substantial EBITDA contribution from recently renovated hotels, including the
Doubletree Club Hollywood in Hollywood, California, the Holiday Inn Anchorage in
Anchorage, Alaska, the Mayfair House Coconut Grove in Miami, Florida and the
Sheraton West Palm Beach in West Palm Beach, Florida. We cannot assure you that
we will realize these expected EBITDA contributions.
ACQUIRE AND IMPROVE UNDERPERFORMING HOTELS. We seek to capitalize on our
management, renovation and development expertise by continuing to acquire
underperforming hotels and implementing operational initiatives and
repositioning programs to achieve revenue growth and margin improvements. We
have generally invested significant capital to renovate and reposition newly
acquired hotels. In certain instances, we re-brand hotels to highlight property
improvements to the marketplace and to improve average daily rates and market
share. We believe that our total cost to acquire and renovate hotels has been
significantly less than the cost to construct new hotels with similar
facilities. We expect that our relationships throughout the industry and our
in-house development capabilities will continue to provide us with a competitive
advantage in identifying, evaluating, acquiring, redeveloping and managing
hotels that meet our criteria.
We believe that a number of lodging industry trends will enable us to
continue to successfully execute our acquisition, renovation and repositioning
strategy, including the following: (1) there has generally been less competition
to purchase underperforming hotels than other properties because of the level of
expertise required to purchase and efficiently reposition such hotels, and (2) a
number of major
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franchisors, such as Bass Hotels and Resorts, have launched quality improvement
initiatives under which owners are required to invest substantial amounts of
capital to upgrade older properties or risk having the franchise agreement
terminated. We believe that these initiatives will provide us with new
acquisition opportunities, as individual or small-portfolio owners are unable or
unwilling to invest the capital required to raise quality standards to the level
required by franchisors.
SELECTIVELY DEVELOP NEW HOTELS. We plan to continue to selectively develop
new full-service, mid-price and upscale hotels. We intend to develop these
properties primarily under the Marriott and Courtyard by Marriott brands due to
the high quality image, strong reservations and marketing networks and overall
quality management of these brands. We have focused our development in suburbs
of metropolitan areas that are experiencing significant demand growth where
there have not historically been suitable acquisition targets. We believe that
the expertise required to develop such assets generally limits access to the
marketplace, and that our in-house development capabilities enable us to develop
hotels more efficiently than our competitors.
Our historical objective has been to develop each property as cost
efficiently as possible while meeting quality standards and return on investment
objectives. We have developed 12 hotels with 1,389 rooms since 1995. In
addition, we have three upscale hotels with 552 rooms under construction,
including the Marriott in downtown Portland, Oregon and the Courtyard by
Marriott in Livermore, California, which are both scheduled to open in the third
quarter of 1999, and the Hilton Garden Inn in Lake Oswego, Oregon, which is
scheduled to open in the first quarter of 2000. In addition, at June 30, 1999,
we owned five land parcels and held an option to purchase one additional land
parcel that together would permit the development of six new hotels with a total
capacity of approximately 1,270 rooms.
OPERATING STRATEGY
We have developed a highly focused operating strategy designed to maximize
the financial performance of our hotels while providing our guests with high
quality service and value. Key elements of our operating strategy include:
ENHANCE HOTEL PERFORMANCE THROUGH DISCIPLINED CAPITAL INVESTMENT. We seek
to reposition and renovate our hotels based on strategic plans designed to
address the opportunities presented by each hotel and the hotel's particular
market. Renovations include enhancing lobbies, restaurants and public areas,
upgrading guest rooms and converting unprofitable lounge areas to meeting rooms
to accommodate the needs of business travelers. Renovations often include a
substantial exterior renovation to improve the property's overall appearance and
appeal. We believe that these renovations enable us to increase both occupancy
and room rates and generate attractive returns on our investment.
SELECTIVE USE OF PREMIUM BRANDS. We believe that the selection of an
appropriate franchise brand is essential in positioning a hotel optimally within
its local market. Because we are not bound by a single franchise brand, we can
choose a franchise relationship that will maximize a hotel's performance in a
particular market and complement our management strategies and those of the
individual hotel. Since January 1, 1996, we have rebranded 14 hotels to better
position them in their competitive markets. We select brands based on factors
such as revenue contribution, product quality standards, local presence of the
franchisor, brand recognition, target demographics and purchasing efficiencies
offered by franchisors.
INDIVIDUAL HOTEL MANAGEMENT. We seek to maximize the performance of our
hotels by developing marketing and business plans specifically tailored for each
individual hotel. We develop and implement marketing plans that properly
position each hotel within its local market and facilitate targeted sales and
marketing efforts. These plans focus on maximizing revenues and improving market
share, guest satisfaction and cost controls. We believe that experienced and
hands-on management of hotel operations is the most critical element in
maximizing revenue and cash flow of hotels, especially in full service hotels.
In order to maintain strong performance of the individual hotels, we stress
management accountability and
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entrepreneurship and provide performance-based compensation at the individual
hotel and regional levels that we believe is among the most attractive in the
industry.
EFFECTIVE CENTRALIZED CONTROLS AND SUPPORT. We have implemented centralized
controls and support that seek to provide corporate and group support services
while promoting flexibility and encouraging associates to develop innovative
solutions. Our hotels are organized into six regions, each headed by a regional
vice president who reports to the chief operating officer. This structure
enables us to provide close oversight of property managers at the regional and
local levels while ensuring that information, standards and goals are
communicated effectively across our entire portfolio. We have established
certain uniform productivity standards and skill requirements for hotel
associates that we believe increase operating efficiencies by enhancing our
ability to measure performance and to allocate associates efficiently within our
hotel system.
LEADING EDGE TECHNOLOGY. We have invested substantial capital in advanced
information systems that allow for increased timely and accurate reporting of
operational and financial data, among many other capabilities. We are also in
the process of implementing Oracle web-based technology, which will permit (1)
more accurate and efficient revenue and expense reporting and forecasting by
providing real-time access to financial information, (2) improved labor and cash
management and (3) the ability to monitor from any location daily revenue
results, labor costs and expenses of every one of our hotels. Through our
intranet, we also can provide real-time reporting, distribute corporate
communications and disseminate critical information to our associates
company-wide.
CENTRALIZED RESERVATIONS AND SALES SUPPORT. We currently operate a revenue
center in Baton Rouge, Louisiana that maintains the reservation system for 47
Holiday Inn hotels, with 30 hotels expected to be added by the end of November
1999. We believe that the revenue center is the first of its kind in the hotel
industry, and we expect it will be able to cover multiple hotel brands in the
near future. The revenue center improves the efficiency of our hotel reservation
process by freeing up hotel associates to service guests and allowing dedicated
reservation agents to focus on taking reservations. We believe that dedicated
reservation agents convert a higher number of inquiries into actual reservations
than hotel associates with multiple responsibilities. Specialists at the revenue
center have complete access to the property reservation systems and price each
room according to market demand, inventory supply and competitor strategies. The
revenue center also has a group sales center which enables hotel salespeople to
focus on direct sales and marketing efforts and building and maintaining client
relationships.
RECENT DEVELOPMENTS
In December 1998, Robert Cole, the President of Impac, became our Chief
Executive Officer and President, replacing David Buddemeyer, Servico's Chairman
and Chief Executive Officer, who resigned from Servico in November 1998. In
addition, in April 1999, Kenneth R. Posner became our Chief Financial Officer,
replacing Warren Knight, who resigned from Lodgian in February 1999. Mr. Posner
previously had served as Chief Financial Officer of the Hyatt Group of Companies
since 1981. Upon completion of the Merger, we closed Servico's headquarters in
West Palm Beach, Florida and relocated to Impac's headquarters in Atlanta,
Georgia.
On July 23, 1999, we issued and sold the Old Notes. We used the net proceeds
of the offering of the Old Notes, together with borrowings under our new credit
facility, to:
- repay approximately $278 million of indebtedness under mortgage notes owed
to Lehman Brothers Holding, Inc;
- repay on September 13, 1999 approximately $132.5 million of indebtedness
under mortgage notes owed to Nomura Asset Capital Corporation;
- repay approximately $5.7 million of indebtedness under mortgage notes owed
to Bank One, Louisiana, National Association;
- pay exit, prepayment and other fees; and
- use as working capital for general corporate purposes.
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Concurrently with the closing of the offering of the Old Notes, Lodgian
Financing entered into a $315.0 million secured credit facility with a $50.0
million revolving facility maturing on April 15, 2004 and up to $265.0 million
maturing no later than July 31, 2006. Approximately $107.5 million of the
facility was funded at closing, with the remainder of the facility to be drawn
under certain conditions. The new credit facility is guaranteed by certain of
Lodgian's subsidiaries and secured by the stock or equity interest in Lodgian
Financing and certain of Lodgian Financing's existing subsidiaries and by
mortgages on each of the hotel properties owned through Lodgian Financing.
Morgan Stanley Senior Funding Inc., an affiliate of Morgan Stanley & Co.
Incorporated, acted as co-lead arranger, joint book manager and syndication
agent and one of the lenders under our new credit facility. An affiliate of
Lehman Brothers Inc. acted as co-lead arranger, joint book manager and
documentation agent and one of the lenders under our new credit facility.
On June 24, 1999, we sold our joint venture interest in our European hotel
portfolio, which consisted of six hotels. We received approximately $6.0 million
at closing and expect to receive an additional $1.5 million in net proceeds from
the sale. As a result of this transaction, we no longer have operations in
Europe.
CORPORATE ORGANIZATION
The following diagram sets forth our corporate structure, after the closing
of the offering of the Notes and the establishment of our new credit facility.
[CHART]
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(1) We plan to use borrowings under our new credit facility to repay our Nomura
Impac I mortgage notes in September 1999. At the time of repayment, the
entity owning the 22 Nomura Impac I properties will become a direct
subsidiary of Lodgian Financing Corp. and will guarantee our new credit
facility and the Notes.
Lodgian Financing is the issuer of the notes and the borrower under the new
credit facility. Lodgian, Inc. and each of Lodgian Financing's wholly-owned
subsidiaries guarantee the notes, on an unsecured senior subordinated basis, and
each of Lodgian Financing's wholly-owned subsidiaries guarantee our new credit
facility. All but one of Lodgian Financing's hotel properties is held through
wholly-owned subsidiaries. Certain of Lodgian's other subsidiaries guarantee our
new credit facility but not the notes. Our new credit facility is secured by the
stock or equity interests of certain of Lodgian's subsidiaries and by mortgages
on each of the hotel properties held through Lodgian Financing.
Our corporate headquarters are located at Lodgian, Inc., 3445 Peachtree
Road, N.E., Suite 700, Atlanta, Georgia 30326, telephone (404) 364-9400.
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THE OFFERING
THE FOLLOWING SUMMARY IS PROVIDED SOLELY FOR YOUR CONVENIENCE AND IS NOT
INTENDED TO BE COMPLETE. YOU SHOULD READ AND CONSIDER THE MORE SPECIFIC DETAILS
CONTAINED IN THIS PROSPECTUS. SEE "THE EXCHANGE OFFER" AND "DESCRIPTION OF THE
NOTES."
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Registration Rights............... You are entitled to exchange your notes for freely
tradeable exchange notes with substantially identical
terms. The Exchange Offer is intended to satisfy your
exchange rights. After the Exchange Offer is complete,
you will no longer be entitled to any exchange or
registration rights with respect to your notes.
Accordingly, if you do not exchange your notes, you will
not be able to reoffer, resell or otherwise dispose of
your notes unless you comply with the registration and
prospectus delivery requirements of the Securities Act
of 1933, as amended (the "Securities Act") or there is
an exemption available.
The Exchange Offer................ We are offering to exchange $1,000 principal amount of
our 12 1/4% Senior Subordinated Notes due 2009, Series
B, which have been registered under the Securities Act,
for $1,000 principal amount of our outstanding 12 1/4%
Senior Subordinated Notes due 2009, Series A, which were
issued in a private offering in July 1999. As of the
date of this Prospectus, there are $200.0 million of
notes outstanding. We will issue exchange notes promptly
after the expiration of the Exchange Offer.
Resales........................... We believe that the exchange notes issued in the
Exchange Offer may be offered for resale, resold or
otherwise transferred by you without compliance with the
registration and prospectus delivery requirements of the
Securities Act provided that:
- you are acquiring the exchange notes in the
ordinary course of your business;
- you are not participating, do not intend to
participate and have no arrangement or understanding
with any person to participate, in a distribution
of the Exchange Notes; and
- you are not an "affiliate" of ours.
If you do not meet the above criteria, you will have to
comply with the registration and prospectus delivery
requirements of the Securities Act in connection with
any reoffer, resale or other disposition of your
Exchange Notes.
Each broker or dealer that receives Exchange Notes for
its own account in exchange for outstanding notes that
were acquired as a result of market-making or other
trading activities must acknowledge that it will deliver
this Prospectus in connection with any sale of Exchange
Notes.
Expiration Date................... 5:00 p.m., New York City time, on October 19, 1998,
unless we extend the expiration date.
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Accrued Interest on the Exchange
Notes and Old Notes............. The Exchange Notes will bear interest from July 23,
1999. If your outstanding notes are accepted for
exchange, then you will waive interest on such
outstanding notes accrued and unpaid to the date the
Exchange Notes are issued.
Conditions to the Exchange
Offer........................... The Exchange Offer is not subject to any condition other
than that the Exchange Notes be freely tradeable and
that the interests of holders of outstanding notes not
be materially adversely affected by consummation of the
Exchange Offer. See "The Exchange Offer--Conditions."
Procedures for Tendering Old
Notes........................... If you wish to tender outstanding notes, you must
complete, sign and date the Letter of Transmittal, or a
facsimile of it, in accordance with its instructions and
transmit the Letter of Transmittal, together with your
notes to be exchanged and any other required
documentation to Bankers Trust Company, who is the
exchange agent, at the address set forth in the Letter
of Transmittal by 5:00 p.m. New York City time, on the
expiration date. See "The Exchange Offer--Procedures for
Tendering." By executing the Letter of Transmittal, you
will represent to us that you are acquiring the Exchange
Notes in the ordinary course of your business, that you
are not participating, do not intend to participate and
have no arrangement or understanding with any person to
participate in the distribution of Exchange Notes, and
that you are not an "affiliate" of ours. See "The
Exchange Offer--Procedures for Tendering."
Special Procedures for Beneficial
Holders......................... If you are the beneficial holder of notes that are
registered in the name of your broker, dealer,
commercial bank, trust company or other nominee, and you
wish to tender in the Exchange Offer, you should contact
the person in whose name your notes are registered
promptly and instruct such person to tender on your
behalf. See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery Procedures.... If you wish to tender your notes and you cannot deliver
your notes, the Letter of Transmittal or any other
required documents to the exchange agent before the
expiration date, you may tender your notes according to
the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights................. Tenders may be withdrawn at any time before 5:00 p.m.,
New York City time, on the expiration date.
Acceptance of Old Notes and
Delivery of Exchange Notes...... Subject to certain conditions, we will accept for
exchange any and all outstanding notes which are
properly tendered in the Exchange Offer before 5:00
p.m., New York City time, on the expiration date. The
Exchange Notes will be delivered promptly after the
expiration date. See "The Exchange Offer--Terms of the
Exchange Offer."
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Certain U.S. Federal Tax
Considerations.................. The exchange of Old Notes for Exchange Notes pursuant to
the Exchange Offer will not be a taxable event for U.S.
federal income tax purposes. You will not recognize any
taxable gain or loss as a result of such exchange and
will have the same tax basis and holding period in the
Exchange Notes as you had in the Old Notes immediately
before the exchange.
Exchange Agent.................... Bankers Trust Company is serving as exchange agent in
connection with the Exchange Offer. The mailing address
of the exchange agent is BT Services Tennessee, Inc.,
Reorganization Unit, P.O. Box 292737, Nashville,
Tennessee 37229-2737, fax number (615) 835-3701.
Deliveries by overnight courier should be addressed to
BT Services Tennessee, Inc., Corporate Trust and Agency
Group, Reorganization Unit, 648 Grassmere Park Road,
Nashville, Tennessee 37211, confirm by telephone at
(615) 835-3572. Deliveries by hand should be addressed
to Bankers Trust Company, Corporate Trust and Agency
Group, Receipt & Delivery Window, 123 Washington Street,
1st Floor, New York, New York 10006. For information
about the Exchange Offer, call the exchange agent at
telephone number: (800) 735-7777.
SUMMARY OF TERMS OF EXCHANGE NOTES
Securities Offered................ $200.0 million aggregate principal amount of 12 1/4%
Senior Subordinated Notes due 2009, Series B.
Issuer............................ Lodgian Financing Corp.
Guarantors........................ Lodgian, Inc., Sheffield Motel Enterprises, Inc., Dothan
Hospitality 3053, Inc., Dothan Hospitality 3071, Inc.,
Gadsden Hospitality, Inc., Servico Flagstaff, Inc.,
Lodgian Anaheim Inc, Lodgian Ontario Inc., Servico
Pensacola, Inc., Servico Pensacola 7200, Inc., Servico
Pensacola 7330, Inc., Servico Ft. Pierce, Inc., AMI
Operating Partners, L.P., Servico West Palm Beach, Inc.,
Servico Winter Haven, Inc., Servico Silver Spring, Inc.,
Albany Hotel, Inc., Palm Beach Motel Enterprises, Inc.,
Servico Northwoods, Inc., Servico Windsor, Inc.,
Brunswick Motel Enterprises, Inc., Little Rock Lodging
Associates I, L.P., Atlanta Hillsboro Lodging, LLC,
Lodgian Richmond, L.L.C., Servico Rolling Meadows, Inc.,
Servico Cedar Rapids, Inc., Servico Metairie, Inc.,
Servico Columbia, Inc., Servico Colesville, Inc.,
Servico Maryland, Inc., NH Motel Enterprises, Inc.,
Minneapolis Motel Enterprises, Inc., Servico Roseville,
Inc., Lodgian Mount Laurel, Inc., Servico Jamestown,
Inc., Servico New York, Inc., Servico Niagara Falls,
Inc., Servico Grand Island, Inc., Fayetteville Motel
Enterprises, Inc., Apico Inns of Green Tree, Inc., Apico
Hills, Inc., Servico Hilton Head, Inc., Servico Austin,
Inc., Servico Market Center, Inc., Servico Houston, Inc.
Maturity Date..................... July 15, 2009.
Interest Payment Dates............ January 15 and July 15, beginning January 15, 2000.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Ranking........................... The Exchange Notes will be unsecured senior obligations
of Lodgian Financing Corp. and will rank:
- junior in right of payment to all existing and
future debt that is senior indebtedness under the
Indenture (including obligations under our new
credit facility);
- equal in right of payment with any of our future
debt that is senior subordinated indebtedness under
the Indenture; and
- senior in right of payment to all our debt that is
subordinated indebtedness under the Indenture,
including our convertible debentures (the
"Convertible Debentures") underlying the
convertible redeemable equity structure trust
securities (the "CRESTS") issued by a subsidiary
trust.
Each guarantee will be subordinated to all of the
guarantors' senior debt to the same extent as the
Exchange Notes are subordinated to Lodgian Financing's
senior debt. However, until we repay the Nomura Impac I
loan referred to above in September 1999, the guarantee
of Lodgian, Inc. will be junior solely to the guarantees
under the Nomura Impac loans and the new credit
facility.
The indebtedness under our new revolving credit facility
is secured by the stock or equity interests of certain
of Lodgian's subsidiaries and by mortgages on each of
the hotel properties held through Lodgian Financing. As
of July 30, 1999, we had unused commitments of $50.0
million under our new revolving credit facility.
Optional Redemption............... The Exchange Notes will be redeemable, in whole or in
part, at our option, on or after July 15, 2004 at the
redemption prices set forth under "Description of the
Notes," plus accrued and unpaid interest to the date of
redemption. In addition, at any time on or prior to July
15, 2002, we may redeem up to 35% of the principal
amount of the Exchange Notes with the proceeds of one or
more offerings of our capital stock (other than to any
subsidiary), at a price equal to 112.250% of their
principal amount, plus accrued interest to the date of
redemption; PROVIDED that at least 65% of the aggregate
principal amount of notes remains outstanding. See
"Description of the Notes--Optional Redemption."
Change of Control................. Upon a change of control, holders of the notes will have
the right to require us to repurchase their notes at a
price equal to 101% of their principal amount plus
accrued interest to the date of repurchase. See
"Description of the Notes--Repurchase of Notes upon a
Change of Control."
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Certain Covenants................. The indenture governing the exchange notes contains
certain covenants that restrict our subsidiaries'
ability to:
- incur debt;
- pay dividends on, or redeem, capital stock, make
investments or redeem subordinated debt;
- dispose of assets;
- sell stock of subsidiaries;
- engage in transactions with affiliates;
- create liens securing subordinated debt; and
- engage in mergers or consolidations
However, these limitations will be subject to a number
of important qualifications and exceptions. See
"Description of the Notes--Covenants."
</TABLE>
USE OF PROCEEDS
We will not receive any proceeds from the Exchange Offer. See "Use of
Proceeds." We have agreed to bear the expenses of the Exchange Offer. No
underwriter is being used in connection with the Exchange Offer.
RISK FACTORS
You should consider carefully all of the information contained in this
memorandum and, in particular, you should evaluate the specific factors under
"Risk Factors" before deciding to invest in the Notes.
14
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The following table presents summary historical consolidated financial data
of Lodgian for the years ended December 31, 1996, 1997 and 1998 and the six
months ended June 30, 1998 and 1999 and summary pro forma consolidated financial
data of Lodgian for the year ended December 31, 1998. We derived the historical
consolidated financial data for each of the three years in the period ended
December 31, 1998 from our audited consolidated financial statements. We derived
the historical financial data as of and for the six months ended June 30, 1998
and 1999 from our unaudited consolidated financial statements. We believe the
financial statements for these periods have been prepared on the same basis as
our audited consolidated financial statements and include all adjustments
(consisting only of normal recurring items) necessary for a fair and consistent
presentation of Lodgian's results of operations and financial position for these
periods and as of these dates. Historical results for the six months ended June
30, 1999 are not necessarily indicative of the results that might be expected
for the entire year ending December 31, 1999.
The pro forma statement of operations data for the year ended December 31,
1998 give effect to:
(1) the Merger;
(2) the 1998 acquisitions of AMI Operating Partners, L.P. (after the sale of
three of the 14 acquired properties) and the Boston Revere Hotel;
(3) the offering of the CRESTS and the repayment of debt with the proceeds;
and
(4) the offering of the Old Notes and borrowings under our new credit
facility and the application of the proceeds thereof, as if each such
transaction occurred on January 1, 1998.
The summary financial data presented below should be read along with
"Unaudited Pro Forma Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements contained elsewhere in this memorandum.
15
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
ACTUAL PRO FORMA ACTUAL
------------------------------- ----------- --------------------
<CAPTION>
1996 1997 1998 1998 1998 1999
--------- --------- --------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 239,526 $ 276,657 $ 395,214 $ 568,024 $ 185,269 $ 295,667
Direct operating expenses......................... 96,428 110,527 156,959 220,889 77,850 115,879
General and administrative........................ 9,297 8,973 10,080 16,859 4,829 11,367
Depreciation and amortization..................... 18,677 23,023 31,114 48,099 14,758 27,500
Other hotel operating expenses.................... 77,183 88,036 129,950 195,776 53,634 85,143
--------- --------- --------- ----------- --------- ---------
Income from operations............................ 37,941 46,098 67,111 86,401 34,198 55,778
Other income (expense):
Interest income and other....................... 1,723 1,720 1,260 2,122 700 817
Interest expense................................ (29,443) (25,909) (30,378) (63,649) (16,132) (37,139)
Non-recurring items(1).......................... 3,612 -- (35,324) (46,428) (432) --
Minority interests:
Preferred redeemable securities................. -- -- (6,475) (12,250) (311) (6,814)
Other........................................... (2,060) (960) (1,436) (1,318) (823) (1,310)
--------- --------- --------- ----------- --------- ---------
Income (loss) before income taxes and
extraordinary item.............................. 11,773 20,949 (5,242) (35,122) 17,200 11,332
Provision (benefit) for income taxes.............. 3,225 8,379 (2,097) (14,049) 6,880 4,533
--------- --------- --------- ----------- --------- ---------
Income (loss) before extraordinary item........... 8,548 12,570 (3,145) (21,073) 10,320 6,799
-----------
-----------
Extraordinary item, net of taxes.................. (348) (3,751) (2,076) (1,095) --
--------- --------- --------- --------- ---------
Net income (loss)................................. $ 8,200 $ 8,819 $ (5,221) $ 9,225 $ 6,799
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
EBITDA(2)......................................... $ 57,915 $ 69,559 $ 98,225 $ 134,500 $ 49,260 $ 84,266
Ratio of earnings to fixed charges(3)............. 1.4x 1.7x -- -- 2.0x 1.2x
Capital expenditures and acquisitions............. $ 96,635 $ 203,406 $ 186,384 $ 118,667 83,286 46,188
Total debt/EBITDA(4).............................. 5.3x 4.7x 8.7x 6.3x N/A N/A
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EBITDA/interest expense........................... 2.0x 2.7x 3.2x 2.1x 3.1x 2.3x
Number of hotels owned at end of period........... 57 69 142 142 87 135
Number of rooms owned at end of period............ 11,059 14,061 26,889 26,889 17,388 25,525
Occupancy(5)...................................... 64.4% 60.9% 60.9% 60.3% 62.1% 62.3%
Average daily rate(6)............................. $ 69.47 $ 71.90 $ 73.52 $ 73.17 $ 73.61 $ 75.42
RevPAR(7)......................................... $ 44.72 $ 43.82 $ 44.77 $ 44.12 $ 45.72 $ 46.95
Available room nights(8).......................... 3,487,689 4,107,066 5,844,637 9,107,862 2,728,523 4,507,909
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1999
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 ACTUAL AS ADJUSTED
--------- --------- --------- --------- -----------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property and equipment, net............................. $ 364,922 $ 534,080 $1,317,470 $1,332,522 $1,329,968
Total assets............................................ 439,786 627,651 1,497,921 1,519,909 1,525,793
Long-term obligations, less current portion............. 284,880 323,320 816,644 833,142 876,467
Minority interests:
Preferred redeemable securities....................... -- -- 175,000 175,000 175,000
Other................................................. 19,627 13,555 15,021 15,922 15,922
Total stockholders' equity.............................. 74,738 239,535 283,767 290,990 275,071
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
16
<PAGE>
(1) Non-recurring items were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C> <C>
ACTUAL PRO FORMA
------------------------------- -----------
<CAPTION>
1996 1997 1998 1998
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Gain on litigation settlement......................................... $ 3,612 $ -- $ -- $ --
Other non-recurring expense........................................... -- -- (432) (432)
Settlement on treasury rate lock transaction.......................... -- -- (31,492) (31,492)
Severance and other................................................... -- -- (3,400) (14,504)
--------- --------- --------- -----------
Total............................................................... $ 3,612 $ -- $ (35,324) $ (46,428)
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
(2) "EBITDA" represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure commonly used in
the lodging industry. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
an alternative to net income as a measure of performance or to cash flow as
a measure of liquidity. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
are determined by adding fixed charges (excluding capitalized interest) and
amortization of capitalized interest to earnings before income taxes. Fixed
charges consist of (i) interest expense (including amortization of debt
issuance costs), (ii) capitalized interest, (iii) dividends paid on the
CRESTS and (iv) the portion of rent expense considered interest. Excluding
the non-recurring items for actual 1998 and pro forma 1998, the ratios would
have been 1.7x and 1.1x respectively. For the year ended December 31, 1998,
actual and pro forma, our earnings were insufficient to cover our fixed
charges by $6.8 million and $41.0 million, respectively.
(4) Based on debt at the end of the period. Excludes $175.0 million of CRESTS.
(5) Occupancy is determined by dividing the total rooms occupied for the period
by the total available room nights for such period. We include rooms being
renovated or otherwise unavailable in determining the total available room
nights.
(6) Average daily rate is determined by dividing room revenue for the period by
the number of rooms occupied for the period.
(7) "RevPAR" means revenue per available room per day, which is calculated as
average daily rate multiplied by the occupancy.
(8) Total rooms multiplied by number of days in the period. Includes rooms being
renovated or otherwise unavailable. Historically, Servico had not included
rooms being renovated or otherwise unavailable.
(9) Our results for the six months ended June 30, 1999 have been materially
affected by the Merger and the acquisitions of AMI and the Boston Revere
Hotel, that were recorded under the purchase method of accounting.
17
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS AND THE OTHER
INFORMATION IN THIS PROSPECTUS. THIS SECTION INCLUDES OR REFERS TO CERTAIN
FORWARD-LOOKING STATEMENTS. YOU SHOULD REFER TO THE EXPLANATION OF THE
QUALIFICATIONS AND LIMITATIONS ON SUCH FORWARD-LOOKING STATEMENTS DISCUSSED
UNDER THE HEADING "FORWARD-LOOKING STATEMENTS" IN THIS PROSPECTUS.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
PREVENT US FROM FULFILLING OUR OBLIGATION UNDER THESE NOTES
We have a substantial amount of debt. As of June 30, 1999, after giving
effect to the offering of the Notes and borrowings under our new credit facility
and the application of the net proceeds thereof, we would have had outstanding
debt of $890.0 million and the ability to borrow an additional $12.8 million
under our existing agreements and $75.0 million under our new credit facility.
These additional borrowings under our new credit facility would be for
designated construction projects and for general corporate purposes. The
Indenture permits us to incur additional debt, subject to specified limitations.
See "Description of Certain Indebtedness and Preferred Stock" and "Description
of the Notes."
Our substantial indebtedness could interfere with the ability to pay
interest and principal on the Notes and may have important consequences for our
operations, including:
- we may not have sufficient funds to pay interest on, and principal of, our
debt (including the Notes);
- we will have to dedicate a substantial portion of our cash flow from
operations to the payment of interest on, and principal of, our debt,
which will reduce funds available for other purposes;
- we may not be able to fund capital expenditures, working capital and other
corporate requirements;
- we may not be able to obtain additional financing; and
- our ability to adjust to changing market conditions and to withstand
competitive pressures could be limited, and we may be vulnerable to
additional risk if there is a downturn in general economic conditions or
our business.
In addition, as of June 30, 1999, after giving effect to the offering of the
Notes and borrowings under our new credit facility and the application of the
net proceeds thereof, $445.2 million of our debt would have had variable rates
of interest, which could result in higher interest expense if interest rates
increase.
We have a significant amount of debt that will mature prior to the maturity
of the Notes, and this debt and the Notes may need to be refinanced at their
maturity. Our ability to refinance our debt will depend upon several factors,
including our financial condition at the time, the restrictions in the existing
debt agreements and other factors, including market condition, which are beyond
our control. We cannot assure you that we will be able to obtain any necessary
refinancing on terms that are acceptable to us.
The following chart is presented assuming we had completed the offering of
the Notes and have made borrowings under our new credit facility and applied the
proceeds as they were so applied:
<TABLE>
<CAPTION>
AT JUNE 30,
1999
---------------
(IN MILLIONS)
<S> <C>
Total indebtedness............................................................................... $ 890.0
Indebtedness senior to the Notes (includes debt of subsidiaries that are not guarantors)......... $ 690.0
</TABLE>
In addition, at June 30, 1999, we had $175.0 million of Convertible
Debentures underlying the CRESTS outstanding. See "Description of Certain
Indebtedness and Preferred Stock--CRESTS."
18
<PAGE>
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH, AND
OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL
Our ability to make payments on our debt, including the Notes, depends on
our future operating performance, which is subject to general economic and
competitive conditions and to financial, business, regulatory and other factors,
many of which we cannot control. If our cash flow from operations is
insufficient, we may take specific actions, including delaying or reducing
capital expenditures, attempting to restructure or refinance our debt, deferring
scheduled CRESTS dividends, selling assets or operations, or seeking additional
equity capital. We may be unable to take any of these actions on satisfactory
terms or in a timely manner. Further, any of these actions may not be sufficient
to allow us to meet our debt obligations. Our existing debt agreements limit our
ability to take certain of these actions. The Indenture will contain similar
restrictions. See "--Our Debt Instruments Restrict Our Ability to Enter into
Certain Transactions." Our failure to earn enough to pay our debts or to
successfully undertake any of these actions could, among other things,
materially and adversely affect the market value of the Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of Certain
Indebtedness and Preferred Stock" and "Description of the Notes."
SUBORDINATION OF THE NOTES AND NOTE GUARANTEES; ASSET ENCUMBRANCES--EXISTENCE OF
SENIOR DEBT COULD LIMIT THE ABILITY OF LODGIAN FINANCING AND THE GUARANTORS TO
FULFILL THEIR OBLIGATIONS UNDER THE NOTES AND THE NOTE GUARANTEES
The right to payment on the Notes and the guarantees is subordinate to all
of the existing and future debt of Lodgian Financing and the guarantors that is
senior indebtedness under the Indenture. In the event of a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding, Lodgian
Financing's assets will be available to pay obligations on the Notes, and the
assets of Lodgian and the subsidiary guarantors will be available to pay their
obligations under their respective guarantees, only after all our outstanding
senior indebtedness has been paid in full. There may not be sufficient assets
remaining to make payments on amounts due on any or all of the Notes then
outstanding or on the guarantees. In addition, under particular circumstances, a
default in the payment of some senior indebtedness prohibits Lodgian Financing
or the guarantors from making payments on the Notes or the guarantees. As of
June 30, 1999, after giving effect to the offering of the Notes and borrowings
under our new credit facility and the application of the net proceeds thereof,
our outstanding senior indebtedness would have been $349.8 million (which
includes $109.8 million of guarantees of debt of subsidiaries that are not
guaranteeing the Notes), and we would have had $465.4 million of debt
outstanding at subsidiaries that have not guaranteed the Notes. Although the
Indenture limits the amount of debt that we may incur, the amount of debt we
incur could be substantial and could be senior indebtedness. See "Description of
the Notes."
The Notes and the guarantees are unsecured and effectively rank junior in
right of payment to any of our secured debt to the extent of the value of the
assets securing that debt. Our secured debt includes debt incurred under our
mortgage notes and credit facilities, which is secured by liens on substantially
all of our assets. If an event of default were to occur under our mortgage notes
or credit facilities, the lenders could foreclose on the assets regardless of
any default with respect to the Notes or the guarantees. The assets would first
be used to repay in full all amounts outstanding under our mortgage notes and
credit facilities. There may not be sufficient value to repay the outstanding
principal amount of the Notes or the guarantees.
COMPANY STRUCTURE; STRUCTURAL SUBORDINATION--FUNDS FROM SUBSIDIARIES MAY NOT BE
SUFFICIENT FOR US TO MAKE PAYMENTS ON THE NOTES
Lodgian is a holding company whose primary assets consist of shares of
Lodgian Financing, Servico and Impac. Lodgian Financing is a holding company
whose operations are conducted through its direct or
19
<PAGE>
indirect subsidiaries. As a result, Lodgian Financing will be dependent on
dividends and other distributions from its subsidiaries for the funds necessary
to make payments on the Notes. The Notes are guaranteed on an unsecured senior
subordinated basis by Lodgian and each of the wholly-owned subsidiaries of
Lodgian Financing. Under our new credit facility, our subsidiaries Impac Hotel
Group, LLC and Servico, Inc. are restricted from making distributions to
Lodgian, other than tax distributions, but can make other distributions to
Lodgian Financing.
Holders of the Notes will effectively be junior to all creditors of our
subsidiaries that are not guarantors. As of June 30, 1999, after giving effect
to the offering of the Notes and borrowings under our new credit facility and
the application of the net proceeds thereof, the total liabilities of these
subsidiaries would have been approximately $613.1 million, including trade
payables, and $465.4 million of debt.
The direct and indirect subsidiaries of Lodgian Financing are legally
distinct entities from us and, except for the subsidiary guarantors, have no
obligation to pay amounts due under the Notes or to make funds available for
payment. The ability of our subsidiaries to make these payments is subject to
the availability of funds and the terms of these subsidiaries' indebtedness,
among other things. For example, our mortgage notes and credit facilities
restrict the ability of our subsidiaries to pay dividends or make other
distributions.
SUBSIDIARY GUARANTEES COULD BE DEEMED TO BE FRAUDULENT CONVEYANCES
All wholly-owned subsidiaries of Lodgian Financing guarantee the Notes. The
issuance of these subsidiary guarantees could be subject to review under
applicable fraudulent transfer or conveyance laws in a bankruptcy or other
similar proceeding. Under these laws, the issuance of a guarantee will be a
fraudulent conveyance if either (1) the subsidiary issued the guarantee with
intent of hindering, delaying or defrauding its creditors, or (2) the subsidiary
received less than reasonably equivalent value or fair consideration in return
for issuing the guarantee, and, in the case of (2) only, one of the following is
also true:
- the subsidiary was insolvent or became insolvent when it issued the
guarantee,
- issuing the guarantee left the subsidiary with an unreasonably small
amount of capital, or
- the subsidiary intended to, or believed that it would, be unable to pay
its debts as they matured.
If the issuance of the subsidiary guarantee were a fraudulent conveyance, a
court could, among other things, void the subsidiary's obligations under the
guarantee and require the repayment of any amounts paid thereunder.
Generally, an entity will be considered insolvent if:
- the sum of its debts is greater that the fair value of its property,
- the present fair value of its assets is less than the amount that it will
be required to pay on its existing debts as they become due, or
- it cannot pay its debts as they become due.
We believe, however, that upon issuance of the Notes, our subsidiaries are
solvent, have sufficient capital to carry on their businesses and are able to
pay their debts as they mature. We cannot be sure, however, as to what standard
a court would apply in making such determinations or that a court would reach
the same conclusions with regard to these issues.
20
<PAGE>
OUR DEBT INSTRUMENTS RESTRICT OUR ABILITY TO ENTER INTO CERTAIN TRANSACTIONS
The Indenture restricts our ability to engage in certain transactions. In
addition, certain of our indebtedness requires us to maintain debt service
coverage ratios. See "Description of Certain Indebtedness and Preferred Stock"
and "Description of the Notes--Covenants."
Our indebtedness and the Indenture restrict our ability, and the ability of
our subsidiaries, to:
- incur additional indebtedness;
- pay dividends and make distributions;
- issue stock of subsidiaries;
- make investments;
- repurchase stock;
- create liens;
- enter into transactions with affiliates;
- enter into sale and leaseback transactions;
- merge or consolidate; and
- transfer and sell assets.
The restrictions imposed by our indebtedness may limit our ability to
finance future operations, respond to changing business and economic conditions,
secure any needed additional financing and engage in opportunistic transactions.
Moreover, we may not satisfy the financial ratios and tests due to events that
are beyond our control. The failure to satisfy any of these restrictions could
result in a default under that indebtedness. Following a default, the lenders
could declare all amounts outstanding to be immediately due and payable. If we
could not repay those amounts, the lenders could foreclose on the collateral
granted to them to secure the indebtedness under those financings. If the
lenders accelerated the outstanding indebtedness, we cannot guarantee that we
could repay such indebtedness nor can we guarantee that we could pay amounts due
in respect of our other indebtedness, including the Notes, with our remaining
assets. See "Description of Certain Indebtedness and Preferred Stock" and
"Description of the Notes--Ranking."
WE MAY BE UNABLE TO REALIZE THE ANTICIPATED BENEFITS OF THE MERGER AND THE
ACQUISITION OF AMI
Primarily as a result of the Merger and the acquisition of AMI Operating
Partners, L.P. ("AMI"), the number of hotels we own almost doubled during 1998.
We must fully integrate the Impac and AMI hotels into our hotel portfolio and we
may need additional people and resources to handle the increased work load. If
we are unable to integrate the Impac and AMI hotels successfully into our
portfolio, our business, financial condition and results of operations could
suffer. Similarly, a large number of the Impac and AMI hotels are in the process
of, or awaiting, substantial renovation, development and rebranding. If the
implementation of these plans is significantly delayed or curtailed, or the
improvements do not yield the anticipated results, then we may have paid too
much for these hotels.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY--ECONOMIC CONDITIONS, OVERSUPPLY,
TRAVEL PATTERNS, WEATHER AND OTHER CONDITIONS BEYOND OUR CONTROL MAY ADVERSELY
AFFECT OUR BUSINESS AND RESULTS OF OPERATION
The lodging industry may be adversely affected by changes in national or
local economic conditions and other local market conditions, such as an
oversupply of hotel rooms or a reduction in demand for hotel space in a
geographic area, changes in travel patterns, extreme weather conditions, changes
in governmental regulations which influence or determine wages, prices or
construction costs, changes in
21
<PAGE>
interest rates, the availability of financing for operating or capital needs, or
changes in real estate tax rates and other operating expenses. In addition, due
in part to the strong correlation between the lodging industry's performance and
economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits. Downturns or prolonged adverse conditions in the real
estate or capital markets or in national or local economies, our inability to
secure financing for the development of hotels or an oversupply of hotel rooms
could have a material adverse effect on our business and results of operations.
RISKS RELATED TO THE DEVELOPMENT OF NEW PROJECTS, ACQUISITIONS AND
RENOVATIONS--WE CANNOT GUARANTEE THE SUCCESS OF ANY FUTURE PROJECTS
Part of our growth strategy is to develop new hotels and to acquire and
redevelop underperforming hotels. Acquiring, developing and renovating involve
substantial risks, including:
- identifying acquisitions that meet our criteria;
- costs exceeding budgeted or contracted amounts;
- delays in completion of construction;
- the failure to obtain necessary zoning and construction permits;
- lack of financing on favorable terms;
- the failure of developed or redeveloped or acquired properties to achieve
desired revenue or profitability levels;
- competition for suitable development sites from competitors who may have
greater financial resources;
- the incurrence of substantial costs for abandoned development projects;
- work stoppages;
- relationships with contractors;
- changes in governmental rules, regulations and interpretations; and
- changes in general economic and business conditions.
As of June 30, 1999, we were constructing three new hotels and renovating 19
hotels. We cannot guarantee that present or future development or renovation
will proceed in accordance with our expectations. We also cannot assure you that
we will acquire and redevelop properties or complete the development and
construction of hotels or that any such development or construction will be
completed on time or within budget.
We compete against numerous entities to acquire hotels. Some of our
competitors have greater financial resources or carry less debt than we do. For
successful growth, we must be able to acquire hotels on attractive terms and
integrate the acquired hotels into our existing operations. For acquired hotels,
including those acquired in the Merger, we must consolidate management,
operations, systems, personnel and procedures. Any delays or unexpected costs in
this integration could materially affect our business, financial condition, or
results of operations. We cannot assure you that our newly acquired hotels will
perform as expected or that we will be able to realize any expected cost
savings.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH
We expect to grow internally and through acquisitions. We expect to expend
significant time and effort in expanding existing businesses and in identifying,
completing and integrating acquisitions and in developing new properties. We
cannot guarantee that our systems, procedures and controls will be adequate to
support our operations as they expand. Any future growth also will impose
significant added
22
<PAGE>
responsibilities on members of senior management, including the need to
identify, recruit and integrate new managers and executives. We cannot guarantee
that we will identify and retain additional management. If we are unable to
manage our growth efficiently and effectively, or are unable to attract and
retain additional qualified management, our business and results of operations
could be materially adversely affected. In making acquisitions, we may have
difficulty combining the operations or realizing the expected benefits and
operating synergies. Our ability to consolidate our business, operations and
personnel (including reducing duplicate functions and costs) with any
acquisitions will affect our growth and profitability. Delays or unexpected
costs in the integration could reduce the expected gains from the combined
business and results of operations. We cannot assure you that we will be able to
accomplish the consolidation and achieve the cost savings in a timely or
profitable manner or that any savings will be realized. See "Business--Growth
Strategy" and "Management."
WE HAVE SIGNIFICANT CAPITAL NEEDS AND ADDITIONAL FINANCINGS MAY NOT BE AVAILABLE
The development, renovation and maintenance of hotels is capital intensive.
As part of our growth strategy we intend to acquire and redevelop additional
hotels and to develop new hotels. To pursue this strategy, we will be required
to obtain additional capital in the future to meet our expansion plans. In
addition, in order for our hotels to remain competitive they must be maintained
and refurbished on an ongoing basis. Moreover, our cash flow from operations may
be adversely affected because portions of the facilities are removed from
service during renovation. We may obtain needed capital from cash on hand,
including reserves, cash flow from operations or from financing, including the
issuance of additional indebtedness. We may also seek financing from other
sources or enter into joint ventures and other collaborative arrangements in
connection with the acquisition or development of hotel properties. We cannot
guarantee that we will be able to raise any additional financing on acceptable
terms on a timely basis or at all. If we cannot obtain such financing, we may be
unable to construct additional hotels, and we may experience delays in our
planned renovation or maintenance of our hotels.
WE DEPEND ON THIRD PARTIES IN OUR JOINT VENTURES AND COLLABORATIVE ARRANGEMENTS
We currently own 12 hotels in partnership with other entities and may in the
future enter into joint venture or other collaborative arrangements. Our
investment in these joint ventures may, under certain circumstances, involve
risks not otherwise present in our business, including (1) the risk that our
partner may become bankrupt, (2) the impact on our ability to sell or dispose of
our property as a result of buy/sell rights that may be imposed by the venture,
and (3) the risk that our partner may have economic or other interests or goals
that are inconsistent with our interests and goals and that they may be in
position to veto actions which may be in our best interests.
COMPETITION IN THE LODGING INDUSTRY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND RESULTS OF OPERATIONS
The lodging industry is highly competitive. Competitive factors within the
industry include:
- room rates;
- quality of accommodations;
- name recognition;
- service levels;
- reputation;
- reservation systems;
- convenience of location; and
- the supply and availability of alternative lodging.
23
<PAGE>
We intend to develop or acquire most of our hotels in geographic locations
where other hotels may be located. We expect to compete for guests and
development sites with national chains, large franchisees and independent
operators. Many of these competitors have greater financial resources and may
have better relationships with prospective franchisors, representatives in the
construction industry and others in the lodging industry. The number of
competitive lodging facilities in a particular area could have a material
adverse effect on our occupancy and rates and, therefore, revenues of our
hotels. See "Business-- Competition and Seasonality."
We believe that competition within the lodging market has increased
substantially and may increase in the foreseeable future. We cannot guarantee
that new or existing competitors will not significantly reduce their rates or
offer greater convenience, services or amenities or significantly expand or
improve hotels in the markets in which we currently or may subsequently compete,
thereby materially adversely affecting our business and results of operations.
WE RELY ON OUR FRANCHISORS, AND OUR FRANCHISE AGREEMENTS MAY RESTRICT OUR HOTEL
OPERATIONS AND MAINTENANCE
We expect to derive substantial benefits from our strategic alliances with
franchisors. Most of the hotels that we own or manage are operated under
franchise licenses, including franchise licenses for the Comfort Inn, Courtyard
by Marriott, Crowne Plaza, Doubletree, Fairfield Inn by Marriott, Hampton Inn,
Hilton, Holiday Inn, Marriott, Radisson, Residence Inn by Marriott and Sheraton
brands, among others. Any significant decline in the reputation of any of our
franchisors could adversely affect our results of operations. Most of our hotels
are affiliated with Holiday Inn and Marriott. If we lose our position as a
franchisee of any of our franchisors, particularly Holiday Inn or Marriott, or
there is a decline in their reputations, our business, financial condition and
results of operations could be adversely affected.
We believe our relationships with our franchisors are good. However, from
time to time, we have terminated relationships with franchisors for quality or
for other reasons and, in addition, one franchisor terminated its franchise with
us on one property that was under notice of termination when we acquired it.
Currently we have received a notice of franchise termination on two hotels. We
expect to convert these hotels to new franchises.
We operate our hotels according to franchise agreements with major hotel
chains. Each franchise agreement usually contains specific standards for, and
restrictions and limitations on, hotel operation and maintenance. These
standards, restrictions, and limitations may conflict with our planned
expenditures and priorities. In addition, franchisors may change their standards
or limit our ability to improve or modify our hotels without franchisor consent.
To comply with franchisors' requirements, or to change a franchise affiliation
for a particular hotel, we may be forced to incur significant costs or make
capital expenditures. Franchisors may usually cancel franchise agreements if the
hotel operator fails (1) to maintain specified operating standards or (2) to
make payments when due under the franchise agreement. If we lose a franchise, we
may suffer in the areas of brand recognition, marketing, and centralized
reservations systems provided by the franchisor, which, in turn, could affect
operations and the underlying value of the affected hotel. Franchise agreements
often define certain transactions as a "change of control" and can require
franchisor approval, or the payment of certain fees, or both. Obtaining approval
for these transactions can take time, and the potential cost of doing so could
have an adverse effect on our business, financial condition and results of
operations.
OUR INVESTMENT IN REAL ESTATE COULD DECLINE IN VALUE, BE ILLIQUID OR EXPERIENCE
UNINSURED OR UNDERINSURED LOSSES
GENERAL RISKS. Our investment in our hotels will be subject to varying
degrees of risk related to the ownership and operation of real property. The
underlying value of our real estate investments depends significantly on our
ability to maintain or increase cash provided by operating the investments. The
value of our hotels and income from the hotels may be materially adversely
affected by:
24
<PAGE>
- changes in national economic conditions;
- changes in general or local economic conditions and neighborhood
characteristics;
- competition from other lodging facilities;
- changes in real property tax rates;
- changes in the availability, cost and terms of financing;
- the effect of present or future environmental laws;
- the ongoing need for capital improvements;
- changes in operating expenses;
- changes in governmental rules and policies;
- natural disasters; and
- other factors which are beyond our control.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively
illiquid. Our ability to vary our portfolio in response to changes in economic
and other conditions will be limited. We cannot guarantee that we will be able
to dispose of an investment when we find disposition advantageous or necessary
or that the sale price of any disposition will recoup or exceed the amount of
our investment.
UNINSURED AND UNDERINSURED LOSSES COULD RESULT IN LOSS OF VALUE OF
HOTELS. We maintain comprehensive insurance on each of our hotels, including
liability, fire and extended coverage, of the type and amount we believe is
customarily obtained for or by an owner of similar real property assets.
However, there are types of losses, generally of a catastrophic nature, such as
earthquakes and floods, that may be uninsurable or not economically insurable.
We use our discretion in determining amounts, coverage limits and deductibility
provisions of insurance, with a view to obtaining appropriate insurance on our
hotels at a reasonable cost and on suitable terms. This may result in insurance
coverage that could be insufficient to pay the full current market value or
current replacement cost of our lost investment. Inflation, changes in building
codes and ordinances, environmental considerations and other factors also might
make it infeasible to use insurance proceeds to replace a hotel after it has
been damaged or destroyed. Under these circumstances, the insurance proceeds we
receive might not be enough to restore our economic position with respect to a
damaged or destroyed hotel. In addition, property and casualty insurance rates
may increase depending on claims experience, insurance market conditions and the
replacement value of our hotels.
THE FAILURE TO COMPLY WITH GOVERNMENT REGULATION MAY ADVERSELY EFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, we are subject to laws governing the relationships
with employees, including minimum wage requirements, overtime, working
conditions, work permit requirements and dramshop laws, which may give an
injured person the right to recover damages from any establishment which
wrongfully served alcoholic beverages to the person who, while intoxicated,
caused the injury.
Further, under the Americans with Disabilities Act of 1990, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While we anticipate that our owned hotels
and the hotels we manage will be substantially in compliance with these
requirements, a determination that we are not in compliance with these
regulations could result in the imposition of fines, an award of damages to
private litigants and significant expense in bringing our hotels in compliance.
See "Business--Regulation."
25
<PAGE>
ENVIRONMENTAL REGULATION MAY ADVERSELY IMPACT OUR COSTS
Our operating costs may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations. In
addition, if any future legislation is adopted, we may at various times be
required to make significant capital and operating expenditures in response to
such legislation. We attempt to minimize our exposure to potential environmental
liability through our site selection procedures. We typically enter into
contracts to purchase real estate subject to certain contingencies. Prior to
exercising our option to purchase property, we typically conduct a Phase I
environmental assessment (which generally includes a physical inspection and
database search, but not soil or groundwater analyses). Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in the
property. These laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of hazardous or toxic substances.
In addition, the presence of contamination from hazardous or toxic substances,
or the failure to properly remediate the contaminated property, may adversely
affect the owner's ability to borrow using the real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of these
substances at the disposal or treatment facility, whether or not the facility is
or ever was owned or operated by that person. Certain environmental laws and
common law principles could be used to impose liability for releases of
hazardous materials, including asbestos-containing materials, into the
environment, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released
hazardous materials. Environmental laws also may impose restrictions on the
manner in which property may be used or transferred or in which businesses may
be operated, and these restrictions may require expenditures. In connection with
the ownership of our properties and the management of other hotels, we
potentially may be liable for any such costs. The cost of defending against
claims of liability or remediating contaminated property and the cost of
complying with environmental laws could materially adversely affect our business
and results of operations.
DEPENDENCE ON KEY PERSONNEL--LOSS OF MANAGEMENT COULD RESULT IN A MATERIAL
ADVERSE EFFECT
We depend substantially on the efforts and skills of members of management,
in particular Robert S. Cole. Mr. Cole is our Chief Executive Officer, President
and a director. The loss of the services of Mr. Cole or his inability to devote
sufficient attention to our operations could have a material adverse effect on
our operations.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your notes for exchange notes, you will continue to
be subject to the restrictions on transfer of your notes set forth in their
legend because the outstanding Old Notes were issued pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act. In general, outstanding Old Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. We currently do not anticipate registering the
outstanding Old Notes under the Securities Act.
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<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the Exchange Offer. In consideration
for issuing the Exchange Notes, we will receive in exchange outstanding Old
Notes of like principal amount, the terms of which are identical in all material
respects to the Old Notes. The outstanding Old Notes surrendered in exchange for
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase in our
indebtedness. We have agreed to bear the expenses of the Exchange Offer. No
underwriter is being used in connection with the Exchange Offer.
For a description of the use of proceeds of the offering of outstanding Old
Notes, see "Summary-- Lodgian--Recent Developments."
27
<PAGE>
CAPITALIZATION
The following table presents our consolidated capitalization as of June 30,
1999 (1) on an actual basis and (2) as adjusted for the offering of the Notes
and borrowings under our new credit facility and the application of the proceeds
to repay portions of our existing indebtedness as described in "Summary--
Lodgian--Recent Developments" as if these transactions had occurred on June 30,
1999. The information presented below should be read along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements contained elsewhere in this memorandum.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
------------ ------------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Mortgage notes payable--to be repaid with issuance of the Notes and the new credit
facility(1)....................................................................... $ 412,973 $ --
Mortgage notes with variable interest rates maturing through 2011(2)................ 205,240 205,240
Mortgage notes payable, with fixed rates ranging from 8.6% to 10.7% payable through
2010.............................................................................. 230,345 230,345
Other(3)............................................................................ 20,994 14,369
New credit facility(4).............................................................. -- 240,000
Senior Subordinated Notes offered hereby............................................ -- 200,000
------------ ------------
Total long-term debt(5)........................................................... 869,552 889,954
Minority Interests:
Preferred redeemable securities(6).................................................. 175,000 175,000
Other............................................................................... 15,922 15,922
Stockholders' equity:
Common stock........................................................................ 278 278
Additional paid-in capital.......................................................... 262,436 262,436
Retained earnings(7)................................................................ 29,905 13,906
Accumulated other comprehensive loss................................................ (1,629) (1,629)
------------ ------------
Total stockholders' equity........................................................ 290,990 275,071
------------ ------------
Total capitalization............................................................ $ 1,351,464 $ 1,355,947
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) $132.5 million relating to the Nomura Impac I mortgage notes are to be
repaid in September 1999 with a deferred funding.
(2) Each note converts to a term loan amortizing over a 20-year period,
commencing in October 2000 and October 2001.
(3) As adjusted to reflect exit fees paid to Lehman Brothers upon repayment of
the Lehman Brothers mortgage notes.
(4) Does not reflect any borrowing expected to be available under our new credit
facility other than the borrowings to fund the repayment of the Nomura Impac
I mortgage notes in September 1999.
(5) The weighted average interest rate on the as adjusted total long-term debt
at June 30, 1999 would have been 9.5% (based on the interest expense
relating to the Notes and the new credit facility set forth in Note 5 under
"Unaudited Pro Forma Consolidated Financial Data").
(6) Represents $175.0 million liquidation preference of CRESTS issued by Lodgian
Capital Trust I, with a $50 par value. The sole asset of the trust consists
of $175.0 million principal amount of our convertible subordinated
debentures due 2010. The CRESTS are convertible into common stock of Lodgian
at the option of the holder at a price of $21.42 per share. Holders receive
distributions at a fixed annual rate of 7%, which are deferrable for 20
quarters under the governing indenture. The CRESTS will be redeemed upon the
repayment of the underlying convertible debentures on June 30, 2010 or their
earlier redemption. See "Description of Certain Indebtedness and Preferred
Stock."
(7) As adjusted to reflect certain exit, prepayment and other fees associated
with the repayment of the debt with the proceeds of the offering of the
Notes and borrowings under our new credit facility.
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited 1998 pro forma consolidated statement of operations
of Lodgian gives effect to:
(1) the Merger;
(2) the 1998 acquisitions of AMI (after the sale of three of the 14 acquired
properties) and the Boston Revere Hotel;
(3) the June 1998 offering of the CRESTS and the repayment of debt with the
proceeds; and
(4) the offering of the Old Notes and borrowings under our new credit
facility and the application of the proceeds thereof, as if such
transactions occurred on January 1, 1998.
The unaudited 1998 pro forma consolidated statement of operations of Lodgian
should be read in conjunction with the historical financial statements and other
financial information included elsewhere in this memorandum.
The effect of the offering of the Old Notes and the borrowings under the new
credit facility on the historical consolidated balance sheet as of June 30, 1999
and the consolidated statement of operations for the six months ended June 30,
1999 is immaterial to the respective statements. Therefore, no separate pro
forma balance sheet or statement of operations for these periods is included in
the unaudited pro forma consolidated financial data.
The accompanying unaudited pro forma information is presented for
illustrative purposes only and is based on certain assumptions and adjustments
described in the pro forma financial statements. Such information is not
necessarily indicative of the operating results or financial position that would
have occurred had the transactions been consummated at the dates indicated, nor
is it necessarily indicative of future operating results or the financial
position of Lodgian. No effect has been given in the unaudited 1998 pro forma
consolidated statement of operations for operating and cost savings that may be
realized from the acquisition of AMI or from the Merger.
29
<PAGE>
LODGIAN, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------
OFFERING OF
NOTES,
IMPAC THE CREDIT
(JANUARY 1, AMI AND FACILITY,
1998- BOSTON CRESTS
LODGIAN DECEMBER 11, REVERE HOTEL OFFERING AND
HISTORICAL(1) 1998)(2) ACQUISITIONS(3) MERGER PRO FORMA
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Rooms...................................... $ 267,862 $ 116,495 $ 17,593 $ -- $ 401,950
Food and beverages......................... 107,334 26,425 3,977 -- 137,736
Other...................................... 20,018 7,861 459 -- 28,338
------------ ------------ ------------ ------------ -----------
Total.................................... 395,214 150,781 22,029 -- 568,024
Operating expenses:
Direct
Rooms.................................... 75,316 34,571 4,241 -- 114,128
Food and beverage........................ 81,643 21,714 3,404 -- 106,761
General and administrative................. 10,080 6,437 342 -- 16,859
Other hotel operating expenses............. 129,950 56,067 9,759 -- 195,776
Depreciation and amortization.............. 31,114 14,268 1,010 1,707(4) 48,099
------------ ------------ ------------ ------------ -----------
Total.................................... 328,103 133,057 18,756 1,707 481,623
------------ ------------ ------------ ------------ -----------
Income from operations....................... 67,111 17,724 3,273 (1,707) 86,401
Other income (expenses):
Interest income and other.................. 1,261 56 805 -- 2,122
Loss on asset disposition.................. (432) -- -- -- (432)
Interest expense........................... (30,378) (33,336) -- 65(5) (63,649)
Settlement on swap transactions............ (31,492) -- -- -- (31,492)
Merger related costs....................... (3,400) (11,104) -- -- (14,504)
Minority interests:
Preferred redeemable securities............ (6,476) -- -- (5,774)(5) (12,250)
Other...................................... (1,436) 118 -- -- (1,318)
------------ ------------ ------------ ------------ -----------
(Loss) income before income taxes and
extraordinary item......................... (5,242) (26,542) 4,078 (7,416) (35,122)
(Benefit) provision for income taxes......... (2,097) (10,617) 1,632 (2,967) (14,049)
------------ ------------ ------------ ------------ -----------
Net (loss) income before extraordinary
items...................................... $ (3,145) $ (15,925) $ 2,446 $ (4,449) $ (21,073)
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Loss before extraordinary items per common
share...................................... $ (0.16) $ (0.76)
Loss before extraordinary items per common
share, assuming dilution................... $ (0.16) $ (0.76)
Basic weighted average shares................ 20,245 27,641
Diluted weighted average shares.............. 20,245 27,641
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
30
<PAGE>
(1) The historical statement of operations of Lodgian, Inc. for the year ended
December 31, 1998 includes the operations of various properties that Servico
acquired during 1998 from the date of acquisition through the earlier of
December 31, 1998 or the date of disposition (including Impac from December
11, 1998 to December 31, 1998), and the effect of the CRESTS offering
completed in July 1998 from the date of offering through December 31, 1998.
(2) The unaudited historical results of operations of Impac were derived from
information provided by Impac as of the date of the Merger. The statement of
operations for Impac represents the historical operations of Impac for the
period from January 1, 1998 through the date of the Merger. The statement
includes the operations of the Boston Revere Hotel, acquired by Impac on
July 1, 1998, from the date of acquisition through the date of the Merger.
(3) Reflects the operations of 11 of the 14 hotels acquired in the acquisition
of AMI (the other three hotels were sold by Servico) from January 1, 1998
until May 28, 1998, the date of the AMI acquisition, and the Boston Revere
Hotel from January 1, 1998, until July 1, 1998, the date of its acquisition
by Impac.
(4) Reflects the additional depreciation and amortization resulting from the
allocation of purchase price to the Impac properties and recording of
goodwill pursuant to APB No. 16 in connection with the Merger. The
allocation of the cost of the acquired assets between land, buildings, and
furnishings and equipment is based on the fair values of the assets.
Depreciation expense for buildings and furnishings and equipment is based
upon their estimated useful lives of 40 years and 9.5 years, respectively.
Goodwill is being amortized over a 20-year period. Depreciation and
amortization is calculated on a straight-line basis.
(5) Reflects (i) $6.1 million of additional interest expense related to the
CRESTS ($5.8 million of which is reflected in minority interests--preferred
redeemable securities), which includes the amortization of $.3 of deferred
financing costs, (ii) interest expense of $24.5 million relating to the
Notes plus $.7 million of amortization of deferred financing costs, (iii)
assumed interest expense of $13.1 million relating to the new credit
facility plus $1.1 million of amortization of deferred financing costs, (iv)
the elimination of $3.8 million of interest expense relating to indebtedness
repaid with the CRESTS proceeds and (v) the elimination of $34.4 million of
interest expense relating to indebtedness to be repaid with the net proceeds
from the sale of the Old Notes and borrowings under the new credit facility
(and indebtedness that was repaid with such indebtedness). For each .25%
change in the assumed rate on the new credit facility, pro forma interest
expense will change by approximately $355,576 for the year ended December
31, 1998.
31
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF LODGIAN
In the table below, we provide you with selected historical financial data
of Lodgian. We have prepared this information using the consolidated financial
statements of Lodgian for the years ended December 31, 1994, 1995, 1996, 1997
and 1998 and the six-months periods ended June 30, 1998 and 1999. The financial
statements for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 have
been audited by Ernst & Young LLP, independent auditors. The financial
statements for the six months ended June 30, 1998 and 1999 have not been
audited. We believe the financial statements for these periods have been
prepared on the same basis as our audited consolidated financial statements and
include all adjustments (consisting only of normal recurring items) necessary
for a fair and consistent presentation of our results of operations and
financial position for these periods and as of these dates. Historical results
for the interim periods are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1999.
This summary historical financial data should be read along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements included elsewhere in this
memorandum.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Rooms....................... $ 93,720 $ 113,902 $ 156,564 $ 179,956 $ 267,862 $ 124,761 $ 211,663
Food and beverage........... 46,945 53,499 68,803 80,335 107,334 50,540 69,126
Other....................... 9,018 11,079 14,159 16,366 20,018 9,968 14,878
--------- --------- --------- --------- --------- --------- ---------
Total revenues............ 149,683 178,480 239,526 276,657 395,214 185,269 295,667
Operating Expenses:
Direct:
Rooms..................... 26,848 32,140 43,667 49,608 75,316 34,072 57,122
Food and beverage......... 36,585 41,474 52,761 60,919 81,643 38,460 50,541
General and
administrative............ 7,944 8,977 9,297 8,973 10,080 4,829 11,367
Depreciation and
amortization.............. 9,465 12,370 18,677 23,023 31,114 14,758 27,500
Other hotel operating
expenses.................. 52,205 59,727 77,183 88,036 129,950 56,952 93,359
--------- --------- --------- --------- --------- --------- ---------
Total operating
expenses................ 133,047 154,688 201,585 230,559 328,103 151,071 239,889
--------- --------- --------- --------- --------- --------- ---------
Income from operations........ 16,636 23,792 37,941 46,098 67,111 34,198 55,778
Other income (expense):
Interest income and other... 325 1,197 1,723 1,720 1,260 700 817
Interest expense............ (12,693) (17,903) (29,443) (25,909) (30,378) (16,132) (37,139)
Non-recurring items(1)...... 539 -- 3,612 -- (35,324) (432) --
Minority interests:
Preferred redeemable
securities................ -- -- -- -- (6,475) (311) (6,814)
Other....................... (171) (572) (2,060) (960) (1,436) (823) (1,310)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes and extraordinary
item........................ 4,636 6,514 11,773 20,949 (5,242) 17,200 11,332
Provision (benefit) for income
taxes....................... 1,855 2,605 3,225 8,379 (2,097) 6,880 4,533
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item.......... 2,781 3,909 8,548 12,570 (3,145) 10,320 6,799
Extraordinary item, net of
taxes....................... 1,436 -- (348) (3,751) (2,076) (1,095) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............. $ 4,217 $ 3,909 $ 8,200 $ 8,819 $ (5,221) $ 9,225 $ 6,799
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(2)..................... $ 26,238 $ 36,894 $ 57,915 $ 69,559 $ 98,225 $ 49,260 $ 84,266
Ratio of earnings to fixed
charges(3).................. 1.3x 1.3x 1.4x 1.7x -- 2.0x 1.2x
Capital expenditures.......... $ 20,158 $ 99,560 $ 96,635 $ 203,406 $ 186,384 $ 83,286 $ 46,188
Total debt/EBITDA(4).......... 5.7x 5.8x 5.3x 4.7x 8.7x N/A N/A
EBITDA/interest expense....... 2.1x 2.2x 2.0x 2.7x 3.2x 3.1x 2.3x
Number of hotels owned at end
of period................... 32 46 57 69 142 87 135
Number of rooms owned at end
of period................... 6,544 9,031 11,059 14,061 26,889 17,388 25,525
Occupancy(5).................. 64.7% 66.2% 64.4% 60.9% 60.9% 62.1% 62.3%
Average daily rate(6)......... $ 65.15 $ 67.19 $ 69.47 $ 71.90 $ 73.52 $ 73.61 $ 75.42
RevPAR(7)..................... $ 42.15 $ 44.46 $ 44.72 $ 43.82 $ 44.77 $ 45.72 $ 46.95
Available room nights(8)...... 2,211,700 2,550,932 3,487,689 4,107,066 5,844,637 2,728,523 4,507,909
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property and equipment, net.................... $ 196,788 $ 277,873 $ 364,922 $ 534,080 $1,317,470 $1,332,522
Total assets................................... 228,900 324,202 439,786 627,651 1,497,921 1,519,909
Long-term obligations, less current portion.... 143,830 210,242 284,880 323,320 816,644 833,442
Minority interests
Preferred redeemable securities.............. -- -- -- -- 175,000 175,000
Other........................................ 3,012 11,766 19,627 13,555 15,021 15,922
Total stockholders' equity..................... 46,740 62,820 74,738 239,535 283,767 290,990
</TABLE>
- ------------------------
(1) Non-recurring items are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gain on litigation settlement................ $ -- $ -- $ 3,612 $ -- $ --
Other non-recurring income (expense)......... 539 -- -- -- (432)
Settlement on swap transaction............... -- -- -- -- (31,492)
Severance and other.......................... -- -- -- -- (3,400)
--------- --------- --------- --------- ----------
Total........................................ $ 539 $ -- $ 3,612 $ -- $ (35,324)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure commonly used in
the lodging industry. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
an alternative to net income as a measure of performance or to cash flow as
a measure of liquidity. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
are determined by adding fixed charges (excluding capitalized interest) and
amortization of capitalized interest to earnings before income taxes. Fixed
charges consist of (i) interest expense (including amortization of debt
issuance costs), (ii) capitalized interest, (iii) dividends paid on the
CRESTS and (iv) the portion of rent expense considered interest. Excluding
the non-recurring items for 1998, the ratio would have been 1.7x. For the
year ended December 31, 1998, our earnings were insufficient to cover our
fixed charges by $6.8 million.
(4) Based on debt at the end of the period. Excludes $175.0 million of CRESTS.
33
<PAGE>
(5) Occupancy is determined by dividing the total rooms occupied for the period
by the total available room nights for such period. We include rooms being
renovated or otherwise unavailable in determining the total available room
nights.
(6) Average daily rate is determined by dividing room revenue for the period by
the number of rooms occupied for the period.
(7) "RevPAR" means revenue per available room, which is calculated as average
daily rate multiplied by the occupancy.
(8) Total rooms multiplied by number of days in the period. Includes rooms being
renovated or otherwise unavailable. Historically, Servico had not included
rooms being renovated or otherwise unavailable.
34
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF IMPAC
The following table presents consolidated and combined financial data
derived from Impac's and Impac Hotel Development, Inc.'s ("IHD") unaudited
historical financial statements for the years ended December 31, 1993 and 1994
and for the six months ended June 30, 1997 and 1998 and from their audited
historical financial statements for the years ended December 31, 1995 through
1997. The financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Historical Results of Operations--Impac" and the consolidated and
combined financial statements, related notes and other financial information of
Impac included in this memorandum.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
-------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997(1) 1997 1998
----------- ----------- ---------- ---------- ------------ ---------- ----------
<CAPTION>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 23,927 $ 41,615 $ 55,576 $ 67,813 $ 119,859 $ 52,830 $ 75,884
(Loss) income before
extraordinary
items(2)........... (457) (64) 5,619 14,064 (16,089) (4,589) (8,714)
End of period:
Total assets....... 48,143 71,875 116,248 191,666 417,780 343,614 463,119
Long-term
obligations...... 42,615 61,754 92,849 155,851 355,236 294,970 400,071
Total members'/
partners'
equity........... 3,284 5,375 13,408 19,760 36,970 27,038 27,349
</TABLE>
- ------------------------
(1) On March 12, 1997, Impac was formed through the combination of 22
partnerships, 4 corporations and two operating companies (collectively, the
"Predecessors") through a reorganization. The formation of Impac was
accounted for as a reorganization of entities under common control with the
purchase of minority interest. The operations and financial position of the
Predecessors prior to the reorganization are presented on a combined basis.
The principal activity of IHD was to analyze prospective hotel acquisitions
for Impac. IHD was not acquired by Impac in the above described
reorganization.
(2) Impac is a limited liability company and is not subject to income taxes. The
Predecessors and IHD were each either general or limited partnerships or
S-corporations and were similarly not subject to income taxes. The results
of these entities operations are included in the tax returns of the
unitholders, partners or S-corporation shareholders.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Management believes that results of operations in the hotel industry are
best explained by four key performance measures: occupancy levels, average daily
rate, revenue per available room ("RevPAR") 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 our hotels experience lower
occupancy levels in the fall and winter months (November through February) which
may result in lower revenues, lower net income and less cash flow during these
months.
Our business strategy includes the acquisition of underperforming hotels and
the implementation of our operational initiatives and repositioning and
renovation programs to achieve revenue and margin improvements. During this
period of repositioning, the revenues and earnings of these hotels may be
adversely affected and may negatively impact our consolidated RevPAR, average
daily rate and occupancy rate performance, as well as our EBITDA margins. In
addition, our strategy also includes developing new full service hotels. Newly
developed properties typically require 24 months following completion to
stabilize. To track the execution of our repositioning and development growth
strategy and its impact on our results of operations, we classify our hotels as
either "Stabilized Hotels," "Stabilizing Hotels" or "Being Repositioned Hotels,"
as described below:
- Stabilized Hotels are properties (1) which have experienced little or no
disruption to their operations over the past 24 to 36 months as the result
of redevelopment or repositioning efforts, or (2) newly-constructed hotels
which have been in service for 24 months or more.
- Stabilizing Hotels are (1) properties which have undergone renovation or
repositioning investment within the last 36 months, which work is now
completed, or (2) newly developed properties placed into service within
the past 24 months. Management believes that these properties should
experience higher rates of growth in RevPAR and improvements in operating
margin than the Stabilized Hotels. On average, our hotels which have
undergone renovation have generally reached stabilization within
approximately 12 to 18 months after their completion date, and our newly
developed hotels have reached stabilization in approximately 24 months
after their completion date.
- Being Repositioned Hotels are hotels experiencing disruption to their
operations due to renovation and repositioning. During this period
(generally 12 to 18 months) hotels will usually experience lower operating
results, such as RevPAR and operating margins. We expect significant
improvements in the operating performance of those hotels which have
undergone a repositioning once the renovation is completed. After the
repositioning work is completed, these properties will be reclassified as
Stabilizing Hotels.
We classify each hotel into one of the three categories at the beginning of
each fiscal year. We have not classified our six European hotels, the one hotel
in which we have a minority equity interest or the two hotels we managed for
third parties. We will determine the category most appropriate for each hotel
based on our evaluation of objective and subjective factors, including the time
of completion of renovation and whether the full benefit of renovations have
been realized.
On June 24, 1999, we sold our joint venture interest in our European hotel
portfolio, which consisted of six hotels. We received approximately $6.0 million
at closing and expect to receive an additional $1.5 million in net proceeds from
the sale. We do not expect the sale of these hotels, which were acquired on
October 1, 1998, to have a material effect on our EBITDA or results of
operations. In addition, during July 1999, we sold two wholly-owned hotels in
the United States, and effective August 1, 1999, we ceased managing one hotel
for a third party.
36
<PAGE>
REVENUES. Revenues are composed of rooms and food and beverage (both of
which are classified as direct revenues) and other revenues. Room revenues are
derived from guest room rentals, while food and beverage revenues primarily
include sales from our hotel restaurants, room service and hotel catering. Other
revenues include charges for guests' long-distance telephone service, laundry
service, use of meeting facilities and fees earned by us for services rendered
in conjunction with properties managed for third parties.
OPERATING EXPENSES. Operating expenses are composed of direct, general and
administrative, other hotel operating expenses and depreciation and
amortization. Direct expenses, including both rooms and food and beverage
operations, reflect expenses directly related to hotel operations. These
expenses generally vary with available rooms and occupancy rates, but also have
a small fixed component. General and administrative expenses represent corporate
salaries and other corporate operating expenses and are generally fixed. Other
hotel operating expenses include primarily property level expenses related to
general operations such as advertising, utilities, repairs and maintenance and
other property administrative costs. These expenses are also primarily fixed.
HISTORICAL RESULTS OF OPERATIONS--LODGIAN
Our operating results have been materially impacted by the significant
number of acquisitions and extensive renovation activity during 1997 and 1998.
In June 1998, Servico acquired AMI, an entity that owned and operated 14 hotels,
three of which were subsequently sold. In December 1998, Servico merged with
Impac, an entity that owned or managed 53 hotels, three of which are under
construction. Because these transactions were accounted for using the purchase
accounting method, the results of AMI and Impac are included in our consolidated
results of operations from the time they were acquired. This makes
comparisons of our historical operating results with prior periods less
meaningful. Servico had historically classified its hotels as Stabilized Hotels
and Reposition Hotels. The Stabilized Hotels were hotels that had achieved
normalized operations after completion of renovation and repositioning. The
Reposition Hotels were those hotels that were undergoing or had completed
significant renovation and repositioning but had not yet achieved normalized
operations.
SIX MONTHS ENDED JUNE 30, 1999 (THE "1999 PERIOD") COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD")
Our revenues were $295.7 million for the 1999 Period, a 59.6% increase over
revenues of $185.3 million for the 1998 Period. Of this $110.4 million increase,
$104.1 million was attributable to the acquisition of AMI and the merger with
Impac.
The following table summarizes certain operating data for our hotels for the
six months ended June 30, 1999 and 1998. The Stabilized, Stabilizing and Being
Repositioned Hotels refers to classifications in these respective categories as
of January 1, 1999.
<TABLE>
<CAPTION>
HOTELS (1) ADR OCCUPANCY REVPAR
------------- -------------------- -------------------- ---------
1999 1998 1999 1998 1999 1998 1999
----- ----- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Stabilized........................................ 77 50 $ 74.57 $ 74.68 66.3% 65.8% $ 49.45
Stabilizing....................................... 33 12 $ 75.56 $ 71.50 61.2% 56.0% $ 46.26
Being Repositioned................................ 21 22 $ 78.50 $ 74.75 51.3% 54.8% $ 40.29
--- --- --------- --------- --------- --------- ---------
Total............................................. 131 84 $ 75.42 $ 73.61 62.3% 62.1% $ 46.95
--- --- --------- --------- --------- --------- ---------
--- --- --------- --------- --------- --------- ---------
<CAPTION>
1998
---------
<S> <C>
Stabilized........................................ $ 49.17
Stabilizing....................................... $ 40.02
Being Repositioned................................ $ 40.97
---------
Total............................................. $ 45.72
---------
---------
</TABLE>
- ------------------------------
(1) Excludes two hotels managed for third parties and the one partially owned
non-consolidated hotel. All 1998 figures in the table exclude AMI (prior to
the acquisition date) and the Merger.
37
<PAGE>
Our direct operating expenses were $115.9 million (39.2% of direct revenues)
for the 1999 Period and $77.9 million (42.0% of direct revenue) for the 1998
Period. Of the $38.0 million increase, $39.0 million was attributable to the
acquisition of AMI and the Merger.
General and administrative expenses were $11.4 million in the 1999 Period
and $4.8 million in the 1998 Period. Of the $6.6 million increase, approximately
$4.8 million was attributable to the acquisition of AMI and the Merger.
Additionally, approximately $.8 million represents expenses associated with the
expansion of the corporate sales and marketing staff and the regional offices.
Further, $.5 million represents non-recurring expenses, principally severance.
Depreciation and amortization expense was $27.5 million in the 1999 Period
and $14.8 million in the 1998 Period. The $12.7 million increase was
attributable to the acquisition of AMI, the Merger and the completion of
renovation projects.
Other hotel operating expenses were $85.1 million in the 1999 Period and
$53.6 million in the 1998 Period. Of the $31.5 million increase, $31.4 million
was attributable to the acquisition of AMI and the merger with Impac. In
addition, $1.0 million was attributable to our share of loss from an
unconsolidated partnership, essentially all of which was represented by
depreciation.
As a result of the above, income from operations was $55.8 million in the
1999 Period as compared to $34.2 million in the 1998 Period.
Interest expense was $37.1 million in the 1999 Period and $16.1 million in
the 1998 Period. This increase was primarily a result of an increase in the
level of debt associated with the acquisition of AMI and the Merger.
Minority interest expense was $8.1 million in the 1999 Period and $1.1
million in the 1998 Period. Of the $7.0 million increase, $6.5 million
represents interest on our CRESTS that were issued in June 1998.
After a provision for income taxes of $4.5 million in the 1999 Period and
$6.9 million in the 1998 Period, we had net income of $6.8 million ($0.25 per
share) in the 1999 Period compared with income before extraordinary item of
$10.3 million ($.49 per share) in the 1998 Period. In the 1998 Period, we had an
extraordinary item (net of income tax benefit of $.7 million) of $1.1 million
($.05 loss per share) from the loss on early extinguishment of debt. Net income
for the 1998 Period amounted to $9.2 million ($.44 per share).
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
At December 31, 1998, we owned 141 hotels, managed two hotels for third
party owners and had a minority investment in one hotel compared with 68 hotels
owned, two managed for third party owners and a minority investment in one hotel
at December 31, 1997.
Our revenues were $395.2 million for 1998, a 42.8% increase over revenues of
$276.7 million for 1997. Of this $118.5 million increase in revenues, the 1997
acquisitions, which were not operated for the full year of 1997, contributed
approximately $49.5 million to the increase in revenues. The 1998 acquisitions
contributed approximately $33.6 million to the increase in revenues. The 21 days
of revenues from the Impac Hotels contributed approximately $7.3 million to the
increase in revenues. The remaining increase in revenues of approximately $28.1
is attributed to the balance of the portfolio.
Our direct operating expenses were $156.9 million for 1998 and $110.5
million for 1997. Of the $46.4 million increase, $20.4 million is directly
attributable to the Reposition Hotels with approximately $13.2 million relating
to acquisitions in 1998. The direct operating expenses decreased as a percentage
of direct revenue from 42.5% in 1997 as compared to 41.8% in 1998. The decrease
in operating expenses as a percentage of revenues was a result of the combined
effect of strong revenue growth and continued emphasis on cost controls. Other
operating expenses were $130.0 million for 1998 and $88.0 million for 1997. This
increase of $42.0 million represents the expenses incurred with respect to the
1998 acquisitions
38
<PAGE>
and by the Reposition Hotels. Our depreciation and amortization expense was
$31.1 million for 1998 and $23.0 million for 1997. Included in this $8.1 million
increase was $3.0 million associated with the Reposition Hotels and the
remaining increase was related to the 1998 acquisitions, and to equipment
purchases and improvements made at the Stabilized Hotels.
As a result of the above, income from operations was $67.1 million for 1998
as compared to $46.1 million for 1997.
We incurred $21.2 million (net of a tax benefit of $14.1 million) in
non-recurring charges during 1998. During August 1998, we entered into treasury
rate lock transactions with notional amounts of $175.0 million and $200.0
million with a lender for the purpose of hedging our interest rate exposure on
two anticipated financing transactions. During September 1998, we determined
that it was not probable that we could consummate the anticipated transactions
and recognized a loss of $18.9 million (net of tax benefit of $12.6 million). In
addition, we incurred approximately $3.4 million of severance and other expenses
in connection with the Merger which have been substantially paid at December 31,
1998. These expenses consisted primarily of costs associated with the closing
and relocation of Servico's West Palm Beach, Florida corporate headquarters to
our headquarters in Atlanta, Georgia and termination or relocation of certain
employees.
Interest expense, net of interest income, was $29.1 million for 1998, a $4.9
million increase from the $24.2 million for 1997. The increase was primarily a
result of an increase in the level of debt associated with the 1998
acquisitions.
Minority interests in net income of consolidated partnerships were
approximately $1.4 million for 1998 and $1.0 million for 1997.
During 1998 we repaid, prior to maturity, approximately $247.0 million in
debt, and as a result recorded an extraordinary loss on early extinguishment of
debt of approximately $2.1 million (net of income tax benefit of $1.4 million)
relating to the write-off of unamortized loan costs associated with the debt. We
recognized an extraordinary loss on early extinguishment of debt of $3.8
million, after taxes, in 1997 which related to the refinancing of certain
hotels.
After a benefit for income taxes of $2.1 million in 1998 and a provision for
income taxes of $8.4 million in 1997, we had a net loss of $5.2 million ($(.26)
per share) for 1998 and net income of $8.8 million ($.56 per share) for 1997.
Excluding the non-recurring items discussed above, we had recurring income of
$18.0 million for 1998 ($.89 per share) and $12.6 million for 1997 ($.80 per
share) in 1998 and 1997, respectively.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
At December 31, 1997, we owned 68 hotels, managed two hotels for third party
owners and had a minority investment in one hotel compared with 56 hotels owned,
four managed for third party owners and a minority investment in one hotel at
December 31, 1996.
Our revenues were $276.7 million for 1997, a 15.5% increase over revenues of
$239.5 million for 1996. Of this $37.2 million increase in revenues,
approximately $9.2 million was attributable to the Stabilized Hotels primarily
as a result of a 6.4% increase in RevPAR. The Reposition Hotels contributed
approximately $28 million to the increase in revenues, of which approximately
$14.6 million related to the Reposition Hotels acquired in 1996 which were not
operated for the full year of 1996 but were operated for the full year of 1997.
Reposition Hotels acquired in 1997 contributed the remaining balance of
approximately $13.4 million.
39
<PAGE>
Our direct operating expenses were $110.5 million for 1997 and $96.4 million
for 1996. The decrease in operating expenses as a percentage of revenues was a
result of the combined effect of strong revenue growth and continued emphasis on
cost controls. Our other operating expenses were $88.0 million for 1997 and
$77.2 million for 1996. Our depreciation and amortization expense was $23.0
million for 1997 and $18.7 million for 1996. Included in this $4.3 million
increase was $2.7 million associated with the Reposition Hotels and the
remaining increase was related to equipment purchases and improvements made at
the Stabilized Hotels.
As a result of the above, income from operations was $46.1 million for 1997
as compared to $37.9 million for 1996. Included in 1996 was a non-recurring
charge of $.8 million relating to a severance payment.
Interest expense, net of interest income, was $24.2 million for 1997, a $3.5
million decrease from the $27.7 million for 1996. The decrease was offset in
part by a $1.2 million increase relating to acquisitions in 1997. The decrease
was primarily a result of a reduction in the level of debt and effective
interest rate in connection with certain debt which was repaid with the proceeds
of a common stock offering.
Included in other income for 1996 was a non-recurring $3.6 million gain on
litigation settlement (net of expenses) in connection with a lawsuit brought on
our behalf against a bank group and law firm based on alleged breaches of their
duties to us.
Minority interests in net income of consolidated partnerships were
approximately $1.0 million for 1997 and $2.1 million for 1996. Of this $1.1
million decrease, $.9 million related to three hotels in which we increased its
ownership from 51% to 100% during 1997.
During 1997 we repaid, prior to maturity, approximately $128.0 million in
debt, and as a result recorded an extraordinary loss on early extinguishment of
debt of approximately $3.8 million (net of income tax benefit of $2.5 million)
relating to the write-off of unamortized loan costs associated with the debt. We
recognized an extraordinary loss on early extinguishment of debt of $.3 million,
after taxes in 1996 which related to the refinancing of certain hotels.
After a provision for income taxes of $8.4 million for 1997 and $3.2 million
for 1996, we had net income of $8.8 million ($.56 per share) for 1997 and $8.2
million ($.84 per share) for 1996. Without consideration of the non-recurring
items discussed above, we had recurring income of $12.6 million for 1997 ($.80
per share) and $5.4 million for 1996 ($.55 per share).
HISTORICAL RESULTS OF OPERATIONS--IMPAC
Impac owned or managed primarily upscale or mid-market full service hotels,
including 52 wholly owned hotels, one partially owned hotel and two managed
hotels. Prior to March 12, 1997, Impac consisted of 22 partnerships and four
corporations, each of which owned between one and six hotels (the "Initial
Hotels"), and two operating corporations, Impac Hotel Management, Inc. ("Impac,
Inc.") and Impac Development & Construction, Inc, ("IDC"). The principals of
Impac, Inc. and their affiliates owned an aggregate of approximately 23% of the
Initial Hotels, while various other investors owned the remaining interests. On
February 26, 1997, Impac was formed for the purpose of acquiring, either
directly or indirectly, the outstanding ownership interests in the Initial
Hotels. On March 12, 1997, Impac acquired all of the Initial Hotels through the
issuance of units in exchange for all of the limited partnership interests or
shares, as applicable, of the limited partnerships and corporations that owned
the Initial Hotels. In addition, Impac acquired, in exchange for units, all of
the assets of Impac, Inc. and IDC. See Note 1 to Impac's financial statements.
Beginning in late 1996, Impac began to invest significantly in additional
professional staff and corporate infrastructure and systems and incurred
significant costs in order to position itself to both acquire and develop hotel
properties. From January 1996 through June 1998, Impac acquired 26 hotels and
developed nine hotels. In addition, Impac had five hotels under construction at
June 30, 1998. The
40
<PAGE>
acquired hotels underwent significant renovations and therefore revenue trends
are not comparable to revenues which would be realized had these properties been
stabilized. In addition, during the fiscal years ended December 31, 1996 and
December 31, 1995, Impac sold seven and three hotels, respectively. The
historical financial statements of the years ended December 31, 1997, 1996 and
1995 and for the six months ended June 30, 1998 and 1997 reflect differing
numbers of owned hotels throughout the periods. Due to the timing and magnitude
of the acquisitions made during these periods, it is difficult to compare
results of the periods to each other.
SIX MONTHS ENDED JUNE 30, 1998 (THE "1998 PERIOD") AS COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997 (THE "1997 PERIOD")
As of June 30, 1998, Impac owned and operated 52 hotels (including five
under construction) and managed two hotels for third-party owners. One hotel was
partially owned. This compared to 42 hotels (including three under construction)
owned and operated and two hotels managed for third parties at June 30, 1997.
Impac acquired or opened two hotels during the 1998 Period compared to 12 hotels
during the 1997 Period. Sixteen hotels were under significant renovation during
the 1998 Period compared to 20 in the 1997 Period.
Revenues for the 1998 Period were $75.9 million as compared to $52.8 million
for the 1997 Period. The revenue increase primarily is attributable to the
inclusion of a full six months of revenue in the 1998 Period for 12 hotels that
were opened or purchased during the 1997 Period. During the 1997 Period, 20
properties returned to full operating capacity. However, revenue growth in both
the 1998 Period and 1997 Period was adversely affected by the 16 and 20 hotels,
respectively, that were under renovation.
Total operating expenses before depreciation and amortization increased to
$60.1 million for the 1998 Period from $43.7 million for the 1997 Period. As a
percentage of revenue, operating expenses before depreciation and amortization
were 79% for the 1998 Period compared to 83% for the 1997 Period. The decrease
as a percentage of revenue is attributable to properties coming out of
renovation in late 1997 and early 1998 which had been under renovation or
recently purchased in the 1997 Period. Operating efficiencies also contributed
to the decrease.
Depreciation and amortization costs increased by 51% to $7.4 million for the
1998 Period from $4.9 million for the 1997 Period.
Interest expense rose to $14.2 million in the 1998 Period as compared to
$8.9 million in the 1997 Period. The increase was attributable to increased debt
levels associated with the addition of the hotels described above.
In connection with the Merger, Impac incurred costs of $3.1 million through
June 30, 1998. These costs were expensed in the 1998 Period.
Extraordinary losses related to costs incurred in the early extinguishment
of indebtedness of $13.3 million were incurred during the 1997 Period. Impac
completed a reorganization of its partnerships and corporations into one entity
during March 1997. See Note 1 to Impac's financial statements. Individual
partnership debt from numerous lenders was replaced with a facility from one
lender. Accordingly, the debt previously existing was retired at a cost of $8.6
million. Approximately $4.7 million in deferred financing costs were written
off.
A net loss of $8.7 million was recorded (after provision for merger costs of
$3.1 million) for the 1998 Period as compared to a net loss of $17.9 million for
the 1997 Period. EBITDA increased by 72% to $15.8 million for the 1998 Period
compared to $9.2 million for the 1997 Period.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
As of December 31, 1997, Impac owned 45 hotels and managed two hotels for
third-party owners. One hotel was partially owned. This compares with 26 hotels
and two managed for third parties at December 31, 1996. Additionally, six hotels
were under construction at December 31, 1997. Impac developed three hotels
during 1997 and acquired 16 others. Impac significantly renovated 25 hotels
during 1997 and early 1998. Nine of these properties were purchased in 1996 and
significant renovations were completed during 1997.
Revenues for 1997 were $119.9 million as compared to $67.8 million for 1996.
The revenue increase was a result of the acquisition and development of 19
hotels as well as the inclusion of a full year of revenues in 1997 for the 14
properties added in 1996. Revenue growth is adversely affected by the renovation
of properties which were newly acquired. The renovation process adversely
affects net income and EBITDA as a consequence of decreased revenue.
Total operating expenses before depreciation and amortization were $102.8
million in 1997. This compares to $55.8 million in 1996. As a percentage of
revenues, operating expenses before depreciation and amortization were 86% for
1997 and 82% for 1996. This percentage increase is the result of significant
renovations. Revenue levels during renovation are lower than would normally be
expected during a period of stabilization. However, fixed operating costs for
properties under renovation typically remain constant. Expenses also increased
as a result of the addition of the new properties described above and the
inclusion of expenses for a full year for properties acquired in 1996. Finally,
Impac invested significant amounts in staffing and corporate infrastructure
beginning in 1996 for Impac's in-house construction department, the Impac
revenue center (a centralized reservations center), and for accounting, hotel
operations and information technology functions. Accordingly, overhead costs
increased during a time period when numerous rooms were taken out of service for
renovation.
Depreciation and amortization costs increased by 92% to $11.1 million as
compared to $5.8 million for 1996. The increase is attributable to increased
investment in hotel properties and to the step-up of the asset basis resulting
from the reorganization completed in 1997. See Note 2 to Impac's financial
statements.
As a result of the factors described above, income from operations decreased
to $5.9 million as compared to $6.2 million for 1996.
Interest expense rose to $21.3 million for 1997 from $11.8 million in 1996.
The increase was attributable to increased debt levels associated with
additional investments in hotel properties.
Other income for 1997 decreased to $300,000 as compared to $19.7 million in
1996. Seven properties were sold in 1996, resulting in the substantial gain. No
properties were sold in 1997.
Extraordinary losses related to costs incurred in the early extinguishment
of indebtedness of $13.3 million were incurred during 1997. As described in Note
1 to Impac's financial statements, Impac completed a reorganization of its
partnerships and corporations into one entity during March 1997. Individual
partnership-level debt from numerous lenders was replaced with a facility from
one lender. Accordingly, the debt previously existing was retired early at a
cost of $8.6 million. Approximately $4.7 million in deferred financing costs
were written off.
Impac recorded a net loss of $29.4 million for 1997 as compared to income of
$14.1 million for 1996. EBITDA increased to $17.1 million as compared to $12.0
million for 1996.
INCOME TAXES
As of December 31, 1998, Lodgian had net operating loss carryforwards of
approximately $50.0 million for federal income tax purposes, which expire in
2005 through 2018. Our ability to use these net operating loss carryforwards to
offset our future income is subject to certain limitations, and may be
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subject to additional limitations in the future. Due to these limitations, a
portion or all of these net operating loss carryforwards could expire unused.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity consist of existing cash balances, cash
flow from operations and financing. We had earnings from operations before
interest, taxes, depreciation and amortization ("EBITDA") for the 1999 Period of
$84.3 million, a 71.1% increase from the $49.3 million for the 1998 Period.
EBITDA is a widely regarded industry measure of lodging performance used in the
assessment of hotel property values, although EBITDA is not indicative of and
should not be used as an alternative to net income or net cash provided by
operations as specified by generally accepted accounting principles. Net cash
provided by operating activities for the 1999 Period was $20.3 million as
compared with $33.3 million for the 1998 Period.
Cash flows used in investing activities were $34.5 million and $63.8 million
in the six months ended June 30, 1999 and 1998, respectively. The 1999 amount
includes capital expenditures of $46.2 million and net proceeds from the sale of
assets of $11.1 million, including the disposition of our investment in six
European hotels. The 1998 amount consists of capital expenditures of $83.3
million, including the acquisition of the AMI hotels, net of assumed debt, and
proceeds from capital expenditure escrows of $15.7 million.
Cash flows provided by financing activities were $15.4 million and $54.3
million in the six months ended June 30, 1999 and 1998, respectively. The 1999
amount consists primarily of the net proceeds from the issuance and repayment of
long-term obligations. The 1998 amount includes the net proceeds from the
issuance and repayment of long-term obligations of $68.8 million (including
$168.5 million of net proceeds from the issuance of CRESTS) reduced by $15.6
million from the repurchase of common stock.
At June 30, 1999, we had a working capital deficit of $40.0 million as
compared with a working capital deficit of $65.1 million at December 31, 1998.
At June 30, 1999 our long-term obligations were $833.4 million, not
including $175 million of CRESTS. Our long-term obligations were $816.6 million
at December 31, 1998.
Certain of our hotels are operated under license agreements that require us
to make capital improvements in accordance with a specified time schedule.
Additionally, in connection with the refinancing of hotels, we have agreed to
make certain capital improvements and, as of June 30, 1999, we have
approximately $29.8 million escrowed for such improvements. We estimate our
remaining obligations for all of such commitments to be approximately $52.2
million, of which approximately $17.2 million is expected to be spent during
1999, with the balance to be spent thereafter. During the balance of 1999 and
the first quarter of 2000, we expect to spend approximately $23.8 million to
complete the construction of three new hotels. Substantially all of the funds
necessary to complete construction of these hotels are expected to be provided
by existing loan facilities.
In connection with the Merger on December 11, 1998, we obtained $265 million
of mortgage notes from Lehman Brothers Holding, Inc. ("Lehman"). The net
proceeds were used to repay existing debt and related obligations. This
financing contains various covenants and coverage ratios, with which we are in
compliance at June 30, 1999.
At the time of the Merger, $23 million of the $265 million provided by
Lehman was set aside in escrow for future capital improvements. In March 1999,
Lehman released $15 million from escrow, and simultaneously issued us a
commitment for $15 million to replenish this escrow at a future date. This
additional loan was closed in June, thereby increasing the total facility to
$280 million on the same terms and conditions as previously described.
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In July, we sold $200 million of the Notes. In addition, we entered into a
new, multi-tranche Senior, Secured loan credit facility. The facility consists
of development loans with a maximum capacity of $75 million (the tranche A and C
loans), a $240 million tranche B term loan and a $50 million revolving credit
facility. The tranche A and C loans will be used for hotel development projects.
The tranche B loan, along with the proceeds from the Senior Subordinated Notes
was used to repay the Lehman loan and, in September, a $132.5 million loan (one
of three facilities) from Nomura Asset Capital Corporation.
Continuation of our current growth strategy beyond the facilities described
above will require additional financing. Our financial position may, in the
future, be strengthened through an increase in revenues, the refinancing of its
properties or capital from equity or debt markets. We cannot guarantee that we
will be successful in these efforts.
INFLATION
The rate of inflation has not had a material effect on our revenues or costs
and expenses in the three most recent fiscal years, and it is not anticipated
that inflation will have a material effect on us in the near term.
YEAR 2000 MATTERS
The Year 2000 issue is the result of certain computer programs being written
using two digits rather than four to define the applicable year. Certain of our
computer programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in miscalculations causing disruptions to our
corporate operations, including accounting and financial reporting, budgeting,
tax, accounts receivable and payable, word processing, spreadsheet applications
and to hotel operations, including the temporary inability to process
transactions, including processing reservations, collection of payment,
purchasing, distributing, sending invoices, or engaging in similar normal
business activities.
The systems that we have identified as being critical include but may not be
limited to the following: Unix operating system, property management systems,
point of sale systems, Oracle general ledger system and credit card processing,
as well as our banking relationships and telecommunications vendors. We have
also identified non-critical issues including, but not limited to, stand alone
personal computers, other third party vendors and possible security issues.
THE COMPANY'S STATE OF READINESS
Based on our recent assessment, we determined that we will have to modify or
replace portions of our existing software so that our computer systems will
properly utilize dates beyond December 31, 1999. Remediation plans have been
established for all major systems we have identified that may be potentially
affected by the Year 2000 issue. The current status of the plans for information
technology-based systems are summarized as follows:
1. IDENTIFICATION OF ALL APPLICATIONS AND HARDWARE WITH POTENTIAL YEAR 2000
ISSUES. To the best of our knowledge, this has been completed.
2. FOR EACH ITEM IDENTIFIED, PERFORMANCE OF AN ASSESSMENT TO DETERMINE AN
APPROPRIATE ACTION PLAN AND TIMETABLE FOR REMEDIATION OF EACH ITEM. The
plan consists of replacement, upgrade or elimination of the application.
This phase has been completed.
3. IMPLEMENTATION OF THE SPECIFIC ACTION PLAN. Action plans have been
completed for all known mission critical systems, including property
management systems and corporate systems.
4. TESTING EACH APPLICATION UPON COMPLETION. We will use both internal and
external resources to reprogram, or replace, and test the software for
Year 2000 modifications. All internally developed systems have been
tested and found to be compliant. Vendor-supplied software has been
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upgraded to Year 2000 compliant versions for our software vendors and we
have received certification of compliance from them. The remaining
vendors have informed us that testing is expected to be completed at the
latest by the third quarter of 1999.
5. PLACEMENT OF THE NEW PROCESS INTO PRODUCTION. All applications and
systems are expected to be updated by September 30, 1999.
We have initiated formal communications with our significant suppliers and
vendors for corporate and hotel operations to determine our vulnerability to
those third parties' failure to remediate their own Year 2000 Issue.
Identification of areas of potential third party risk is nearly complete and,
for those areas identified to date, remediation plans are being developed.
Identification and assessment should be completed by the end of the second
quarter of 1999 and implemented by the end of the third quarter of 1999. We
cannot guarantee that the systems of our suppliers will be timely converted and
would not disrupt operations and have an adverse effect on us.
We are in the process of identifying all non-information technology based
systems which include equipment and services containing embedded microprocessors
such as alarm systems and voice mail systems. We are in the process of
identifying, developing, implementing and testing appropriate remediation plans.
We expect to fully implement such plans by the end of the third quarter of 1999.
THE COSTS INVOLVED
Our total cost of achieving Year 2000 compliance is not expected to exceed
$2.0 million and will consist of the utilization of both internal and external
resources. Spending to date totals approximately $250,000. Expenditures either
have been appropriately allocated for through the 1999 capital improvements
budget by property or are expected to be expensed as appropriate. All costs
related to achieving Year 2000 compliance are based on management's best
estimates. We cannot guarantee that these results will be achieved, and actual
results may differ materially from those anticipated.
RISKS AND CONTINGENCY PLAN
We are in the process of determining the risks we would face in the event
certain aspects of our Year 2000 remediation plan failed. We are also developing
contingency plans for all critical processes including replacement of certain
vendors, increases in staffing to process transactions and alternate hosting of
critical systems. Under a "worst case" scenario, our corporate operations would
be disrupted due to internal system failures including the ability to properly
and timely process corporate records and transactions and accounting functions.
Our hotel operations could be disrupted based on the inability of vendors and
suppliers to deliver products for our food, beverage and lodging operations. In
addition our hotel's reservation and payment collection processes would be
disrupted. While these systems can be replaced with manual systems on a
temporary basis, it could cause substantial delays and inefficiencies in hotel
operations. The failure of national and worldwide banking information systems or
the loss of essential utilities services due to the Year 2000 issue could result
in the inability of many businesses, including ours, to conduct business. Risk
assessment has been completed, and contingency plans should be completed in the
third quarter of 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our financial instruments which
are sensitive to changes in interest rates, including CRESTS and debt
obligations. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date. As of December 31, 1998, the change in current yields
between one-year and five-year U.S. Treasury bonds is
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three basis points, thus, minimal fluctuations in the average interest rates are
anticipated over the maturity periods.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
----------------------------------------------------- FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
--------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Liabilities
Long-term Debt:
Mortgage notes payable with interest
at variable rate of LIBOR plus
3.25%.............................. $ 18,000 $ 247,000 $ -- $ -- $ -- $ -- $ 265,000 $ 265,000
Credit facilities totaling $396
million with interest at variable
rate of LIBOR plus 2.25% to 2.75%
maturing through 2011. Each loan
converts to term loans with a fixed
rate of interest and a 20-year
amortization period................ 722 3,842 6,816 7,940 8,580 295,844 323,744 323,744
Mortgage notes payable with an
interest rate of 9%................ 10,000 62,000 -- -- -- -- 72,000 72,000
Mortgage notes payable with fixed
rates ranging from 8.6% to 10.7%
payable through 2010............... 3,715 4,174 4,584 5,024 38,655 107,957 164,109 164,109
Other................................ 3,697 8,033 5,197 279 307 10,412 27,925 27,925
--------- --------- --------- --------- --------- ----------- --------- ---------
Total.................................. $ 36,134 $ 325,049 $ 16,597 $ 13,243 $ 47,542 $ 414,213 $ 852,778 $ 852,778
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Average interest rate.................. 11.2% 11.9% 8.6% 8.6% 8.6% 8.5% 10.0%
Other:
Convertible preferred securities..... $ -- $ -- $ -- $ -- $ -- $ 175,000 $ 175,000 $ 78,750
Interest rate protection agreement:
Notional amount...................... $ -- $ 54,000 $ -- $ -- $ -- $ -- $ 54,000 $ 5,000
Weighted average rate................ -- 10.5% -- -- -- -- 10.5% --
</TABLE>
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the sale of our 12 1/4% Senior Subordinated Notes due
2009, Series A (the "Old Notes") to Morgan Stanley & Co. Incorporated, Lehman
Brothers Inc. and Bear, Stearns & Co. Inc. (the "Placement Agents") pursuant to
the Placement Agreement, dated July 20, 1999, among Lodgian Financing Corp.
("Lodgian Financing," and together with its subsidiaries, the "Company") and
Lodgian, Inc. and the guarantors named therein (collectively, the "Guarantors")
and the Placement Agents, the holders of the Old Notes became entitled to the
benefits of the Registration Rights Agreement, dated as of July 20, 1999 (the
"Registration Rights Agreement"), among Lodgian Financing, the Guarantors and
the Placement Agents.
Under the Registration Rights Agreement, Lodgian became obligated to cause
the notes to be generally freely transferable under the Securities Act no later
than six months after the closing of the offering of the Old Notes. The Exchange
Offer being made hereby, if consummated within the required time periods, will
satisfy Lodgian Financing's obligations under the Registration Rights Agreement.
Lodgian Financing understands that there are approximately 21 beneficial owners
of such Old Notes. This Prospectus, together with the Letter of Transmittal, is
being sent to all such beneficial holders known to Lodgian Financing.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, Lodgian Financing will accept all
Old Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date (as defined). Lodgian Financing will issue $1,000
principal amount of exchange notes in exchange for each $1,000 principal amount
of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some
or all of their Old Notes pursuant to the Exchange Offer.
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in Morgan Stanley & Co. Incorporated,
SEC No-Action Letter (available June 5, 1991) (the "Morgan Stanley Letter"),
Exxon Capital Holdings Corporation, SEC No-Action Letter (available May 13,
1988) (the "Exxon Capital Letter") and similar letters, Lodgian believes that
the 12 1/4% Senior Subordinated Notes due 2009, Series B (the "Exchange Notes")
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by any person who received such
Exchange Notes, whether or not such person is the holder (other than any such
holder or other person which is (i) a broker-dealer that receives Exchange Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making or other trading
activities, or (ii) an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, PROVIDED that such
Exchange Notes are acquired in the ordinary course of such holder's or other
person's business, neither such holder nor such other person is engaged in or
intends to engage in any distribution of the Exchange Notes and such holders or
other persons have no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
If any person were to be participating in the Exchange Offer for the
purposes of participating in a distribution of the Exchange Notes in a manner
not permitted by the Commission's interpretation, such person (a) could not rely
upon the Morgan Stanley Letter, the Exxon Capital Letter or similar letters and
(b) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such
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Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as result
of market-making activities or other trading activities. Lodgian Financing has
agreed that, for a period of 180 days after consummation of the Exchange Offer,
it will make this Prospectus, as it may be amended or supplemented from time to
time, available to any broker-dealer for use in connection with any such resale.
See "Plan of Distribution."
Lodgian Financing will not receive any proceeds from the Exchange Offer. See
"Use of Proceeds." Lodgian Financing has agreed to bear the expenses of the
Exchange Offer pursuant to the Registration Rights Agreement. No underwriter is
being used in connection with the Exchange Offer.
Lodgian Financing shall be deemed to have accepted validly tendered Old
Notes when, as and if Lodgian Financing has given oral or written notice thereof
to Bankers Trust Company, as exchange agent (the "Exchange Agent"). The Exchange
Agent will act as agent for the tendering holders of Old Notes for the purposes
of receiving the Exchange Notes from Lodgian Financing and delivering Exchange
Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain conditions set forth herein under
"--Conditions" without waiver by Lodgian Financing, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. Lodgian Financing will pay all charges and
expenses, other than certain applicable taxes in connection with the Exchange
Offer. See "--Fees and Expenses."
In the event the Exchange Offer is consummated, Lodgian Financing will not
be required to register the Old Notes. In such event, holders of Old Notes
seeking liquidity in their investment would have to rely on exemptions to
registration requirements under the securities laws, including the Securities
Act. See "Risk Factors--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENT
The term "Expiration Date" shall mean the expiration date set forth on the
cover page of this Prospectus, unless Lodgian Financing, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, Lodgian Financing will notify the
Exchange Agent of any extension by oral or written notice and will issue a
public announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Such
announcement may state that Lodgian Financing is extending the Exchange Offer
for a specified period of time.
Lodgian Financing reserves the right (a) to delay accepting any Old Notes,
to extend the Exchange Offer or to terminate the Exchange Offer and not accept
Old Notes not previously accepted if any of the conditions set forth herein
under "--Conditions" shall have occurred and shall not have been waived by
Lodgian Financing (if permitted to be waived by Lodgian Financing), by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent, or (b) to amend the terms of the Exchange Offer in any manner deemed by
it to be advantageous to the holders of the Old Notes. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof. If the Exchange Offer is amended
in a manner determined by Lodgian Financing to
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constitute a material change, Lodgian Financing will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment, and Lodgian Financing may extend the Exchange Offer for
a period of up to ten business days, depending upon the significance of the
amendment and the manner of disclosure to holders of the Old Notes, if the
Exchange Offer would otherwise expire during such extension period.
Without limiting the manner in which Lodgian Financing may choose to make
public announcement of any extension, amendment or termination of the Exchange
Offer, Lodgian Financing shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from July 23, 1999, payable
semiannually on January 15 and July 15 of each year, commencing January 15,
2000, at the rate of 12 1/4% per annum. Holders of Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued and unpaid up until the
date of the issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by instruction 3 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents. To be validly tendered, such
documents must reach the Exchange Agent on or before 5:00 p.m., New York City
time, on the Expiration Date.
The tender by a holder of Old Notes will constitute an agreement between
such holder and Lodgian Financing in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or other nominees to effect such tender for
such holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery to the Exchange Agent on or before 5:00 p.m.
New York City time, on the Expiration Date. No Letter of Transmittal or Old
Notes should be sent to Lodgian Financing or the Guarantors.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of Lodgian Financing or any other
person who has obtained a properly completed bond power from the registered
holder.
Any beneficial holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such registered holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
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Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States (an "Eligible Institution") unless the Old Notes tendered pursuant
thereto are tendered (a) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (b) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case signed
as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by Lodgian Financing,
evidence satisfactory to Lodgian Financing of their authority so to act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Old Notes will be determined by Lodgian
Financing in its sole discretion, which determination will be final and binding.
Lodgian Financing reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes Lodgian Financing's acceptance of which
would, in the opinion of counsel for Lodgian Financing, be unlawful. Lodgian
Financing also reserves the right to waive any irregularities or conditions of
tender as to particular Old Notes. Lodgian Financing's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Old Notes must be
cured within such time as Lodgian Financing shall determine. None of Lodgian
Financing, the Guarantors, the Exchange Agent or any other person shall be under
any duty to give notification of defects or irregularities with respect to
tenders of Old Notes, nor shall any of them incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such irregularities have been cured or waived. Any Old Notes received
by the Exchange Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent to the tendering holders of Old Notes, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, Lodgian Financing reserves the right in its sole discretion to
(a) purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth under "--Conditions," to terminate the
Exchange Offer in accordance with the terms of the Registration Rights Agreement
and (b) to the extent permitted by applicable law, purchase Old Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers will differ from the terms of the Exchange Offer.
By tendering, each holder will represent to Lodgian Financing that, among
other things, (a) the Exchange Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of such holder or other
person, (b) neither such holder nor such other person is engaged in or intends
to engage in a distribution of the Exchange Notes (c) neither such holder or
other person has any arrangement or understanding with any person to participate
in the distribution of such Exchange Notes, and (d) such holder or other person
is not an "affiliate," as defined under Rule 405 of the Securities Act, of
Lodgian Financing or, if such holder or other person is such an affiliate, will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
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Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as result
of market-making activities or other trading activities. Lodgian Financing has
agreed that, for a period of 180 days after consummation of the Exchange Offer,
it will make this Prospectus, as it may be amended or supplemented from time to
time, available to any broker-dealer for use in connection with any such resale.
See "Plan of Distribution."
Lodgian Financing will not receive any proceeds from the Exchange Offer. See
"Use of Proceeds." Lodgian Financing has agreed to bear the expenses of the
Exchange Offer pursuant to the Registration Rights Agreement. No underwriter is
being used in connection with the Exchange Offer.
The Old Notes were issued on July 23, 1999, and there is no public market
for them at present. To the extent Old Notes are tendered and accepted in the
Exchange Offer, the principal amount of outstanding Old Notes will decrease with
a resulting decrease in the liquidity in the market therefor. Following the
consummation of the Exchange Offer, holders of Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the Old Notes could be adversely affected.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (a) whose Old Notes are not
immediately available or (b) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if: (i) the tender is make through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby, and guaranteeing
that, within three business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s) representing
the Old Notes to be tendered in proper form for transfer and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and (iii) such properly completed and
executed Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing all tendered Old Notes in proper form for transfer
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (a) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"), (b)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (c) be signed by the Depositor
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by
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documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the Depositor
withdrawing the tender and (d) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. All questions as to
the validity, form and eligibility (including time of receipt) of such
withdrawal notices will be determined by Lodgian Financing, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no Exchange Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Any Old Notes which have been tendered but
which are not accepted for exchange will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may
be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Lodgian Financing will
not be required to accept for exchange, or exchange notes for, any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes, if Lodgian Financing
or the holders of at least a majority in principal amount of Old Notes
reasonably determine in good faith that any of the following conditions exist:
(a) the Exchange Notes to be received by such holders of Old Notes in the
Exchange Offer, upon receipt, will not be tradable by each such holder (other
than a holder which is an affiliate of Lodgian Financing at any time on or prior
to the consummation of the Exchange Offer) without restriction under the
Securities Act and the Exchange Act and without material restrictions under the
blue sky or securities laws of substantially all of the states of the United
States, (b) the interests of the holders of the Old Notes, taken as a whole,
would be materially adversely affected by the consummation of the Exchange Offer
or (c) after conferring with counsel, the Commission is unlikely to permit the
making of the Exchange Offer prior to January 23, 2000.
Pursuant to the Registration Rights Agreement, if an Exchange Offer shall
not be consummated prior to the Exchange Offer Termination Date, Lodgian
Financing will be obligated to cause to be filed with the Commission a shelf
registration statement with respect to the Old Notes (the "Shelf Registration
Statement") as promptly as practicable after the Exchange Offer Termination Date
and thereafter use its best efforts to have the Shelf Registration Statement
declared effective.
"Exchange Offer Termination Date" means the date on which the earliest of
any of the following events occurs: (a) applicable interpretations of the staff
of the Commission do not permit to effect the Exchange Offer, (b) any holder of
Notes notifies Lodgian Financing that either (i) such holder is not eligible to
participate in the Exchange Offer or (ii) such holder participates in the
Exchange Offer and does not receive freely transferable Exchange Notes in
exchange for tendered Old Notes or (c) the Exchange Offer is not consummated
within six months after the closing after the Issue Date.
If any of the conditions described above exist, Lodgian Financing will
refuse to accept any Old Notes and will return all tendered Old Notes to
exchanging holders of the Old Notes.
EXCHANGE AGENT
Bankers Trust Company has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance and requests for additional copies
of this Prospectus or of the Letter of
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Transmittal and deliveries of completed Letters of Transmittal with tendered Old
Notes should be directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
BY MAIL: BY OVERNIGHT MAIL OR COURIER:
BT Services Tennessee, Inc. BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust & Agency Group
P.O. Box 292737 Reorganization Unit
Nashville, Tennessee 37229-2737 648 Grassmere Park Road
Fax: (615) 835-3701 Nashville, Tennessee 37211
Confirm by Telephone
(615) 835-3572
</TABLE>
BY HAND:
Bankers Trust Company
Corporate Trust and Agency Group
Attn: Reorganization Department
Receipt & Delivery Window
123 Washington Street, 1st Floor
New York, New York 10006
Information (800) 735-7777
Lodgian Financing will indemnify the Exchange Agent and its agents for any
loss, liability or expense incurred by them, including reasonable costs and
expenses of their defense, except for any such loss, liability or expense caused
by negligence or bad faith.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Lodgian Financing. The principal solicitation for tenders pursuant to
the Exchange Offer is being made by mail. Additional solicitations may be made
by officers and regular employees of Lodgian Financing and its affiliates in
person, by telephone or facsimile.
Lodgian Financing will not make any payments to brokers, dealers, or other
persons soliciting acceptances of the Exchange Offer. Lodgian Financing,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse the Exchange Agent for its reasonable out-of-pocket
expenses in connection therewith. Lodgian Financing may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the Old
Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and expenses, will be paid by Lodgian Financing, and are estimated in the
aggregate to be approximately $500,000.
Lodgian Financing will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes (or Old Notes for principal amounts not tendered or
accepted for exchange) are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or
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exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
Lodgian Financing will not recognize any gain or loss for accounting
purposes upon the consummation of the Exchange Offer. The expense of the
Exchange Offer will be amortized by Lodgian Financing over the term of the
Exchange Notes under U.S. GAAP.
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BUSINESS
GENERAL
We are one of the largest owners and operators of full-service hotels in the
United States, with 134 hotels containing approximately 25,375 rooms located in
35 states and Canada. Our hotels include 121 wholly-owned hotels (including
three under construction), 11 hotels in which we have a 50% or greater equity
interest, one hotel in which we have a minority equity interest and one hotel
managed for a third party. Our hotels are primarily full-service properties
which offer food and beverage services, meeting space and banquet facilities and
compete in the mid-price and upscale segments of the lodging industry. We
believe that these segments have more consistent demand generators than other
segments of the lodging industry and that they have recently experienced less
development of new properties than other lodging segments, such as the limited
service, economy and budget segments. Substantially all of our hotels are
affiliated with nationally recognized hospitality franchises. We own and operate
hotels under franchise agreements with Marriott International, Bass Hotels and
Resorts, the franchisor for the Holiday Inn and Crowne Plaza brands, and the
franchisors of the Doubletree, Hilton, Omni, Radisson and Sheraton brands, among
others. We are one of the largest Holiday Inn franchisees and one of the largest
Marriott franchisees nationally.
Our success in managing, developing, renovating and repositioning our hotels
has resulted in strong relationships with our franchisors. We pride ourselves on
the recognition and awards we have received from our franchisors. These awards
include, among others:
- Seven Modernization Awards during the last four consecutive years from
Bass Hotels and Resorts;
- Torchbearer Award for quality for several hotels from Bass Hotels and
Resorts;
- President's Award for quality for three hotels in 1998 from Marriott
International;
- Best New Hotel Opening in 1997 for the Courtyard by Marriott, Tulsa and in
1998 for the Denver Airport Marriott, in each case from Marriott
International;
- Hotel of the Year for the Club Hotel by Doubletree in Philadelphia from
Promus Hotels; and
- "Best New Franchisee" in 1995 from Marriott International.
Lodgian was formed by Servico's merger with Impac in December 1998. We
believe that the Merger enhances our growth potential and provides significant
opportunities for operating synergies, due to the complementary nature of the
two companies' property portfolios, strategies and core competencies. Both
companies had portfolios consisting of full-service properties in the mid-price
and upscale segments with leading franchise brands, such as Holiday Inn,
Sheraton, Hilton and Doubletree. Both companies pursued a strategy of renovating
and repositioning their hotel properties to achieve growth in revenue per
available room and profitability and strong returns on capital. Impac developed
significant in-house development and construction management capabilities and
expertise, while Servico generally relied on others, including Impac, for
renovation and redevelopment services. We believe that the addition of Impac's
in-house development capabilities and relationships with high quality
franchisors, such as Marriott, will enable us to take advantage of more
opportunities to reposition our existing hotels, as well as to selectively
acquire and develop new hotels. We also believe that we have opportunities to
improve the operating performance of Impac's hotels by applying Servico's
operating expertise and "best practices." In addition, we believe that we will
be able to generate greater value from our portfolio through operating synergies
(including opportunities for cost savings in overhead, purchasing, insurance and
related activities) achieved as a result of, among other things, national
purchasing contracts.
Servico was incorporated in 1956 under the laws of the State of Delaware.
From 1956 through 1990, the predecessor engaged in the ownership and operation
of hotels under a series of different ownerships. In September 1990, Servico
filed for protection under Chapter 11 of the United States Bankruptcy Code. The
predecessor emerged from reorganization proceedings in August 1992 as Servico,
Inc., a Florida corporation.
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GROWTH STRATEGY
We have developed a strategy designed to increase our revenues, cash flow
and profitability while focusing on return on investment as the primary
criterion for growth. Our growth strategy consists primarily of (1) realizing
the built-in growth of our existing portfolio, (2) acquiring existing
full-service, mid-price and upscale hotels that are in need of substantial
renovation and repositioning and (3) developing new full-service, mid-price and
upscale hotels, primarily franchised under Marriott brands.
REALIZE BUILT-IN GROWTH. We intend to capitalize on the substantial
investments we have made in the development and renovation of the hotels in our
portfolio. From January 1, 1996 to June 30, 1999, Servico grew from 46 owned
hotels with approximately 9,031 rooms to 135 owned hotels (including Impac's
hotels, three of which were under construction) with approximately 25,525 rooms,
largely through acquisitions. From January 1, 1996 to the Merger, Impac grew
from 19 hotels with approximately 3,502 rooms to 53 hotels with 8,895 rooms.
From January 1, 1996 to June 30, 1999, Servico acquired 41 hotels (excluding six
European hotels) with 8,458 rooms at an average purchase price of $36,800 per
room. In that time, Servico spent approximately $9,400 per room in renovations
and other capital assets. During this same period, Impac acquired 24 hotels with
4,185 rooms at an average purchase price of $40,000 per room and spent an
average of an additional $16,700 on renovations and other capital assets. In
addition, from January 1, 1996 to June 30, 1999, Impac completed the development
of 11 hotels and initiated development of three hotels. From January 1, 1997 to
June 30, 1999, Servico completed renovations on 27 hotels, Impac completed
renovations on 31 hotels, and we completed renovations on two hotels since the
Merger, including renovations on hotels acquired since January 1, 1996. We plan
to spend an additional $26.1 million for planned renovations to these acquired
properties and expect our total cost per room for the properties acquired by
Servico and Impac to be $51,800.
Through the implementation of our operating strategies, we expect to be
well-positioned to realize the built-in growth of our recently renovated and
developed properties. We expect to realize significant EBITDA contribution from
four newly developed hotels which were completed in 1998, including the Marriott
at the Denver Airport in Denver, Colorado, the Residence Inn Little Rock in
Little Rock, Arkansas, the Hilton Garden Rio Rancho in Rio Rancho, New Mexico
and the Residence Inn Dedham in Boston, Massachusetts. Furthermore, we expect
substantial EBITDA contribution from recently renovated hotels, including the
Doubletree Club Hollywood in Hollywood, California, the Holiday Inn Anchorage in
Anchorage, Alaska, the Mayfair House Coconut Grove in Miami, Florida and the
Sheraton West Palm Beach in West Palm Beach, Florida. We cannot assure you that
we will realize these expected EBITDA contributions.
ACQUIRE AND IMPROVE UNDERPERFORMING HOTELS. We seek to capitalize on our
management, renovation and development expertise by continuing to acquire
underperforming hotels and implementing operational initiatives and
repositioning programs to achieve revenue growth and margin improvements. We
have generally invested significant capital to renovate and reposition newly
acquired hotels. In certain instances, we re-brand hotels to highlight property
improvements to the marketplace and to improve average daily rates and market
share. We believe that our total cost to acquire and renovate hotels has been
significantly less than the cost to construct new hotels with similar
facilities. We expect that our relationships throughout the industry and our
in-house development capabilities will continue to provide us with a competitive
advantage in identifying, evaluating, acquiring, redeveloping and managing
hotels that meet our criteria.
We believe that a number of lodging industry trends will enable us to
continue to successfully execute our acquisition, renovation and repositioning
strategy, including the following: (1) there has generally been less competition
to purchase underperforming hotels than other properties because of the level of
expertise required to purchase and efficiently reposition such hotels, and (2) a
number of major franchisors, such as Bass Hotels and Resorts, have launched
quality improvement initiatives under which owners are required to invest
substantial amounts of capital to upgrade older properties or risk having the
franchise agreement terminated. We believe that these initiatives will provide
us with new acquisition
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opportunities, as individual or small-portfolio owners are unable or unwilling
to invest the capital required to raise quality standards to the level required
by franchisors.
SELECTIVELY DEVELOP NEW HOTELS. We plan to continue to selectively develop
new full-service, mid-price and upscale hotels. We intend to develop these
properties primarily under the Marriott and Courtyard by Marriott brands due to
the high quality image, strong reservations and marketing networks and overall
quality management of these brands. We have focused our development in suburbs
of metropolitan areas that are experiencing significant demand growth where
there have not historically been suitable acquisition targets. We believe that
the expertise required to develop such assets generally limits access to the
marketplace, and that our in-house development capabilities enable us to develop
hotels more efficiently than our competitors.
Our historical objective has been to develop each property as cost
efficiently as possible while meeting quality standards and return on investment
objectives. We have developed 12 hotels with 1,389 rooms since 1995. In
addition, we have three upscale hotels with 552 rooms under construction,
including the Marriott in downtown Portland, Oregon and the Courtyard by
Marriott in Livermore, California, which are both scheduled to open in the third
quarter of 1999, and the Hilton Garden Inn in Lake Oswego, Oregon, which is
scheduled to open in the first quarter of 2000. In addition, at June 30, 1999,
we owned five land parcels and held an option to purchase one additional land
parcel that together would permit the development of six new hotels with a total
capacity of approximately 1,270 rooms.
OPERATING STRATEGY
We have developed a highly focused operating strategy designed to maximize
the financial performance of our hotels while providing our guests with high
quality service and value. Key elements of our operating strategy include:
ENHANCE HOTEL PERFORMANCE THROUGH DISCIPLINED CAPITAL INVESTMENT. We seek
to reposition and renovate our hotels based on strategic plans designed to
address the opportunities presented by each hotel and the hotel's particular
market. Renovations include enhancing lobbies, restaurants and public areas,
upgrading guest rooms and converting unprofitable lounge areas to meeting rooms
to accommodate the needs of business travelers. Renovations often include a
substantial exterior renovation to improve the property's overall appearance and
appeal. We believe that these renovations enable us to increase both occupancy
and room rates and generate attractive returns on our investment.
SELECTIVE USE OF PREMIUM BRANDS. We believe that the selection of an
appropriate franchise brand is essential in positioning a hotel optimally within
its local market. Because we are not bound by a single franchise brand, we can
choose a franchise relationship that will maximize a hotel's performance in a
particular market and complement our management strategies and those of the
individual hotel. Since January 1, 1996, we have rebranded 14 hotels to better
position them in their competitive markets. We select brands based on factors
such as revenue contribution, product quality standards, local presence of the
franchisor, brand recognition, target demographics and purchasing efficiencies
offered by franchisors.
INDIVIDUAL HOTEL MANAGEMENT. We seek to maximize the performance of our
hotels by developing marketing and business plans specifically tailored for each
individual hotel. We develop and implement marketing plans that properly
position each hotel within its local market and facilitate targeted sales and
marketing efforts. These plans focus on maximizing revenues and improving market
share, guest satisfaction and cost controls. We believe that experienced and
hands-on management of hotel operations is the most critical element in
maximizing revenue and cash flow of hotels, especially in full service hotels.
In order to maintain strong performance of the individual hotels, we stress
management accountability and entrepreneurship and provide performance-based
compensation at the individual hotel and regional levels that we believe is
among the most attractive in the industry.
EFFECTIVE CENTRALIZED CONTROLS AND SUPPORT. We have implemented centralized
controls and support that seek to provide corporate and group support services
while promoting flexibility and encouraging associates to develop innovative
solutions. Our hotels are organized into six regions, each headed by a
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regional vice president who reports to the chief operating officer. This
structure enables us to provide close oversight of property managers at the
regional and local levels while ensuring that information, standards and goals
are communicated effectively across our entire portfolio. We have established
certain uniform productivity standards and skill requirements for hotel
associates that we believe increase operating efficiencies by enhancing our
ability to measure performance and to allocate associates efficiently within our
hotel system.
LEADING EDGE TECHNOLOGY. We have invested substantial capital in advanced
information systems that allow for increased timely and accurate reporting of
operational and financial data, among many other capabilities. We are also in
the process of implementing Oracle web-based technology, which will permit (1)
more accurate and efficient revenue and expense reporting and forecasting by
providing real-time access to financial information, (2) improved labor and cash
management and (3) the ability to monitor from any location daily revenue
results, labor costs and expenses of every one of our hotels. Through our
intranet, we also can provide real-time reporting, distribute corporate
communications and disseminate critical information to our associates
company-wide.
CENTRALIZED RESERVATIONS AND SALES SUPPORT. We currently operate a revenue
center in Baton Rouge, Louisiana that maintains the reservation system for 47
Holiday Inn hotels, with 30 hotels expected to be added by the end of November
1999. We believe that the revenue center is the first of its kind in the hotel
industry, and we expect it to be able to cover multiple hotel brands in the near
future. The revenue center improves the efficiency of our hotel reservation
process by freeing up hotel associates to service guests and allowing dedicated
reservation agents to focus on taking reservations. We believe that dedicated
reservation agents convert a higher number of inquiries into actual reservations
than hotel associates with multiple responsibilities. Specialists at the revenue
center have complete access to the property management systems and price each
room according to market demand, inventory supply and competitor strategies. The
revenue center also has a group sales center which enables hotel salespeople to
focus on direct sales and marketing efforts and building and maintaining client
relationships.
OUR HOTELS
We owned or operated 136 hotels containing approximately 25,615 rooms
located in 35 states and June 30, 1999. During July 1999, we sold two
wholly-owned hotels in the United States, and effective August 1, 1999, we
ceased managing one hotel for a third party.
GROWTH THROUGH ACQUISITIONS
In 1997 and 1998, Servico and Impac each significantly expanded its
respective property portfolio. Our portfolio is shown in the following table:
COMBINED HOTELS OWNED AT FISCAL YEAR END
<TABLE>
<CAPTION>
HOTELS ROOMS
--------------------------------------- --------------------
DECEMBER 31, SERVICO IMPAC PRO FORMA SERVICO IMPAC
- -------------------------------------------------------------- ----------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
1996.......................................................... 57 26 83 11,059 4,496
1997.......................................................... 69 45 113 14,061 7,713
1998(1)....................................................... 89 53 142 17,994 8,895
Net Acquisitions since December 31, 1996...................... 32 27 59 6,935 4,399
<CAPTION>
DECEMBER 31, PRO FORMA
- -------------------------------------------------------------- -----------
<S> <C>
1996.......................................................... 15,555
1997.......................................................... 21,774
1998(1)....................................................... 26,889
Net Acquisitions since December 31, 1996...................... 11,334
</TABLE>
- ------------------------
(1) Includes three hotels currently under construction and 18 hotels that are
partially owned.
In connection with the Merger, we acquired 53 hotels with 8,895 rooms. Using
the purchase accounting method, the average purchase price of these hotels is
$70,500 per room. We expect to spend approximately $3,050 per room in
renovations and completion of construction for a total cost per room of $73,550.
In June 1998, Servico completed the acquisition of the 14 hotel properties from
AMI, for an aggregate acquisition value of $75.0 million, or an average purchase
price of $32,600 per room. Three of
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the AMI properties were subsequently sold. We intend to invest approximately
$19,200 per room to renovate and reposition ten of the AMI properties. In
addition, during 1997 and 1998, we purchased 16 hotels (4,132 rooms) for an
average purchase price of approximately $42,500 per room. We have spent
approximately $8,400 per room in renovations and capital assets and expect to
spend an additional $13.8 million, for a total cost per room of approximately
$54,300. We believe these costs per room to acquire and renovate these hotels
are significantly less than the costs to replace these hotels.
PROPERTY CLASSIFICATION
To better illustrate and demonstrate the execution of our repositioning
strategy, we classify our hotels as either "Stabilized Hotels," "Stabilizing
Hotels" or "Being Repositioned Hotels."
- Stabilized Hotels are properties (1) which have experienced little or no
disruption to their operations over the past 24 to 36 months as the result
of redevelopment or repositioning efforts, or (2) newly-constructed hotels
which have been in service for 24 months or more.
- Stabilizing Hotels are (1) properties that have undergone renovation or
repositioning investment within the last 36 months, which work is now
completed, or (2) newly developed properties placed into service within
the past 24 months. Management believes that these properties should
experience higher rates of growth in RevPAR and operating margin than the
Stabilized Hotels. On average, our hotels which have undergone renovation
have generally reached stabilization in approximately 12 to 18 months
after their completion date, and our newly developed hotels have reached
stabilization in approximately 24 months after their completion date.
- Being Repositioned Hotels are hotels experiencing disruption to their
operations due to renovation and repositioning. During this period
(generally 12 to 18 months) hotels will usually experience lower operating
results, such as RevPAR, and operating margins. We expect significant
improvements in the operating performance of those hotels that have
undergone a repositioning once the renovation is completed. After the
repositioning work is completed, these properties will be reclassified as
Stabilizing Hotels.
STABILIZED HOTELS. As of January 1, 1999, we had 77 Stabilized Hotels
(representing 14,084 rooms) which, based on management's determination, have
achieved normalized operations. The following table sets forth the number of our
Stabilized Hotels on which we completed renovation or construction in the
periods presented.
<TABLE>
<CAPTION>
STABILIZED HOTELS
YEAR OF LAST RENOVATION OR CONSTRUCTION
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRIOR TO 1995 1995 1996 1997 1998
--------------- --------- --------- --------- ---------
Hotels....................................................... 11 13 21 22 10
Rooms........................................................ 1,886 2,442 4,328 3,692 1,736
<CAPTION>
<S> <C>
TOTAL(1)
-----------
Hotels....................................................... 77
Rooms........................................................ 14,084
</TABLE>
- ------------------------
(1) Excludes two managed hotels and one hotel in which we have a minority
interest.
STABILIZING HOTELS. As of January 1, 1999, we had 33 Stabilizing Hotels
(representing 6,056 rooms). Set forth below is the date of completion of
renovation or new construction of our Stabilizing Hotels in the periods
presented.
<TABLE>
<CAPTION>
STABILIZING HOTELS
PERIOD OF LAST RENOVATION OR CONSTRUCTION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JAN 97-JUN 97 JUL 97-DEC 97(1) JAN 98-JUN 98(2) JUL 98-DEC 98(3) TOTAL
----------------- ------------------- ----------------- ----------------- ---------
Hotels............................... 1 4 14 14 33
Rooms................................ 106 635 2,847 2,468 6,056
</TABLE>
- ------------------------
(1) Includes one newly constructed hotel (90 rooms).
(2) Includes one newly constructed hotel (81 rooms).
(3) Includes three newly constructed hotels (463 rooms).
59
<PAGE>
On January 1, 1999, 31 hotels became stabilized. Of these hotels, we
completed renovations on 18 in 1997 and 13 in 1998. As shown below, RevPAR
increased from $43.72 in 1996 to $49.27 in 1998 for the hotels we completed
renovating in 1997 and from $45.64 in 1996 to $51.87 in 1998 for the hotels we
completed renovating in 1998. The following table sets forth additional
operating data for the 1997 and 1998 renovations which became stabilized on
January 1, 1999.
<TABLE>
<CAPTION>
HOTELS THAT BECAME STABILIZED ON
JANUARY 1, 1999
-------------------------------------
<S> <C> <C> <C>
1996 1997 1998
----------- ----------- -----------
1997 RENOVATIONS:
Average Daily Rate.................................................................. $ 65.91 $ 75.29 $ 77.50
Occupancy........................................................................... 66.3% 59.9% 63.6%
RevPAR.............................................................................. $ 43.72 $ 45.07 $ 49.27
EBITDA Margin....................................................................... 21.8% 20.2% 24.9%
1998 RENOVATIONS:
Average Daily Rate.................................................................. $ 71.50 $ 74.86 $ 77.70
Occupancy........................................................................... 63.8% 64.2% 66.8%
RevPAR.............................................................................. $ 45.64 $ 48.04 $ 51.87
EBITDA Margin....................................................................... 27.4% 26.8% 29.0%
</TABLE>
BEING REPOSITIONED HOTELS. As of June 30, 1999, we had 21 Being
Repositioned Hotels in the U.S. (representing 4,593 rooms). We are in the
process of repositioning and renovating the Being Repositioned Hotels based on
strategic plans designed to address the opportunities presented by each hotel
and the hotel's particular market. Renovations are chosen based on meeting
return on investment criteria and brand standards. These renovations include
improving exteriors, enhancing lobbies, restaurants and public areas, upgrading
guest rooms and converting unprofitable lounge areas to meeting rooms to
accommodate the needs of business travelers. In certain instances, hotel
properties are rebranded to improve market share and further identify the
improved property to the community. We believe that these renovations enable us
to increase both occupancy and room rates. The following table sets forth the
periods in which we expect to complete renovation of our Being Repositioned
Hotels.
<TABLE>
<CAPTION>
BEING REPOSITIONED HOTELS
EXPECTED DATE OF COMPLETION OF RENOVATION
--------------------------------------------
2Q'99 3Q'99 4Q'99 1Q'00 TOTAL(1)
----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Hotels................................................................. 2 4 4 11 21
Rooms.................................................................. 540 1,050 690 2,313 4,593
</TABLE>
- ------------------------
(1) Excludes six European hotels which we sold.
The timing of the renovation for the Being Repositioned hotels may vary and
will depend upon a number of factors, including costs of renovation exceeding
budgeted or contracted amounts, the availability of capital, delays in
completion of construction, work stoppages and relationships with contractors.
See "Risk Factors--Risks Related to the Development of New Projects,
Acquisitions and Renovations--We Cannot Guarantee the Success of Any Future
Projects."
60
<PAGE>
NEW DEVELOPMENT PROPERTIES
Our objective is to develop properties as cost efficiently as possible while
meeting quality standards. We have developed 12 hotels with 1,389 rooms since
1995, including the Marriott in Denver, Colorado which opened in November 1998
and the Hilton Garden Inn in Rio Rancho, New Mexico which opened in December
1998. We have an additional three hotels with 552 rooms under construction: the
Marriott in downtown Portland, Oregon and the Courtyard by Marriott in
Livermore, California, both of which are scheduled to open in the third quarter
of 1999, and the Hilton Garden Inn in Lake Oswego, Oregon, which is scheduled to
open in the first quarter of 2000. In addition, at June 30, 1999, we owned five
land parcels and held an option to purchase one additional land parcel that
together would permit the development of six new hotels with a total capacity of
approximately 1,270 rooms.
The timing of the development of new properties may vary and will depend
upon a number of factors, including costs of development exceeding budgeted or
contracted amounts, delays in completion of construction, the failure to obtain
necessary construction permits, availability of financing, work stoppages,
relationships with contractors and changes in general economic and business
conditions. See "Risk Factors--Risks Related to the Development of New Projects,
Acquisitions and Renovations--We Cannot Guarantee the Success of Any Future
Projects."
PORTFOLIO
Our hotel portfolio (with classifications as of January 1, 1999) is set
forth below.
LODGIAN HOTEL PORTFOLIO
<TABLE>
<CAPTION>
YEAR OF LAST
RENOVATION OR
HOTEL NAME NO. OF ROOMS LOCATION CONSTRUCTION
- ------------------------------------------------------ ------------- ---------------------------- ---------------
<S> <C> <C> <C>
STABILIZED
- ------------------------------------------------------
Best Western Central Omaha............................ 213 Omaha, NE 1997
Best Western Council Bluffs........................... 89 Council Bluffs, IA 1997
Best Western Northwoods Atrium Inn.................... 197 Charleston, SC 1994
Clarion Royce Hotel................................... 193 Pittsburgh, PA 1995
Comfort Inn Roseville................................. 118 Roseville, MN 1993
Comfort Inn San Antonio............................... 203 San Antonio, TX 1997
Comfort Suites Greenville............................. 85 Greenville, SC 1996
Courtyard by Marriott Abilene(1)...................... 99 Abilene, TX 1996
Courtyard by Marriott Bentonville(1).................. 90 Bentonville, AR 1996
Courtyard by Marriott Buckhead(1)..................... 181 Atlanta, GA 1996
Courtyard by Marriott Florence(1)..................... 78 Florence, KY 1995
Courtyard by Marriott Paducah(1)...................... 100 Paducah, KY 1997
Courtyard by Marriott Tifton(1)(2).................... 90 Tifton, GA 1996
Courtyard by Marriott Tulsa(1)........................ 122 Tulsa, OK 1997
Crowne Plaza Saginaw(3)............................... 177 Saginaw, MI 1996
Crowne Plaza Worcester(3)............................. 243 Worcester, MA 1996
Doubletree Club Louisville............................ 399 Louisville, KY 1996
Doubletree Club Philadelphia.......................... 188 Philadelphia, PA 1997
Fairfield Inn Valdosta................................ 108 Valdosta, GA 1997
Four Points Hilton Head............................... 139 Hilton Head, SC 1997
French Quarter Suites Memphis......................... 105 Memphis, TN 1997
Hampton Inn Dothan.................................... 113 Dothan, AL 1996
Hampton Inn Pensacola................................. 124 Pensacola, FL 1995
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LAST
RENOVATION OR
HOTEL NAME NO. OF ROOMS LOCATION CONSTRUCTION
- ------------------------------------------------------ ------------- ---------------------------- ---------------
<S> <C> <C> <C>
Hilton Fort Wayne..................................... 245 Fort Wayne, IN 1996
Hilton Inn Columbia................................... 152 Columbia, MD 1998
Hilton Inn Northfield................................. 186 Northfield, MI 1997
Hilton Inn Sioux City(3).............................. 193 Sioux City, IA 1994
Holiday Inn Arden Hills............................... 156 St. Paul, MN 1995
Holiday Inn Austin (South)............................ 210 Austin, TX 1994
Holiday Inn Birmingham................................ 166 Birmingham, AL 1996
Holiday Inn Bloomington............................... 187 Bloomington, IN 1992
Holiday Inn Brunswick (I-95).......................... 126 Brunswick, GA 1998
Holiday Inn City Center(4)............................ 240 Columbus, OH 1996
Holiday Inn Clarksburg................................ 160 Clarksburg, WV 1997
Holiday Inn Dothan.................................... 102 Dothan, AL 1996
Holiday Inn Express Fort Pierce....................... 100 Fort Pierce, FL 1998
Holiday Inn Express Gadsden........................... 141 Gadsden, AL 1997
Holiday Inn Express Palm Desert....................... 129 Palm Desert, CA 1992
Holiday Inn Express Pensacola......................... 214 Pensacola, FL 1996
Holiday Inn Fairmont.................................. 106 Fairmont, WV 1997
Holiday Inn Fayetteville.............................. 198 Fayetteville, NC 1997
Holiday Inn Fort Wayne(3)............................. 208 Fort Wayne, IN 1995
Holiday Inn Greentree................................. 200 Pittsburgh, PA 1998
Holiday Inn Hamburg................................... 129 Buffalo, NY 1998
Holiday Inn Hilton Head............................... 201 Hilton Head, SC 1995
Holiday Inn Lawrence.................................. 192 Lawrence, KS 1996
Holiday Inn Manhattan................................. 197 Manhattan, KS 1996
Holiday Inn Marietta.................................. 196 Atlanta, GA 1996
Holiday Inn McKnight Rd.(3)........................... 147 Pittsburgh, PA 1995
Holiday Inn Meadow Lands.............................. 138 Pittsburgh, PA 1996
Holiday Inn Melbourne(3).............................. 293 Melbourne, FL 1996
Holiday Inn Monroeville............................... 189 Pittsburgh, PA 1998
Holiday Inn Morgantown................................ 147 Morgantown, WV 1997
Holiday Inn Myrtle Beach.............................. 133 Myrtle Beach, SC 1998
Holiday Inn Parkway East.............................. 180 Pittsburgh, PA 1996
Holiday Inn Phoenix West.............................. 144 Phoenix, AZ 1995
Holiday Inn Raleigh Downtown.......................... 202 Raleigh, NC 1994
Holiday Inn Santa Fe.................................. 130 Santa Fe, NM 1992
Holiday Inn Select Airport Phoenix.................... 298 Phoenix, AZ 1995
Holiday Inn Select DFW................................ 282 Dallas, TX 1997
Holiday Inn Select Strongsville....................... 304 Cleveland, OH 1996
Holiday Inn Select Windsor, Ontario................... 214 Windsor, Ontario 1998
Holiday Inn Sheffield................................. 201 Sheffield, AL 1994
Holiday Inn St. Louis North........................... 391 St. Louis, MO 1996
Holiday Inn St. Louis West............................ 249 St. Louis, MO 1998
Holiday Inn Syracuse.................................. 153 Syracuse, NY 1997
Holiday Inn University Mall........................... 152 Pensacola, FL 1997
Holiday Inn Valdosta.................................. 173 Valdosta, GA 1997
Omni Albany NY........................................ 386 Albany, NY 1995
Omni West Palm Beach(3)............................... 219 West Palm Beach, FL 1994
Quality Hotel & Conference Ctr........................ 204 New Orleans, LA 1995
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LAST
RENOVATION OR
HOTEL NAME NO. OF ROOMS LOCATION CONSTRUCTION
- ------------------------------------------------------ ------------- ---------------------------- ---------------
<S> <C> <C> <C>
Radisson New Orleans(3)............................... 244 New Orleans, LA 1998
Radisson Phoenix Hotel................................ 163 Phoenix, AZ 1995
Sheraton Hotel Concord................................ 323 Concord, CA 1996
Super 8 Hazard........................................ 52 Hazard, KY 1997
Super 8 Prestonburg................................... 80 Prestonburg, KY 1997
Westin William Penn Pittsburgh........................ 595 Pittsburgh, PA 1997
------
SUBTOTAL.......................................... 14,174
------
STABILIZING
- ------------------------------------------------------
Courtyard by Marriott Lafayette (1)................... 90 Lafayette, LA 1997
Crowne Plaza Cedar Rapids............................. 275 Cedar Rapids, IA 1998
Crowne Plaza Macon(3)................................. 298 Macon, GA 1998
Doubletree Club Hollywood............................. 160 Hollywood, CA 1998
Fairfield Inn Augusta................................. 117 Augusta, GA 1998
Fairfield Inn Colchester.............................. 117 Burlington, VT 1998
Fairfield Inn Jackson................................. 105 Jackson, TN 1998
Fairfield Inn Merrimack............................... 116 Merrimack, NH 1998
Four Points Omaha..................................... 168 Omaha, NE 1997
Four Points West Des Moines........................... 161 Des Moines, IA 1997
Hilton Garden Rio Rancho(1)........................... 129 Rio Rancho, NM 1998
Holiday Inn Anchorage................................. 251 Anchorage, AK 1998
Holiday Inn Augusta(3)................................ 239 Augusta, GA 1998
Holiday Inn Boise..................................... 265 Boise, ID 1998
Holiday Inn Cincinnati................................ 244 Cincinnati, OH 1998
Holiday Inn Florence.................................. 106 Florence, KY 1997
Holiday Inn Fort Mitchell............................. 214 Fort Mitchell, KY 1998
Holiday Inn Frisco.................................... 216 Frisco, CO 1997
Holiday Inn Jamestown................................. 150 Jamestown, NY 1998
Holiday Inn Lansing West.............................. 239 Lansing, MI 1998
Holiday Inn Market Center Dallas...................... 246 Dallas, TX 1998
Holiday Inn Memphis................................... 175 Memphis, TN 1998
Holiday Inn North Miami............................... 98 Miami, FL 1998
Holiday Inn Richfield(3).............................. 219 Richfield, OH 1998
Holiday Inn Select Riverside.......................... 286 Riverside, CA 1998
Holiday Inn Select Wilsonville........................ 169 Portland, OR 1998
Holiday Inn Silver Spring............................. 232 Silver Spring, MD 1998
Holiday Inn Wichita Airport........................... 152 Wichita, KS 1998
Holiday Inn Winter Haven.............................. 225 Winter Haven, FL 1998
Marriott Denver(1).................................... 238 Denver, CO 1998
Mayfair House Coconut Grove........................... 179 Miami, FL 1998
Residence Inn Dedham(1)............................... 96 Boston, MA 1998
Residence Inn Little Rock(1).......................... 81 Little Rock, AR 1998
------
SUBTOTAL.......................................... 6,056
------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
EXPECTED
HOTEL NAME NO. OF ROOMS LOCATION COMPLETION DATE
- ---------------------------------------------------- ------------- ---------------------------- -----------------
<S> <C> <C> <C>
BEING REPOSITIONED
- ----------------------------------------------------
Courtyard by Marriott Revere........................ 120 Boston, MA 3Q99
Crowne Plaza Houston................................ 298 Houston, TX 3Q99
Four Points by Sheraton, Niagara Inn................ 190 Niagara Falls, NY 2Q99
Holiday Inn Belmont................................. 135 Belmont, MD 4Q99
Holiday Inn BWI Airport............................. 259 Baltimore, MD 4Q99
Holiday Inn Cromwell Bridge......................... 139 Cromwell Bridge, MD 4Q99
Holiday Inn East Hartford........................... 130 East Hartford, CT 1Q00
Holiday Inn Express Nashville....................... 210 Nashville, TN 3Q99
Holiday Inn Frederick............................... 157 Frederick, MD 4Q99
Holiday Inn Glen Burnie North....................... 128 Glen Burnie, MD 1Q00
Holiday Inn Grand Island............................ 265 Grand Island, NY 1Q00
Holiday Inn Inner Harbor............................ 373 Baltimore, MD 1Q00
Holiday Inn Jekyll Island........................... 199 Jekyll Island, GA 1Q00
Holiday Inn Lancaster (East)........................ 189 Lancaster, PA 1Q00
Holiday Inn New Haven............................... 160 New Haven, CT 1Q00
Holiday Inn Rolling Meadows......................... 422 Rolling Meadows, IL 3Q99
Holiday Inn Select Niagara Falls.................... 395 Niagara Falls, NY 1Q00
Holiday Inn York (Arsenal Rd.)...................... 100 York, PA 1Q00
Holiday Inn York (Market St.)(5).................... 120 York, PA N/A
Sheraton West Palm Beach............................ 350 West Palm Beach, FL 2Q99
Town Center Hotel Silver Spring..................... 254 Silver Spring, MD 1Q00
------
SUBTOTAL........................................ 4,593
------
UNDER CONSTRUCTION
- ----------------------------------------------------
Courtyard by Marriott Livermore..................... 122 San Francisco, CA 3Q99
Hilton Garden Inn Lake Oswego....................... 181 Lake Oswego, OR 1Q00
Marriott City Center Portland....................... 249 Portland, OR 3Q99
------
SUBTOTAL........................................ 552
------
TOTAL........................................... 25,375
------
------
</TABLE>
- ------------------------
(1) These hotels were newly constructed.
(2) This hotel is owned by third parties and is currently being renovated.
(3) These hotels are partially owned and consolidated.
(4) This hotel is partially owned and not consolidated.
(5) We are in the process of selling this hotel.
Sixteen of our hotels are located on land subject to long-term leases.
Generally, the leases are for terms in excess of the depreciable lives of the
improvements or contain a purchase option and provide for fixed rents. In
certain instances, additional rents, based on a percentage of revenue or cash
flow, may be payable. The leases generally require us to pay the cost of
repairs, insurance and real estate taxes.
FRANCHISE AFFILIATIONS
We believe that our strong brand affiliations bring many benefits in terms
of guest loyalty and market share premiums. With 73% of our portfolio composed
of Holiday Inn and Marriott hotels, we believe that we are well-positioned to
take advantage of superior brand equity, quality standards and reservation
contribution. As a result of our renovations and improvements, as well as
improvements made by other
64
<PAGE>
franchisees under the "Holiday Inn Worldwide Core Modernization" program, we
believe that the Holiday Inn image will be greatly enhanced. In addition, we
believe that Marriott continues to be a very strong name among travelers and in
the industry, providing consistently high quality products and service. Our
hotels also benefit from both franchisors' toll free reservation numbers, which
contribute approximately 30% of our total reservations for these brands.
At July 31, 1999, substantially all of our owned hotels were affiliated with
national franchisors, as set forth in the following table:
<TABLE>
<CAPTION>
TOTAL
------------------------------
<S> <C> <C>
NO. OF HOTELS NO. OF ROOMS
--------------- -------------
Bass Hotels and Resorts(1)....................................... 81 16,266
Marriott International(2)........................................ 18 2,229
Starwood(3)...................................................... 6 1,736
Hilton........................................................... 6 1,086
Promus(4)........................................................ 5 984
Choice Hotel(5).................................................. 5 803
Omni............................................................. 2 605
Best Western..................................................... 3 499
Radisson......................................................... 2 407
Cendant.......................................................... 2 132
Other............................................................ 3 538
--- ------
Total owned.............................................. 133 25,285
--- ------
--- ------
</TABLE>
- ------------------------
(1) Holiday Inn, Holiday Inn Select and Crowne Plaza brands.
(2) Marriott, Courtyard by Marriott and Fairfield Inn brands.
(3) Westin, Four Points and Sheraton brands.
(4) Doubletree brands.
(5) Comfort Inn and Suites and Clarion brands.
Franchisors provide a number of services to hotel operators which can
positively contribute to the improved financial performance of their properties,
including national reservation systems, marketing and advertising programs and
direct sales programs. We believe that noted franchisors with larger numbers of
hotels enjoy greater brand awareness among potential hotel guests than those
with fewer numbers of hotels. Hotels typically operate with high fixed costs,
and increases in revenues generated by affiliation with a national franchisor
can, at times, contribute positively to a hotel's financial performance.
Our license agreements with the national hotel franchisors typically
authorize the operation of a hotel under the licensed name, at a specific
location or within a specific area, and require that the hotel be operated in
accordance with standards specified by the licensor. Generally, the license
agreements require us to pay a royalty fee, an advertising/marketing fee, a fee
for the use of the licensor's nationwide reservation system and certain
ancillary charges. Royalty fees under our various license agreements generally
range from 3% to 6.5% of gross room revenues, while advertising/marketing fees
provided for in the agreements generally range from 1% to 2% of gross room
revenues and reservation system fees generally range from 1% to 2.5% of gross
room revenues. In the aggregate, royalty fees, advertising/ marketing fees and
reservation system fees range from 6% to 9% of gross revenues. The license
agreements are subject to cancellation in the event of a default, including the
failure to operate the hotel in accordance with the quality standards and
specifications of the licensor. The license agreements generally have an
original ten-year term, although certain license agreements provide for original
15 and 20-year terms. The majority of our license agreements have five to ten
years remaining on the term. The licensor may require us to upgrade our
facilities at any time to comply with the licensor's then current standards. The
licensee may apply for a license renewal as existing licenses expire. In
connection with license
65
<PAGE>
renewals, the licensor may require payment of a renewal fee, increased royalty
and other recurring fees and substantial renovation of the facility or the
licensor may elect not to renew the license. It is our policy to review
individual property franchise affiliations at the time of property acquisition
and, thereafter, on a regular basis. These reviews may result in changes in such
affiliations.
JOINT VENTURES; MANAGEMENT AGREEMENTS
In addition to operating the 121 hotels which we wholly owned at June 30,
1999, we operated 11 hotels owned in partnerships in which we have a 50% or
greater equity interest and one hotel owned in partnership in which we have a
minority equity interest. In each case in which a hotel is owned in partnership,
to varying extents we share decision making authority with our joint venture
partners and may not have sole discretion with respect to a hotel's disposition.
We are currently negotiating the terms of a development joint venture, under
which we would contribute three development parcels for a 15% interest in the
venture, sell two existing hotels to the venture for fair market value and be
retained by the venture as manager of the venture's properties. If the venture
is completed, we would expect to receive management fees equal to 2% of gross
revenues with an incentive fee for exceeding certain negotiated amounts.
In addition to the hotels we own or in which we have an ownership interest,
at June 30, 1999, we managed two hotels for third parties: the Courtyard by
Marriott in Tifton, Georgia and the Radisson in Chattanooga, Tennessee. These
hotels are managed in accordance with written management agreements. Our
management agreements provide that we be paid a base fee calculated as a
percentage of gross revenues and generally provide for an accounting services
fee and an incentive management fee. The incentive fees are generally a
percentage of gross operating profits exceeding negotiated amounts. All
operating and other expenses are paid by the owner. The existing management
agreements have remaining terms of one and five years and pay us management fees
of 3% and 4% of gross sales, respectively.
One of our hotels, the Westin William Penn Hotel located in Pittsburgh,
Pennsylvania, is managed by Starwood Hotels & Resorts, an unaffiliated third
party. The terms of this management agreement, which expires in December 31,
2010, provide for the manager to receive the greater of a base fee of 3% of
gross revenues or an incentive fee based on profits available for debt service.
The agreement also provides that we are responsible to make funds available for
capital improvements.
COMPETITION AND SEASONALITY
The hotel business is highly competitive. We compete with other facilities
on various bases, including room prices, quality, service, location and
amenities customarily offered to the traveling public. The demand for
accommodations and the resulting cash flow vary seasonally. The off-season tends
to be the winter months for properties located in colder weather climates and
the summer months for properties located in warmer weather climates. Levels of
demand are dependent upon many factors including general and local economic
conditions and changes in levels of tourism and business-related travel. Our
hotels depend upon both commercial and tourist travelers for revenues.
Generally, our hotels operate in areas that contain numerous other competitive
lodging facilities, including hotels associated with franchisors which may have
more extensive reservation networks than those which may be available to us.
We also compete with other hotel owners and operators with respect to (1)
licensing upscale and mid-priced franchises in targeted markets, (2) acquiring
hotel properties to renovate and reposition, and (3) acquiring development sites
for new hotel properties. Our competition is highly fragmented and is composed
of relatively small, private owners and operators of hotel properties, public
REITs and private equity funds.
EMPLOYEES
At June 30, 1999, we had approximately 8,000 full-time and 4,000 part-time
associates. We had 150 full time associates engaged in administrative and
executive activities. The balance of our associates manage,
66
<PAGE>
operate and maintain our properties. At June 30, 1999, approximately 1,500 of
our full- and part-time associates located at 11 hotels were covered by
collective bargaining agreements which expire between September 1999 and
December 2001. We consider relations with our associates to be good.
INSURANCE
We maintain insurance covering liabilities for personal injuries and
property damage. We also maintain, among other types of insurance coverage, real
and personal property insurance, directors and officers liability insurance,
liquor liability insurance, workers' compensation insurance, travel accident
insurance for certain of our employees, fiduciary liability insurance and
business automobile insurance. We believe we maintain sufficient insurance
coverage for the operation of our business.
REGULATION
Our hotels are subject to certain federal, state and local regulations and
we must obtain and maintain various licenses and permits. All such licenses and
permits must be periodically renewed and may be revoked or suspended for cause
at any time. Certain of these licenses and permits are material to our business
and the loss of such licenses could have a material adverse effect on our
financial condition and results of operations. We are not aware of any reason
why we should not be in a position to maintain our licenses.
We are subject to certain federal and state labor laws and regulations such
as minimum wage requirements, regulations relating to working conditions, laws
restricting the employment of illegal aliens and the Americans with Disabilities
Act. As a provider of restaurant services, we are also subject to certain
federal, state and local health laws and regulations. We believe we comply with
such laws and regulations in all material respects. We are also subject in
certain states to dramshop statutes, which may give an injured person the right
to recover damages from any establishment which wrongfully served alcoholic
beverages to the person who, while intoxicated, caused the injury. We believe
that our insurance coverage with respect to any such liquor liability is
adequate.
To date, federal and state environmental regulations have not had a material
effect on our operations. However, such laws potentially impose cleanup costs
for hazardous waste contamination on property owners. If any material hazardous
waste contamination problems do exist on any of our properties, we may be
exposed to liability for the costs associated with the cleanup of such sites.
LEGAL PROCEEDINGS
On June 1, 1999, a contractor hired by Servico to perform work on six
properties in New York, Illinois and Texas filed a summons with notice against
us in the Supreme Court of the State of New York, claiming breach of contract
and quantum meruit, among other things. The contractor is seeking damages in the
aggregate amount of $45 million. The contractor is required to file a formal
complaint. We have filed an appearance to the summons and will vigorously defend
our position. We believe we have valid defenses and counterclaims and that the
outcome will not have a material adverse effect on our financial position or
results of operations.
We are a party to other legal proceedings arising in the ordinary course of
our business, the impact of which would not, either individually or in the
aggregate, in management's opinion, have a material adverse effect on our
financial condition or results of operations.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of our
directors, nominee for director and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Robert S. Cole.................................... 37 Chief Executive Officer, President and Director
Karyn Marasco..................................... 41 Chief Operating Officer and Executive Vice
President
Kenneth R. Posner................................. 51 Chief Financial Officer and Executive Vice
President
Joseph C. Calabro................................. 48 Chairman of the Office of the Chairman of the
Board of Directors and Director
Peter R. Tyson.................................... 52 Director
John Lang......................................... 44 Director
Michael A. Leven.................................. 62 Director
Richard H. Weiner................................. 49 Director
</TABLE>
ROBERT S. COLE has been the Chief Executive Officer and President of Lodgian
since the Merger. From 1990 until the Merger, Mr. Cole was the President of
Impac and its predecessors and affiliates. Prior to that time, he held a variety
of general manager positions in hotels throughout the United States.
KARYN MARASCO has been the Chief Operating Officer and Executive Vice
President of Lodgian since the Merger. From 1997 until the Merger, Ms. Marasco
was the Chief Operating Officer and Executive Vice President of Servico. Prior
to such time, Ms. Marasco was affiliated with Westin Hotels & Resorts for 18
years. Most recently, Ms. Marasco served as Westin's Area Managing Director,
based in Chicago.
KENNETH R. POSNER was appointed Chief Financial Officer and Executive Vice
President of Lodgian, effective April 1999. From 1981 until he joined Lodgian,
Mr. Posner served as Chief Financial Officer of the Hyatt Group of Companies.
JOSEPH C. CALABRO has been a director of Lodgian since the Merger and was a
director of Servico from August 1992 until the Merger. Mr. Calabro has been a
principal of Joseph C. Calabro, C.P.A., a Devon, Pennsylvania accounting firm,
since 1982. Mr. Calabro has also been an officer and director of Bibsy
Corporation, which previously owned and operated a Holiday Inn hotel in
Bensalem, Pennsylvania, since 1971.
JOHN M. LANG has been a director of Lodgian since the Merger. Mr. Lang is
the President of Lang Capital Partners, LLC, a private real estate venture firm
based in Atlanta, Georgia. From June 1996 until May 1998, Mr. Lang served as
Chief Executive Officer of ProTrust Capital, Inc. ("ProTrust"), a private
investment firm based in Atlanta, Georgia. Prior to joining ProTrust in June
1996, Mr. Lang, an attorney, was the managing partner of Reece & Lang, P.S.C., a
London, Kentucky law firm with offices in Atlanta.
MICHAEL A. LEVEN has been a director of Lodgian since the Merger and was a
director of Servico from August 1997 until the Merger. Since October 1995, Mr.
Leven has been President and Chief Executive Officer of US Franchise Systems,
Inc., which sells franchises for Hawthorne Suites, Best Inns and Microtel
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Inns hotel brands. From October 1990 until September 1995, Mr. Leven was
President and Chief Operating Officer of Holiday Inn Worldwide.
PETER R. TYSON has been a director of Lodgian since the Merger and was a
director of Servico from August 1992 until the Merger. From December 1990 to the
present, Mr. Tyson has been President of Peter R. Tyson & Associates, Inc., a
firm offering consulting services to clients in the hospitality industry. Prior
to forming Peter R. Tyson & Associates, Inc., Mr. Tyson was the
partner-in-charge of the hospitality industry consulting practice in the
Philadelphia office of the accounting and consulting firm of Laventhol &
Horwath, with which he was associated for 20 years.
RICHARD H. WEINER has been a director of Lodgian since the Merger and was a
director of Servico from August 1992 until the Merger. Mr. Weiner is a senior
partner in the Albany, New York law firm of Cooper, Erving, Savage, Nolan &
Heller, where he has practiced law since 1975.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by us, to or on behalf of the Chief Executive
Officer and to each of our three most highly compensated executive officers
other than the Chief Executive Officer during the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ AWARDS
OTHER SECURITIES ALL OTHER
ANNUAL UNDERLYING COMPEN-
COMPEN- OPTIONS/SARS SATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION (7) (8)
- ------------------------------------------- --------- ---------- ---------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Cole............................. 1998 $ 17,308 $ -- $ -- 185,000 $ --
Chief Executive Officer and President(1)
David Buddemeyer........................... 1998 $ 358,269 $ -- $ 1,282,500(5) -- $ --
Chairman of the Board, Chief Executive 1997 385,000 120,000 -- 400,000 2,948
Officer and President(2) 1996 350,000 96,745 -- 13,500 4,726
Karyn Marasco.............................. 1998 $ 235,000 $ 100,000 $ -- -- $ 20,106
Chief Operating Officer and Executive 1997 137,269 60,000 -- 125,000 --
Vice President(3)
Warren M. Knight........................... 1998 $ 215,000 $ 60,000 $ -- -- $ 2,500
Chief Financial Officer and Vice 1997 188,000 60,000 -- 75,000 3,556
President--Finance 1996 170,000 46,990 -- 13,500 4,844
Peter J. Walz.............................. 1998 $ 157,500 $ -- $ 249,909(6) -- $ 2,500
Vice President--Acquisitions(4) 1997 150,000 -- 174,700(6) 100,000 3,793
1996 122,596 139,438(6) 15,000 2,375
</TABLE>
- ------------------------
(1) Mr. Cole has served as President and Chief Executive Officer of Lodgian
since December 11, 1998.
(2) Mr. Buddemeyer served as Chairman of the Board, President and Chief
Executive Officer of Servico until his resignation on November 10, 1998.
(3) Ms. Marasco's employment with Servico began in May 1997.
(4) Mr. Walz's employment with Servico began in January 1996.
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(5) Represents severance payments made to Mr. Buddemeyer in connection with his
separation from Servico.
(6) Represents commission payments made to Mr. Walz.
(7) Represents the number of shares of common stock underlying the options/SARs.
(8) Each item included in this column represents a contribution made by Servico
under its 401(k) Plan on behalf of the named executive based on such
executive's annual elective pre-tax deferred contribution (included under
Salary) to such plan, except for Ms. Marasco, whose figure also includes a
relocation allowance of $19,687.
STOCK OPTION PLAN
Our Stock Option Plan provides for the issuance of incentive stock options
within the meaning of Section 422A of the Internal Revenue Code of 1986 (the
"Internal Revenue Code") and non-qualified stock options not intended to meet
the requirements of Section 422A of the Internal Revenue Code. The plan is
administered by a committee of the Board of Directors which, subject to the
terms of the plan, determines to whom grants are made and the vesting, timing
and amounts of such grants.
The following table sets forth information concerning stock option grants
made during 1998 to the executive officers named in the "Summary Compensation
Table," including the potential realizable value of each grant assuming that the
market value of the Common Stock appreciates from the date of grant to the
expiration of the option at annualized rates of 5% and 10%, in each case
compounded annually over the term of the option. These assumed rates of
appreciation have been specified by the Securities and Exchange Commission for
illustration purposes only and are not intended to predict future prices of the
Common Stock. The actual future value of the options will depend on the market
value of the Common Stock.
STOCK OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF
SECURITIES TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS/SARS EXERCISE APPRECIATION FOR OPTION
OPTIONS/SARS GRANTED TO PRICE EXPIRATION ------------------------
NAME GRANTED EMPLOYEES ($/SH) DATE 5% 10%
- -------------------------------------------- ------------- --------------- ----------- ----------- ---------- ------------
Robert S. Cole (1).......................... 185,000 24.5% $ 6.125 12/11/08 $ 712,616 $ 1,805,909
David Buddemeyer (2)........................ -- -- -- -- -- --
Karyn Marasco............................... -- -- -- -- -- --
Warren M. Knight............................ -- -- -- -- -- --
Peter J. Walz............................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Mr. Cole has served as President and Chief Executive Officer of Lodgian
since December 11, 1998; Mr. Cole's options were initially issued with an
exercise price of $17.75, but were repriced on December 18, 1998 to $6.125.
(2) Mr. Buddemeyer served as Chairman of the Board, President and Chief
Executive Officer of Servico until his resignation on November 10, 1998.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase Servico's Common Stock as of
December 31, 1998, under Servico's Stock Option Plan held by the executive
officers named in the "Summary Compensation Table."
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STOCK OPTION EXERCISES IN FISCAL YEAR
1998 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS HELD AT FISCAL OPTIONS/SARS AT
VALUE YEAR-END (#) FISCAL YEAR-END ($) (3)
NAME AND POSITION DURING ACQUIRED ON REALIZED --------------------------- --------------------------
1998 FISCAL YEAR EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ------------- ----------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Cole........................... -- -- -- 185,000 -- --
Chief Executive Officer and
President(1)
David Buddemeyer......................... -- -- 270,700 252,800 78,750 --
Chairman of the Board, President and
Chief Executive Officer(2)
Karyn Marasco............................ -- -- 50,000 75,000 -- --
Chief Operating Officer and Executive
Vice President
Warren M. Knight......................... -- -- 130,900 55,100 69,375 --
Chief Financial Officer and
Vice President--Finance
Peter J. Walz............................ -- -- 46,000 69,000 -- --
Vice President--Acquisitions
</TABLE>
- ------------------------
(1) Mr. Cole has served as President and Chief Executive Officer of Lodgian
since December 11, 1998.
(2) Mr. Buddemeyer served as Chairman of the Board, President and Chief
Executive Officer of Servico until his resignation on November 10, 1998.
(3) The value of unexercised in-the-money options/SARs represents the number of
options/SARs held at year-end 1998 multiplied by the difference between the
exercise price and $4.75, the closing price of Lodgian's Common Stock at
year-end 1998.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT
EMPLOYMENT AGREEMENTS
ROBERT COLE entered into an employment agreement with Lodgian relating to
his employment as President and Chief Executive Officer, as of December 11,
1998. The employment agreement provided for a base salary subject to increases
and bonuses, including a bonus of up to 100% of his base salary, in each case,
at the discretion of the Board of Directors. The base salary paid to Mr. Cole
during 1998 was $17,308 (base salary of $300,000 for the period of December 11,
1998 through year end). Mr. Cole also receives paid health insurance, paid
disability insurance and is entitled to participate, to the extent eligible,
under any benefit plans provided to other executives of Lodgian. Mr. Cole is
entitled to a minimum of four weeks paid vacation annually. Mr. Cole's
employment agreement contains provisions for payments to Mr. Cole in the event
of a change in control, as described more fully under "--Arrangements Regarding
Termination of Employment and Changes of Control."
DAVID BUDDEMEYER entered into an employment agreement with Servico relating
to his employment as President and Chief Operating Officer, as of May 14, 1993.
Effective December 21, 1995, Mr. Buddemeyer was elected Chief Executive Officer
of Servico and continued in that position until his resignation on November 10,
1998. The employment agreement provided for a base salary subject to increases
and bonuses, in each case, at the discretion of the Board of Directors. The base
salary paid to Mr. Buddemeyer during 1998 was $348,411 (base salary of $405,000
for the period of January 1, 1998 through November 10, 1998). Mr. Buddemeyer
also received paid health insurance, paid disability insurance and was entitled
to
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participate, to the extent eligible, under any benefit plans provided to other
executives of Servico. Mr. Buddemeyer was entitled to a minimum of four weeks
paid vacation annually.
KENNETH POSNER entered into a two-year automatically extendable employment
agreement with Lodgian relating to his employment as Chief Financial Officer, as
of April 9, 1999. The employment agreement provides for a base salary of
$250,000 subject to increases and bonuses, in each case at the discretion of the
Board of Directors. Mr. Posner also receives paid health insurance, paid
disability insurance and is entitled to participate, to the extent possible,
under any benefit plans provided to other executives of Lodgian. Mr. Posner is
entitled to a minimum of four weeks paid vacation annually. Posner is also
entitled to receive the benefits offered other executive officers, including a
bonus of up to 100% of salary, payable at the discretion of the Board. Pursuant
to the terms of his employment agreement, Mr. Posner was granted options to
acquire 400,000 shares of Lodgian Common Stock, 20% of which will vest per year
beginning April 9, 2000. The employment agreement is terminable upon 30 days
notice but in the event Mr. Posner is terminated other than "for Cause," as
defined in the agreement, he will be entitled to his base salary and benefits
under the agreement for the greater of the unexpired term or one year.
KARYN MARASCO entered into a three-year employment agreement with Servico
relating to her employment as Executive Vice President and Chief Operating
Officer of Servico on May 2, 1997. On November 24, 1998, the agreement was
extended for a period of one year. This agreement was assumed by Lodgian and is
still in effect. The employment agreement provides for a base salary of $235,000
subject to increases and bonuses in the discretion of the Board. Ms. Marasco is
also entitled to receive the benefits offered other executive officers. Pursuant
to the terms of her employment agreement, in 1997 Ms. Marasco was granted
options to acquire 50,000 shares of Lodgian Common Stock with options with
respect to 10,000 of such shares vesting immediately and 10,000 vesting
annually. The employment agreement is terminable upon 30 days notice but in the
event Ms. Marasco is terminated other than "for Cause," as defined in the
agreement, she will be entitled to her base salary and benefits under the
agreement for the greater of the unexpired term or one year.
ARRANGEMENTS REGARDING TERMINATION OF EMPLOYMENT AND CHANGES OF CONTROL
On November 10, 1998, David Buddemeyer, Servico's Chairman and Chief
Executive Officer, resigned from Servico. Servico and Lodgian paid to Mr.
Buddemeyer an aggregate severance pay equal to $1,282,500. Lodgian will continue
insurance coverage for Mr. Buddemeyer, on the same terms and conditions as would
be applicable if Mr. Buddemeyer were an active employee, under Lodgian's life
insurance, group disability benefits and similar welfare benefit plans for a
period of one year. Mr. Buddemeyer holds currently exercisable stock options to
purchase 423,500 shares of Lodgian's Common Stock which were originally granted
to him pursuant to Servico's Stock Option Plan and 100,000 stock appreciation
rights. The stock options or stock appreciation rights will continue to vest at
the same time they would have vested had Mr. Buddemeyer remained an employee of
Lodgian.
In addition, on February 28, 1999, Warren Knight, Lodgian's then Chief
Financial Officer, resigned and was replaced on an interim basis by Lawrence
Carballo. Lodgian paid to Mr. Knight an aggregate severance pay equal to
$350,000 and a bonus in compensation for services rendered during 1998 equal to
$60,000. Lodgian will continue insurance coverage for Mr. Knight, on the same
terms and conditions as would be applicable if Mr. Knight were an active
employee, under the Company's life insurance, group disability benefits and
similar welfare benefit plans for a period of one year. Mr. Knight holds
currently exercisable stock options to purchase 173,500 shares of Lodgian's
Common Stock which were originally granted to him pursuant to Servico's Stock
Option Plan and 12,500 stock appreciation rights. The stock options or stock
appreciation rights will continue to vest at the same time they would have
vested had Mr. Knight remained an employee of Lodgian.
The employment agreement between Lodgian and Mr. Cole provides for payments
to Mr. Cole in an amount equal to two and one-half times his annual base
compensation, less any other cash severance
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payments contractually owed to him by Lodgian, in the event that there is either
a change in the majority of the Board of Directors or the acquisition by any
individual or group of in excess of 50% of Lodgian's outstanding Common Stock,
and the duties or responsibilities of Mr. Cole are materially diminished within
24 months thereafter.
DIRECTOR COMPENSATION
During 1998, Servico paid non-employee directors a total annual retainer of
$18,000, as well as a fee per board meeting or board committee meeting of
$1,000. Mr. David Buddemeyer, who served as Chairman of the Board of Servico
until his resignation from that Board in November 1998, received no compensation
for serving as Servico's Chairman from January to November 1998.
In December 1998, Lodgian adopted a fee schedule for board members to
provide for a $24,000 total annual retainer, as well as fees of $1,500 per board
meeting, $1,000 per board committee meeting, and $500 per telephonic board or
board committee meeting. In addition, Mr. Joseph C. Calabro, in lieu of the
normal annual retainer and per meeting fees, is receiving annual director
compensation of $100,000 for services rendered to Lodgian in his capacity as
Chairman of the Office of the Chairman of the Board. Mr. Robert Cole, who served
on Lodgian's Board of Directors from December 11 until December 31, 1998,
received no compensation for serving as a member of Lodgian's Board.
Servico and Lodgian also reimbursed directors for expenses associated with
attending Board and committee meetings of the respective companies.
Under Lodgian's Stock Option Plan, each non-employee director is
automatically granted, on the date such director's term of office commences and
each year thereafter on the day following any annual meeting of stockholders (as
long as such director's term as a director is continuing for the ensuing year),
an option to acquire 5,000 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant. All options
granted to non-employee directors become exercisable upon grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, through the time of the Merger, the following directors served
on the Compensation Committee of the Board of Directors: Joseph C. Calabro,
Peter R. Tyson and Richard H. Weiner. Following the Merger, the following
directors served on the Compensation Committee: John M. Lang, Michael A. Leven,
Peter R. Tyson and Richard H. Weiner. None of such persons is or has been an
executive officer of Lodgian, and no interlocking relationships exist between
any such person and the directors or executive officers of Lodgian.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
Common Stock as of June 25, 1999, by (1) each person known to Lodgian to be the
beneficial owner of more than 5% of the issued and outstanding Common Stock as
of June 25, 1999, (2) each of the members of Lodgian's Board of Directors, (3)
each of Lodgian's executive officers named in the "Summary Compensation Table"
under "Executive Compensation" below, and (4) all directors and executive
officers of Lodgian as a group. All shares were owned directly with sole voting
and investment power unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK PERCENT OF COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER AND ADDRESS OF 5% BENEFICIAL OWNER OWNED (1) OWNED (2)
- --------------------------------------------------------------- ----------------------- ---------------------------
<S> <C> <C>
BENEFICIAL OWNERS OF 5% OR MORE OF OUTSTANDING
COMMON STOCK:
Heitman/PRA Securities Advisors, Inc. ......................... 2,205,100(3) 8.1%
180 North LaSalle Street, Suite 3600
Chicago, IL 60601
Prudential Insurance Company of America ....................... 2,113,000(4) 7.8%
751 Broad Street
Newark, NJ 07102-3777
Eagle Asset Management, Inc. .................................. 1,788,310(5) 6.6%
880 Carillon Parkway
St. Petersburg, FL 33716
Dimensional Fund Advisors ..................................... 1,538,000(6) 5.7%
1299 Ocean Avenue, 11(th) Floor
Santa Monica, CA 90401
DIRECTORS:
Robert S. Cole................................................. 622,843 2.3%
Joseph C. Calabro.............................................. 261,100(7) *
John M. Lang................................................... 326,116(8) 1.2%
Michael A. Leven............................................... 30,700(9) *
Peter R. Tyson................................................. 55,500(10) *
Richard H. Weiner.............................................. 55,100(10) *
NON-DIRECTOR EXECUTIVE OFFICERS:
David Buddemeyer............................................... 304,219(11) 1.1%
Karyn Marasco.................................................. 77,700(10) *
Warren M. Knight............................................... 138,311(12) *
Peter J. Walz.................................................. 49,000(13) *
Lawrence Carballo.............................................. 17,400(14) *
All directors and executive officers as a group (11 persons)... 1,937,989(15) 6.9%
</TABLE>
- ------------------------
* Represents less than 1%.
(1) This number does not include those shares of Lodgian to be distributed upon
conversion of Servico shares and Impac units pursuant to the Merger which
have as yet not been converted.
(2) Ownership percentages are based on 27,218,161 shares of Common Stock
(including 15,689 shares to be issued pursuant to Lodgian's Stock Option
Plan) outstanding as of June 25, 1999 and any Common Stock that such named
individual or group has the right to acquire within 60 days.
(3) Heitman/PRA Securities Advisors, Inc. filed a Schedule 13G dated October 15,
1998 with the SEC reporting ownership of 2,205,100 shares of Common Stock of
Lodgian's predecessor, Servico, with
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sole voting power with respect to 2,147,400 shares, sole dispositive power
with respect to 2,172,500 shares, and shared dispositive power with respect
to 32,600 shares.
(4) Prudential Insurance Company of America filed a Schedule 13G dated January
8, 1999 with the SEC reporting ownership of 2,113,000 shares of Common Stock
with sole voting and dispositive power with respect to 1,204,100 shares and
with shared voting and dispositive power with respect to 908,900 shares.
(5) Eagle Asset Management, Inc. filed a Schedule 13G dated January 29, 1999
with the SEC reporting ownership of 1,788,310 shares of Common Stock with
sole voting and dispositive power with respect to such shares.
(6) Dimensional Fund Advisors filed a Schedule 13G dated February 12, 1999 with
the SEC reporting ownership of 1,538,000 shares of Common Stock with sole
voting and dispositive power with respect to such shares.
(7) Includes currently exercisable options to purchase 55,000 shares. Mr.
Calabro has sole voting and dispositive power with respect to 203,100 of
such shares and shares voting and dispositive power with respect to 3,000
shares with his spouse.
(8) The shares in the table above do not include shares beneficially owned by
Hotel Capital II, LLC, a limited liability company whose manager, with sole
voting and dispositive power, is Robert H. Woods (a partner in Lang Capital
Partners, LLC). Mr. Lang is not a member or manager of Hotel Capital II, LLC
and does not have voting or dispositive power with respect to shares owned
by Hotel Capital II, LLC; therefore, such shares are not included in Mr.
Lang's beneficial ownership.
(9) Includes currently exercisable options to purchase 25,000 shares of Common
Stock and 5,700 shares owned by Mr. Leven's spouse.
(10) Includes currently exercisable options to purchase 55,000 shares of Common
Stock.
(11) Includes currently exercisable options to purchase 274,400 shares of Common
Stock.
(12) Includes currently exercisable options to purchase 134,600 shares of Common
Stock.
(13) Includes currently exercisable options to purchase 49,000 shares of Common
Stock.
(14) Includes currently exercisable options to purchase 17,400 shares of Common
Stock.
(15) Includes currently exercisable options to purchase 720,400 shares of Common
Stock.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following parties had a direct or indirect material interest in
transactions with the Company since the beginning of its most recently completed
fiscal year and such transactions are described below.
Mr. Cole is a minority shareholder of Impac Hotel Development ("IHD"), which
provided acquisition and property development services to Impac for a
development fee of 4% of the total project cost of each property acquired or
developed. Impac agreed to terminate this agreement prior to the consummation of
the Merger so that Impac and its subsidiaries will have no further obligations
under the agreement after the Merger other than the payment of up to a 4%
development fee (not to exceed $2.5 million in the aggregate) in the event
Lodgian acquires or develops any of the hotels or properties identified in the
merger agreement as Impac's acquisition and development pipeline.
IHD had contracted with Elegant Interiors, LLC ("Elegant"), an entity wholly
owned by Sheila Lang (the spouse of John M. Lang) to provide interior design
consulting services. In the event IHD, or its assignee, receives payment of the
above-referenced development fees, IHD, or its assignee, will pay Elegant
accrued consulting fees (not to exceed $250,000) with respect to any of the
hotels or properties identified in the merger agreement as being in Impac's
acquisition pipeline.
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DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK
The following description of our indebtedness does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the agreements related to the indebtedness. The following
description of the indebtedness sets forth the terms of certain material credit
agreements currently in place and anticipated to survive the consummation of the
offering.
GMAC COMMERCIAL MORTGAGE CORPORATION LOANS
GENERAL
The GMAC loans are composed of, and evidenced by, among other things, three
separate loan agreements (the "GMAC Loan Agreements"), among several of our
operating subsidiaries (the "GMAC Loan Subsidiaries") and GMAC Commercial
Mortgage Corporation ("GMAC") and three separate mortgage notes (the "GMAC
Mortgage Notes"). The three loan agreements are referred to as "Seldin" (which
includes five hotels in Iowa, Kansas and Nebraska), "Heartland Hotels" (which
includes three hotels in Georgia, Iowa and Ohio) and Lansing (which pertains to
a hotel in Michigan). The aggregate outstanding principal amount under the GMAC
Loans was approximately $34.0 million at June 30, 1999.
INTEREST
The Seldin and Lansing mortgage notes bear interest at 9.875% and the
Heartland Hotels mortgage bears interest at 8.625%.
SECURITY
The indebtedness of the GMAC Mortgage Notes is secured by a limited recourse
mortgage on, and an assignment of the leases and rents from, the nine hotels
referred to above.
TERM AND PREPAYMENT
The notes are repayable in equal monthly installments of principal and
interest based on a seven-year amortization schedule. All amounts outstanding
under the GMAC Mortgage Notes are due and payable February 1, 2003 (Heartland
Hotels), June 1, 2003 (Lansing) and August 1, 2003 (Seldin). The principal
balance of each of the GMAC Loans may be prepaid upon notice, payment of accrued
interest, payment of all other sums due under the GMAC Loan documents and
payment of a prepayment fee.
CERTAIN COVENANTS
In addition to customary covenants, the GMAC Mortgage Notes require, among
other things, that the GMAC Loan Subsidiaries: (a) not transfer or encumber the
mortgaged property; (b) not incur any indebtedness other than the GMAC Mortgage
Notes and certain other limited indebtedness; (c) not permit any lien to exist
on any of its property, assets or revenues, except the limited liens in favor of
GMAC, existing liens and certain other liens; (d) not make any loans to any
third party; and (e) not incur any guarantee obligations, except the guarantee
obligations related to the GMAC Mortgage Notes and certain other guarantee
obligations.
EVENTS OF DEFAULT
Events of default, under the GMAC Mortgage Notes, include, without
limitation, the following: (i) any failure by any of the GMAC Loan Subsidiaries
to pay principal, interest or other obligations under the GMAC Mortgage Notes
when due, (ii) any representation or warranty made by any of the GMAC Loan
Subsidiaries in the GMAC Loan Agreements and related documents proves to have
been untrue in any material respect when made, (iii) any default by GMAC Loan
Subsidiaries in the observance or performance of covenants or other agreements
contained in any of the GMAC Loan Agreements or
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related agreements, (iv) certain events of bankruptcy or insolvency of the GMAC
Loan Subsidiaries or any guarantor, and (v) the occurrence of an event of
default under any other GMAC Loan document.
COLUMN FINANCIAL, INC. LOANS ("COLUMN FINANCIAL LOANS")
GENERAL
The Column Financial Loans are evidenced by, among other things, three loan
agreements (the "Column Financial Loan Agreements"), among several of our
operating subsidiaries (the "Column Financial Loan Subsidiaries"), and Column
Financial, Inc. ("Column Financial"), an affiliate of Donaldson, Lufkin &
Jenrette. The aggregate outstanding principal balance of the Column Financial
Loans was approximately $69.4 million at June 30, 1999.
INTEREST
The Column Financial Loans bear interest at rates of 9.45%, 10.59% and
10.74% on principal balances of $10.1 million, $55.7 million and $3.6 million,
respectively.
SECURITY
The Column Financial Loans are secured by mortgages and assignments of
leases and rents on all of the Column Financial Loan Subsidiaries' 12 hotels.
TERM
The Column Financial Loans mature in March 2005 (for the $3.6 million loan),
in March 2010 (for the $55.7 million loan) and July 2010 (for the $10.1 million
loan).
CERTAIN COVENANTS
In addition to customary covenants, the Column Financial Loans require,
among other things, that the Column Financial Loan Subsidiaries: (a) not incur,
create or assume any outstanding debt other than the Column Financial Loans and
certain other limited indebtedness; (b) not make any advances or loans to any
third party; (c) not enter into or be a party to any transaction with an
affiliate of a Column Financial Loan Subsidiary, with certain limited
exceptions; (d) not permit any lien to exist on any of their properties, assets
or revenues, except the liens in favor of Column Financial, existing liens and
certain other liens; and (e) not amend or modify, terminate or extend, or
consent to assignment of any franchise agreement between any Column Financial
Loan Subsidiary and any franchisor.
EVENTS OF DEFAULT
The Column Financial Loan Agreements contain certain events of default,
including, without limitation, the following: (i) any failure by any of the
Column Financial Loan Subsidiaries to pay principal, interest or other
obligations under the Column Financial Loans when due, (ii) any representation
or warranty made by any of the Column Financial Loan Subsidiaries in the Column
Financial Loan Agreements or related agreements proves to have been untrue in
any material respect when made, (iii) any default by any Column Financial Loan
Subsidiaries in the observance or performance of covenants or other agreements
contained in any Credit Agreement or related agreements, (iv) certain events of
bankruptcy or insolvency of the Column Financial Loan Subsidiaries, and (v) the
occurrence of an event of default under any other Column Financial Loan
documents.
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NOMURA ASSET CAPITAL CORPORATION LOANS ("NOMURA LOANS")
THREE SEPARATE LOAN FACILITIES
Nomura Asset Capital Corporation ("NACC") entered into three separate loan
facilities with certain subsidiaries of Impac in an aggregate principal loan
amount of $337.7 million as of June 30, 1999. The three facilities are
hereinafter referred to as "Nomura I," "Nomura II" and "Nomura III."
NOMURA I
GENERAL
In March 1997, NACC made a $132.5 million term loan (the "Nomura I Loan") to
Impac Hotels I, L.L.C. ("Impac I"), a subsidiary of Impac, to refinance existing
debt on 22 hotel properties acquired by Impac I (the "Nomura I Properties").
NACC has assigned the Nomura I Loan to LaSalle National Bank, as Trustee for
Nomura Depositor Trust ST I, Commercial Mortgage Pass-Through Certificates,
Series 1998-ST I (together with its successors and assigns, the "Nomura I
Lender"). The Nomura I Loan is evidenced by, among other things, a loan
agreement between Impac I and NACC dated as of March 12, 1997 (the "Nomura I
Loan Agreement").
INTEREST
Prior to the Nomura I Adjustment Date (September 11, 1999), the Nomura I
Loan bears interest at a floating interest rate that fluctuates monthly, equal
to 30-day LIBOR plus 2.25%. From and after the Nomura I Adjustment Date,
interest converts to a fixed rate equal to the sum of (a) the implied yield on a
10-year U.S. Treasury note determined as of the earlier of (i) the date on which
the benchmark Treasury rate is locked pursuant to an interest rate management
agreement among Impac, Impac I and NACC (the "Nomura I Interest Rate
Agreement"), and (ii) the third business day prior to the Nomura I Adjustment
Date (the "Nomura I Benchmark Treasury Rate"), plus (b) a spread based on the
debt service coverage ratio ("DSCR") of the Nomura I Properties (which spread
ranges from a low of 1.925% to a high of 3.025%), plus (c), until the Nomura I
Optional Prepayment Date (as defined below), the Additional Nomura I Spread (as
defined below), plus (d) from and after the Nomura I Optional Prepayment Date,
the Additional Nomura I Hyperamortization Spread (as defined below). The
"Additional Nomura I Hyperamortization Spread" is 2.00% for the first monthly
debt service period after the Nomura I Optional Prepayment Date, and 5.00%
thereafter.
INTEREST RATE PROTECTION
Impac I may, from time to time, lock the Nomura I Benchmark Treasury Rate to
be used in calculating the base rate on all or a portion of the Nomura I Loan.
In addition, if prior to the Nomura I Adjustment Date the implied yield of the
10-year Treasury note two years forward exceeds certain pre-determined levels,
Impac I must elect either to lock the Nomura I Benchmark Treasury Rate on a
portion of the Nomura I Loan or prepay a portion of the Nomura I Loan. NACC can
also lock the Nomura I Benchmark Treasury Rate if it exceeds 7.80% or at any
time following the occurrence and during the continuation of an "event of
default" under the Nomura I Loan. If NACC determines prior to the Nomura I
Adjustment Date that it will incur or has incurred losses on its interest rate
hedge positions relating to the rate-locked portion of the Nomura I Loan in
excess of 25% of the net equity of Impac I in the Nomura I Properties, Impac I
or Impac are required to pay to NACC an amount of cash collateral sufficient to
reduce NACC's losses to no more than 20% of the net equity of Impac I in the
Nomura I Properties. Such collateral is returned to Impac I (1) if it converts
the rate-locked portion of the Nomura I Loan to a fixed rate loan, or (2) in the
event such collateral exceeds actual hedging losses, under which circumstances
Impac I is required to pay a monthly maintenance fee equal to eight basis points
on the principal amount of the Nomura I Loan on which the Nomura I Benchmark
Treasury Rate is locked. Of that fee, two basis points are due and payable on a
current basis, and the remainder (together with accrued interest thereon)
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will be recovered by NACC by adding an additional spread (the "Additional Nomura
I Spread") to the base rate from and after the Nomura I Adjustment Date and
prior to the Nomura I Optional Prepayment Date. In addition to the other
collateral described herein, the obligations of Impac and Impac I under the
Nomura I Interest Rate Agreement are secured by a pledge of Impac's 99%
membership interest in Impac I.
REPAYMENT OF PRINCIPAL
Interest-only payments on the Nomura I Loan are due and payable monthly,
prior to the Nomura I Adjustment Date. After the Nomura I Adjustment Date, the
Nomura I Loan is repayable in equal, monthly installments of principal and
interest based on a 20-year amortization schedule. If the Nomura I Loan or any
Split Nomura I Loan has not been prepaid in full by the tenth anniversary of the
applicable Nomura I Adjustment Date (the "Nomura I Optional Prepayment Date"),
excess cash flow from the Nomura I Properties financed by the Nomura I Loan or
the applicable Split Nomura I Loan will be applied monthly to reduce outstanding
principal, in addition to the scheduled installments of principal and interest.
The final maturity date of the Nomura I Loan is March 11, 2019.
PREPAYMENT
The Nomura I Loan may be prepaid in whole or in part without penalty or
premium on or after the Nomura I Optional Prepayment Date. Prior to the Nomura I
Adjustment Date, up to 40% of the Nomura I Loan may be prepaid from the proceeds
of the issuance of additional equity by Impac or from the proceeds of sale of
one or more Nomura I Properties, subject to a scale of increasing premiums
ranging from 0% to 3% of the principal so prepaid. Upon the reacquisition of the
Nomura I Loan from the current Nomura I Lender by Capital Company of America LLC
("CCA") or its designee on the Nomura I Adjustment Date, the Impac I Loan
Agreement will be amended to permit the Nomura I Loan to be prepaid in full, at
the option of Impac I, on the Nomura I Loan reacquisition date, at a prepayment
price equal to (a) 101% of the outstanding principal amount of the Nomura I Loan
or (b) if the Nomura III Loan shall have been prepaid in full (see "Nomura
III--Prepayment" below), 100.5% of the outstanding principal amount of the Impac
I Loan. If the DSCR of the remaining Nomura I Properties as of the Nomura I
Adjustment Date is less than 1.40, the Nomura I Loan must be prepaid in the
amount necessary to bring the DSCR up to 1.40. No prepayment of the Nomura I
Loan or any Split Nomura I Loans is permitted after the Nomura I Adjustment Date
and prior to the Optional Nomura I Prepayment Date; however; Impac I may obtain
the release of one or more Nomura I Properties from the applicable mortgage(s)
securing the Nomura I Loan or the applicable Split Nomura I Loan by defeasing
the portion of such loan allocated to each such Nomura I Property. Defeasance is
achieved by using equity proceeds or proceeds from the sale of each such Nomura
I Property to acquire U.S. Treasury securities in an amount equal to 125% of the
allocated loan amount (or, upon the release of the last Nomura I Property, 100%
of the allocated loan amount), which securities are delivered to the servicer of
the Nomura I Loan or such Split Nomura I Loan as replacement collateral for the
released Nomura I Properties.
Pursuant to an agreement with NACC, we expect to repay this loan on or about
September 11, 1999 with proceeds from our new credit facility.
SPLIT LOANS
The term "Split Nomura I Loans" refers to any refinancing loan made by NACC
pursuant to the Nomura I Loan Agreement to a bankruptcy-remote affiliate of
Impac to which Impac I has transferred a segregated pool of Nomura I Properties
for the purposes of effectively fixing the interest rate on a portion of the
Nomura I Loan and facilitating the securitization thereof by NACC.
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COLLATERAL
The Nomura I Loan is secured by mortgages on each of the 22 Nomura I
Properties (the "Nomura I Mortgages") and by a general security interest in all
personal property and fixtures of Impac I. The Nomura I Mortgages are
cross-collateralized and cross-defaulted with each other.
CERTAIN COVENANTS
In addition to customary covenants, the Nomura Loans require, among other
things, that the Nomura Loan Subsidiaries: (a) not purchase or lease real
property or hold assets other than assets related to the properties subject to
the Nomura Loans; (b) not incur any indebtedness other than the Nomura Loans and
certain other indebtedness; (c) not dissolve, liquidate or merge; and (d) not
engage in any transactions with an affiliate. In addition, Lodgian is required
to maintain a minimum net worth of $133.0 million.
EVENTS OF DEFAULT
The Nomura Loan Agreements contain certain events of default, including,
without limitation, the following: (i) any failure by any of the Nomura Loan
Subsidiaries to pay principal, interest or other obligations under the Nomura
Loans when due, (ii) any representation or warranty made by any of the Nomura
Loan Subsidiaries in the Nomura Loan agreements or related agreements proves to
have been untrue in any material respect when made, (iii) any default by the
Nomura Loan Subsidiaries in the observance or performance of covenants or other
agreements contained in any Nomura Loan documents, (iv) certain events of
bankruptcy or insolvency of any of the Nomura Loan Subsidiaries or any managing
member thereof, and (v) the entering of a judgment or decree against any Nomura
Loan Subsidiary involving an aggregate liability of $1.0 million or more.
NOMURA II
GENERAL
NACC entered into a loan facility (the "Nomura II Loan") with a subsidiary
of Impac, Impac Hotels II, L.L.C. ("Impac II") with an original maximum loan
amount of $150 million. As of June 30, 1999, $160.9 million was outstanding. The
loan amount was later increased to $163.5 million. The loan was made pursuant to
a loan agreement dated as of March 12, 1997 (as amended, the "Nomura II Loan
Agreement") between Impac II and NACC to finance a portion of the cost of
acquiring, constructing and rehabilitating 18 additional hotel properties (the
"Nomura II Properties"). NACC has transferred the Nomura II Loan to CCA
(together with its successors and assigns, the "Nomura II Lender"). The entire
Nomura II Loan has been committed to identified Impac II Properties. All
advances under the Nomura II Loan Agreement must be made and all construction
and rehabilitation of the Nomura II Properties completed by October 18, 1999.
INTEREST
Prior to the Nomura II Adjustment Date (as defined below) the Nomura II Loan
bears interest at a floating interest rate that fluctuates monthly, equal to
30-day LIBOR plus 2.75%. From and after the Nomura II Adjustment Date, interest
converts to a fixed rate as described above in "Nomura I--Interest", except that
(i) the date on which the benchmark Treasury rate is locked is pursuant to a
separate interest rate management agreement among Impac, Impac II, and the
Nomura II Lender (the "Nomura II Interest Rate Lock Agreement"), and (ii) the
spread based on the DSCR of the Nomura II Properties ranges from a low of 1.925%
to a high of 3.250%.
The Nomura II Adjustment Date will be the earlier of (y) October 18, 2000,
and (z) with respect to any portion of the Nomura II Loan that becomes a Split
Nomura II Loan (as defined below), the date on which such portion of the Nomura
II Loan becomes a Split Nomura II Loan. It is anticipated that Nomura
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II Lender will securitize the Nomura II Loan and any Split Nomura II Loan after
the applicable Nomura II Adjustment Date.
INTEREST RATE PROTECTION
The Nomura II Interest Rate Lock Agreement contains substantially similar
terms as those set forth under "Nomura I--Interest Rate Protection" above except
that the Nomura II Benchmark Treasury Rate is based on a four-year forward rate
rather than a two-year forward rate, and the prepayment amounts differ in the
event the Nomura II Benchmark Treasury Rate exceeds the pre-determined
thresholds. Pursuant to the terms of the Nomura II Interest Rate Agreement,
Impac II locked the Nomura II Benchmark Treasury Rate on $54 million of the
Nomura II Loan at 7.235% during April, 1997. In the event that Lodgian
determines that it is in its best interest to "break" that interest rate lock,
it would be required to pay a significant fee to the Nomura II Lender.
REPAYMENT OF PRINCIPAL
Principal and interest payments are to be made on the same terms as are
described above under "Nomura I--Repayment of Principal," except that the
schedule refers to the Nomura II Adjustment Date and the Nomura II Optional
Prepayment Date (which is the tenth anniversary of the Nomura II Adjustment
Date). The final maturity date of the Nomura II Loan is October 31, 2020.
PREPAYMENT
The Nomura II Loan may be prepaid on the same terms and under the same
conditions as are described under "Nomura I--Prepayment" above, except that all
references to Nomura I refer instead to Nomura II and except that Impac II does
not have the right to prepay the Nomura II Loan in full on the Nomura II
Adjustment Date.
SPLIT LOANS
Prior to the scheduled Nomura II Adjustment Date, the Nomura II Loan can be
split at the option of Impac II to effectively fix the interest rate thereon,
similar to the concept of Split Nomura I Loans discussed under the heading
"Nomura I--Split Loans" above (each portion so split, a "Split Nomura II Loan").
COLLATERAL
The Nomura II Loan is secured by first-priority mortgages on each Nomura II
Property (the "Nomura II Mortgages") and by a general security interest in all
personal property and fixtures of Impac II. The Nomura II Mortgages are
cross-collateralized and cross-defaulted with each other.
GUARANTEES
Impac has guaranteed the repayment of the portion of the Nomura II Loan
funding rehabilitation and construction costs (but not the acquisition costs) of
the Nomura II Properties. These guarantees expire upon completion of
rehabilitation or construction (as applicable). Currently, only $24.3 million of
such guarantees remain outstanding related to the Marriott Hotel being
constructed in Portland, Oregon which is expected to be completed no later than
the fall of 1999. In addition, where Impac II elected to increase the Nomura II
Loan for any particular Nomura II Property above 65% of the approved project
costs (but not higher than 80%), Impac has guaranteed repayment of such excess
(the "Guaranteed Differential") until the Nomura II Properties in question have
achieved a trailing 12-month DSCR of not less than 1.20. Three hotels have
passed the DSCR test, resulting in the expiration of Impac's guaranty of the
Guaranteed Differential with respect to such hotels. The aggregate amount of the
Guaranteed Differential still guaranteed by Impac is approximately $23.5
million.
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In December, 1998, as a condition to obtaining the consent of the Nomura II
Lender to the Merger transaction, Lodgian executed a joinder agreement pursuant
to which it became jointly and severally liable with Impac under the foregoing
payment guarantees pertaining to the Nomura II Loan.
CERTAIN COVENANTS AND EVENTS OF DEFAULT
The covenants and events of default provisions of the Nomura II Loan are in
all material respects essentially the same as those for the Nomura I Loan.
NOMURA III
GENERAL
NACC has extended a loan (the "Nomura III Loan") to a subsidiary of Impac,
Impac Hotels III, LLC. ("Impac III") in a maximum amount of $100 million, of
which approximately $44.4 million was funded at June 30, 1999. The loan was made
pursuant to a loan agreement between Impac III and NACC dated as of October 29,
1997 (as amended, the "Nomura III Loan Agreement") to finance a portion of the
cost of acquiring, constructing and rehabilitating nine hotel properties (the
"Nomura III Properties"). NACC has transferred the Nomura III Loan to CCA
(together with its successors and assigns, the "Nomura III Lender").
TERMS AND CONDITIONS
The terms and conditions of the Nomura III Loan are in all material respects
essentially the same as those for the Nomura II Loan, except as follows: (a) the
outside Nomura III Adjustment Date is October 11, 2001, (b) all advances under
the Nomura III Loan for the acquisition of a Nomura III Property must have been
made by October 31, 1998, (c) the rehabilitation and construction of the Nomura
III Properties must be completed by October 31, 2000, (d) the Nomura III Loan
has a final maturity date of November 11, 2021, (e) the maximum loan amount of
the Nomura III Loan relating to any particular Nomura III Property is 70% of
NACC-approved project costs, approved by the Nomura III Lender, (f) there are no
Impac and Lodgian payment guaranties, (g) the entire Nomura III Loan is subject
to optional prepayment in whole or in part from certain sources (e.g.,
additional equity, sale proceeds and short-term bridge financing) prior to the
Nomura III Adjustment Date at premiums increasing from 0% to 4% of the principal
prepaid, and (h) the Nomura III Loan is secured by mortgages and security
interests on the Nomura III Properties. Under an agreement with NACC, the Nomura
III Loan may be prepaid in full, at the option of Impac III, contemporaneously
with the consummation of this offering and the new credit facility at 105% of
face value.
BANC ONE CAPITAL FUNDING CORPORATION LOANS ("BANC ONE LOANS")
GENERAL
The Banc One Loans are evidenced by, among other things, loan agreements
dated as of December 8, 1998 among several of our operating subsidiaries (the
"Banc One Loan Subsidiaries") and Banc One Capital Funding Corporation ("Banc
One"). In addition, each loan is evidenced by two separate promissory notes, one
for an aggregate of $62.0 million (the "Primary Notes") and one for an aggregate
of $10.0 million (the "Additional Notes.") The aggregate principal balance of
the Banc One Loans was $67.0 million at June 30, 1999.
PAYMENT OF INTEREST AND PRINCIPAL
The interest rate payable on the Banc One Loans is 9% and after November 30,
2000, it may be increased up to the maximum rate allowable by applicable law
(as, and to the extent that, the interest rate on United States Treasury Issues
with maturity dates as closely as possible to November 30, 2001 exceeds 5.5%).
The principal balance of the Additional Notes must be repaid by July 1999.
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SECURITY
The Banc One Loan Subsidiaries have granted to Banc One a first priority
mortgage on substantially all of their real property, encompassing six
properties. Lodgian and certain affiliates have entered into guaranty and
indemnity agreements with Banc One in favor of the Banc One Operating
Subsidiaries, guaranteeing the prompt and complete payment and performance of
principal, interest and other monetary obligations of the Banc One Operating
Subsidiaries under the Primary and Additional Notes. Lodgian's payment guarantee
is limited in time and terminates upon completion of the renovation work
contemplated by the Banc One loan agreements.
TERM AND PREPAYMENT
The Primary Notes of the Banc One Loans mature on November 30, 2000, but may
be extended until November 30, 2001 provided that the extension fee (in the
amount specified in the Banc One Primary Notes) is paid on or before November
30, 2000. The Additional Notes have a maturity date of July 1999. The principal
balance of the Primary Notes may be prepaid in full after December 1, 1999 upon
payment of a prepayment fee. In addition, certain prepayments of the outstanding
principal balance may be required, if necessary to attain a certain debt
coverage ratio.
CERTAIN COVENANTS
In addition to customary covenants, the Banc One Loans require, among other
things, that the Banc One Loan Subsidiaries (a) maintain a debt service coverage
ratio of at least 1.25:1 or, subsequent to January 20, 2000, 1.40:1, (b) not
incur any indebtedness other than permitted indebtedness, (c) not permit any
lien to exist on any of their property, assets or revenues, except permitted
liens and (d) not incur any guarantee obligations, except the guarantee
obligations related to the Banc One Loans and certain other guarantee
obligations.
EVENTS OF DEFAULT
The Banc One loan agreements contain certain events of default, including,
without limitation, the following: (1) any failure by any of the Banc One Loan
Subsidiaries to pay principal, interest or other obligations under the Banc One
Loans when due, (2) any representation or warranty made by any of the Banc One
Loan Subsidiaries in any of the Banc One loan agreements or related agreements
proves to have been untrue in any material respect when made, (3) any default by
any of the Banc One Loan Subsidiaries in the observance or performance of
covenants or other agreements contained in any of the Banc One Loan agreements
or related agreements, (4) certain events of bankruptcy or insolvency of any of
the Banc One Loan Subsidiaries, (5) the entering of a judgment or decree against
any Banc One Loan Subsidiary involving an aggregate liability of $50,000 or
more, and (6) the occurrence of an event of default under any franchise
agreement between a franchisor and any Banc One Loan Subsidiary.
SINGLE ASSET MORTGAGES
We also have 18 loans totaling $86.5 million at June 30, 1999 with various
other lenders secured by single properties. The interest rates on such loans
range from 6% to 14% with maturities ranging from 2001 to 2016. The agreements
contain customary covenants and events of default.
CRESTS
In June 1998, Lodgian Capital Trust I, a statutory business trust formed
under the laws of the State of Delaware (the "Trust"), issued $175 million of
CRESTS. The CRESTS bear interest at 7% and are convertible into shares of our
common stock. The sole assets of the Trust are $175 million principal amount of
Lodgian's Convertible Debentures.
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TERMS OF THE CRESTS
The holders of the CRESTS receive distributions on the CRESTS at a fixed
annual rate of $3.50 per each $50 of CRESTS, subject to increase if certain
events occur. Payments may be deferred if interest on the Convertible Debentures
is deferred as described below.
The CRESTS are convertible, at the option of the holders, into shares of
Common Stock of Lodgian at a price equal to $21.42 per share of Common Stock (or
2.3343 shares of Common Stock per CRESTS). The CRESTS will be redeemed upon
repayment of the Convertible Debentures on June 30, 2010 or their earlier
redemption, in a liquidation amount equal to the principal amount of the related
Convertible Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Convertible Debentures plus accumulated and
unpaid distributions to the date of redemption.
TERMS OF THE CONVERTIBLE DEBENTURES
The Convertible Debentures will mature on June 30, 2010, unless previously
redeemed. The convertible debentures are subordinate and junior in right of
payment to all indebtedness of Lodgian.
Lodgian has the option to redeem all or a part of the Convertible Debentures
for cash with the sale proceeds of its equity securities beginning July 3, 2002
at a price through July 27, 2003 equal to 104.2% of the aggregate principal
amount of the Convertible Debentures to be redeemed, declining annually to 100%
on June 30, 2008 (together with accrued and unpaid interest to the redemption
date).
Lodgian also has the option to redeem all or part of the Convertible
Debentures for cash beginning on July 3, 2002 at a price equal to 100% of the
aggregate principal amount of the Convertible Debentures to be redeemed (plus
accrued and unpaid interest to the redemption date). Lodgian may however,
exercise this option only if (1) for any 20 trading days within any 30
consecutive trading days, the closing price of its Common Stock on the New York
Stock Exchange exceeds $25.71 per share (subject to adjustments in certain
circumstances) and (2) on or prior to the notice of redemption, Lodgian has
entered into an agreement with a nationally recognized investment banking firm
to buy and sell at least the same number of shares of Lodgian Common Stock as
would be issuable upon conversion of the unconverted Convertible Debentures.
Lodgian may defer payments of interest on the Convertible Debentures by
extending the interest payment period on the Convertible Debentures. However,
the total extension period (together with all extensions) may not exceed 20
consecutive quarterly periods or extend beyond June 30, 2010. During any
extension period, interest on the Convertible Debentures will continue to accrue
at the applicable annual rate, compounded quarterly. As a result of such an
extension, distributions on the CRESTS would also be deferred by the Trust
during the extension period; however such distributions would continue to
accumulate at the applicable rate, compounded quarterly. If Lodgian defers its
interest payments, then, subject to limited exceptions, Lodgian may not, and
will not permit its subsidiaries to, (1) declare or pay any dividend on, make
any distribution with respect to, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its capital stock, or (2) pay any
principal, interest or premium on, or repay, repurchase or redeem any of its
debt securities or make any guarantee payment on any debt securities of its
subsidiaries that are similarly ranked with or junior in interest to the
Convertible Debentures.
EVENTS OF DEFAULT
Events of Default with respect to the Convertible Debentures include: (a)
default in paying interest for 30 days after notice is given (provided that
Lodgian has not exercised its option to extend interest); (b) default in paying
(i) liquidated damages for having failed to register the CRESTS under the
registration rights agreement or (ii) principal on the Convertible Debentures;
(c) breach of any other covenant under the Indenture for 90 days after notice is
given; (d) failure to deliver Lodgian's common stock upon conversion of the
CRESTS; (e) cross-default under any debt in excess of $10 million for 30 days
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after notice is given; (f) certain events of bankruptcy; and (g) dissolution of
the Trust (except where the holders of the CRESTS get a distribution of the
Convertible Debentures, the CRESTS are redeemed or the Trust is merged or
amalgamated as provided in the Trust declaration).
If an event of default occurs, the Trustee has the right to accelerate the
Convertible Debentures. If the Trustee fails to enforce its rights under the
Convertible Debentures, the holders of the CRESTS may institute legal
proceedings against Lodgian to enforce the Trustee's rights under the
Convertible Debentures. In addition, if any event of default relates to the
CRESTS and is attributable to a failure of Lodgian to pay interest or principal
on the Convertible Debentures on the date that interest and principal is
otherwise payable, then the holders of the CRESTS may directly institute a
proceeding for enforcement of payment to the holder of the principal of or
interest on the Convertible Debentures having a principal amount equal to the
aggregate liquidation amount of the CRESTS of the holder on or after the
respective due date specified in the Convertible Debentures.
GUARANTEE BY LODGIAN
As a result of the Merger, Lodgian has guaranteed, to the extent the Trust
has available funds, payments of distributions on the CRESTS and payments on
liquidation of the Trust or the redemption of the CRESTS. Lodgian's obligations
under the guarantee are subordinate to all of its liabilities and rank equally
with the most senior preferred stock which it may issue and with any guarantee
which it may issue in respect of any preferred stock of any of its affiliates.
LIQUIDATION RIGHTS
If the Trust liquidates, after satisfying any claims of the Trust's
creditors, the holders of the CRESTS will receive a liquidation amount of $50
per CRESTS (plus accumulated and unpaid distributions to the date of payment),
which may be in the form of a distribution of such amount in Convertible
Debentures.
SPECIAL EVENT DISTRIBUTION OF THE CONVERTIBLE DEBENTURES
Upon the occurrence of a special event such as a change in laws or
regulations or a change in the interpretation or application of laws or
regulations relating to the Trust's tax status or status under the Investment
Company Act of 1940, the Trust may be dissolved and the Convertible Debentures
distributed to the holders of the CRESTS.
THE NEW SENIOR CREDIT FACILITY
GENERAL
Concurrently with the closing of the offering of the Old Notes, Lodgian
Financing entered into a credit agreement establishing $315.0 million in a
secured credit facility (the "Credit Facility"). The Credit Facility is composed
of a $25.0 million delayed draw term loan facility ("Tranche A"), a $240.0
million term loan facility ("Tranche B") and a $50.0 million revolving credit
facility (the "Revolver"). At the closing of the offering, approximately $107.5
million of Tranche B was drawn. We will draw $132.5 million of Tranche B on
September 13, 1999 to repay the Nomura Impac I mortgage notes. The Tranche A
facility is available to be drawn during a 15-month period following the closing
date and can be utilized only to finance, in part, hotel development and
repositioning projects and to pay fees and expenses incurred in connection with
the Credit Facility. The Revolver is available to meet working capital
requirements, for hotel development and repositioning projects and for general
corporate purposes.
INTEREST
The Credit Facility bears interest and an applicable margin in excess of
base or LIBOR rates. The applicable margin is based on our senior secured debt
rating and range from 3.5% to 4.25% for Tranche A
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and Tranche B LIBOR-based loans, 2.25% to 3.0% for Tranche A and Tranche B base
rate loans, 3.25% to 4.00% for Revolver LIBOR-based loans or 2.0% to 2.75% for
Revolver base rate loans.
SECURITY AND GUARANTEES
The Credit Facility is secured by mortgages on the hotels owned through
Lodgian Financing, and a pledge of the capital stock of Lodgian Financing and
its subsidiaries, and limited guarantees from certain subsidiaries of Lodgian
other than Lodgian Financing. In addition, Lodgian will guarantee the Credit
Facility upon expiration of Lodgian's guarantees under the Nomura II Loan
described under "Description of Certain Indebtedness and Preferred Stock--Nomura
Asset Capital Corporation Loans--Nomura II-- Guarantees."
TERM
The final maturity of the Tranche A and Tranche B loans is the earlier of
(i) seven years after the closing date or (ii) the final maturity of the Banc
One Loans as extended whether through amendment or refinancing. The final
maturity of the Revolver is April 15, 2004.
CERTAIN COVENANTS
The Credit Facility limits the amount of our senior debt and provide for
minimum fixed charge coverage and interest coverage ratios. In addition, the
Credit Facility restricts
- liens (other than liens securing the Credit Facilities);
- debt (other than the issuance of up to $100 million of subordinated debt
(in addition to the Notes) on terms and conditions reasonably satisfactory
to the lenders), guarantees or other contingent obligations (including,
without limitation, the subordination of all intercompany indebtedness on
terms satisfactory to the lenders);
- lease obligations;
- mergers and consolidations;
- sales, transfers and other dispositions of assets (other than sales of
inventory in the ordinary course of business);
- loans, acquisitions, joint ventures and other investments;
- dividends and other distributions to stockholders (including, without
limitation, the Convertible Debentures);
- creating new subsidiaries;
- becoming a general partner in any partnership;
- repurchasing shares of capital stock;
- prepaying, redeeming or repurchasing debt;
- capital expenditures;
- granting negative pledges;
- changing the nature of our business;
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- amending organizational documents, or amending or otherwise modifying any
debt, any related document or any other material agreement; and
- changing accounting policies or reporting practices, in each case, with
such exceptions as may be agreed upon in the loan documentation.
EVENTS OF DEFAULT
Events of default under the Credit Facility include:
- failure to pay principal when due or to pay interest or other amounts
within three business days after the same becomes due;
- any representation or warranty proving to have been materially incorrect
when made or confirmed;
- failure to perform or observe convenants set forth in the Credit Facility
within a specified period of time, where customary and appropriate, after
notice or knowledge of such failure;
- cross-defaults to other indebtedness in an amount to be agreed in the
Credit Facility;
- bankruptcy and insolvency defaults (with grace period for involuntary
proceedings);
- monetary judgment defaults and nonmonetary judgment defaults that could
reasonably be expected to have a material adverse effect as defined in the
Credit Facility.
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DESCRIPTION OF THE NOTES
Lodgian Financing Corp. issued the Old Notes, and will issue the Exchange
Notes (together with the Old Notes, the "Notes") under an Indenture, dated as of
July 23, 1999, among Lodgian Financing Corp., as issuer, Lodgian, Inc. and the
Initial Subsidiary Guarantors, as guarantors, and Bankers Trust Company (the
"Trustee"). The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939.
The following is a summary of the material provisions of the Indenture but
does not restate the Indenture in its entirety. You can find the definitions of
certain capitalized terms used in the following summary under the subheading
"--Definitions." We urge you to read the Indenture because it, and not this
description, defines your rights as holders of the Notes. A copy of the
Indenture is available upon request from Lodgian Financing Corp. For purposes of
this "Description of the Notes," the term "Lodgian" means Lodgian, Inc. and its
successors under the Indenture and the term "Lodgian Financing Corp." means
Lodgian Financing Corp. and its successors under the Indenture, in each case
excluding its subsidiaries.
GENERAL
The Notes are unsecured senior subordinated obligations of Lodgian Financing
Corp., initially limited to $200.0 million aggregate principal amount. The Notes
will mature on July 15, 2009. Subject to the covenants described below under
"--Covenants" and applicable law, Lodgian Financing Corp. may issue additional
Notes ("Additional Notes") under the Indenture. The Notes offered hereby and any
Additional Notes subsequently issued would be treated as a single class for all
purposes under the Indenture.
Each Note will initially bear interest at 12 1/4% per annum from the Closing
Date or from the most recent Interest Payment Date to which interest has been
paid. Interest on the Notes will be payable semiannually on January 15 and July
15 of each year, commencing January 15, 2000. Interest will be paid to Holders
of record at the close of business on the January 1 or July 1 immediately
preceding the Interest Payment Date. Interest is computed on the basis of a
360-day year of twelve 30-day months on a U.S. corporate bond basis.
If by the date that is six months after the Closing Date, Lodgian Financing
Corp. has not consummated a registered exchange offer for the Notes or caused a
shelf registration statement with respect to resales of the Notes to be declared
effective, the annual interest rate on the Notes will increase by .5%, and if an
exchange offer is not consummated or a shelf registration statement is not
declared effective on the date that is nine months after the Closing Date, the
annual interest rate on the Notes will increase by an additional .5%, until the
consummation of a registered exchange offer or the effectiveness of a shelf
registration statement. See "--Registration Rights."
The Notes may be exchanged or transferred at the office or agency of Lodgian
Financing Corp. in the Borough of Manhattan, the City of New York. Initially,
the corporate trust office of the Trustee at 4 Albany Street, 4th Floor, New
York, NY 10004 will serve as such office. If you give Lodgian Financing Corp.
wire transfer instructions, Lodgian Financing Corp. will pay all principal,
premium and interest on your Notes in accordance with your instructions. If you
do not give Lodgian Financing Corp. wire transfer instructions, payments of
principal, premium and interest will be made at the office or agency of the
paying agent which will initially be the Trustee, unless Lodgian Financing Corp.
elects to make interest payments by check mailed to the Holders.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and multiples of $1,000. See
"--Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but Lodgian Financing Corp. may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
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OPTIONAL REDEMPTION
Lodgian Financing Corp. may redeem the Notes at any time on or after July
15, 2004. The Redemption Price for the Notes (expressed in percentages of
principal amount), plus accrued interest to the Redemption Date, if redeemed
during the 12-month period commencing July 15, of the years set forth below will
be as follows:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2004........................................................................ 106.125%
2005........................................................................ 104.083%
2006........................................................................ 102.042%
2007 and thereafter......................................................... 100.000%
</TABLE>
In addition, at any time prior to July 15, 2002, Lodgian Financing Corp. may
redeem up to 35% of the principal amount of the Notes with the Net Cash Proceeds
of one or more sales of Capital Stock (other than Disqualified Stock) of Lodgian
or Lodgian Financing Corp. at a Redemption Price (expressed as a percentage of
principal amount) of 112.250%, plus accrued interest to the Redemption Date;
PROVIDED that at least 65% of the aggregate principal amount of Notes originally
issued on the Closing Date remains outstanding after each such redemption and
notice of any such redemption is mailed within 60 days of each such sale of
Capital Stock.
Lodgian Financing Corp. will give not less than 30 days' nor more than 60
days' notice of any redemption. If less than all of the Notes are to be
redeemed, selection of the Notes for redemption will be made by the Trustee:
- in compliance with the requirements of the principal national securities
exchange, if any, on which the Notes are listed, or
- if the Notes are not listed on a national securities exchange, by lot or
by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate.
However, no Note of $1,000 in principal amount or less shall be redeemed in
part. If any Note is to be redeemed in part only, the notice of redemption
relating to such Note will state the portion of the principal amount to be
redeemed. A new Note in principal amount equal to the unredeemed portion will be
issued upon cancellation of the original Note.
RANKING
SUMMARY
The Notes are senior subordinated Indebtedness of Lodgian Financing Corp.
This means that the payment of the principal, premium and interest on the Notes
is subordinated to the prior payment in full of all existing and future Senior
Indebtedness of Lodgian Financing Corp. See "Risk Factors--Subordination of the
Notes and Notes Guarantees; Asset Encumbrances--Existence of Senior Debt Could
Limit the Ability of Lodgian Financing and the Guarantors to Fulfill Their
Obligations Under the Notes and the Note Guarantees." However, payment from the
money or the proceeds of U.S. Government Obligations held in any defeasance
trust described under "--Defeasance" below, will not be subordinated to any
Senior Indebtedness or subject to the restrictions described below.
The Note Guarantees are senior subordinated Indebtedness of Lodgian and the
Initial Subsidiary Guarantors. The Indebtedness evidenced by the Note Guarantees
is subordinated on the same basis to Senior Indebtedness of Lodgian and the
Initial Subsidiary Guarantors as the Notes are subordinated to Senior
Indebtedness of Lodgian Financing Corp. However, until Lodgian repays the Impac
I Debt in September 1999, the Note Guarantee of Lodgian, Inc. will be junior
solely to the guarantees under the Impac loans and the Credit Agreement.
Assuming the offering of the Notes, the borrowings under the new credit
facility and the application of the proceeds as described in "Use of Proceeds"
had occurred on June 30, 1999, Lodgian and Lodgian
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Financing Corp. and the Initial Subsidiary Guarantors would have had $890.0
million of consolidated Indebtedness, of which $349.8 million would have been
Senior Indebtedness (which includes $109.8 million of Guarantees of Indebtedness
of subsidiaries that are not guaranteeing the Notes) and Lodgian's subsidiaries
other than the Initial Subsidiary Guarantors would have had $465.4 million of
Indebtedness which would have been effectively senior to the Notes.
By reason of the subordination provisions described below, in the event of
liquidation or insolvency, creditors of Lodgian Financing Corp. who are not
holders of Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than Holders of the Notes.
TERMS OF SUBORDINATION
Except with respect to the money, securities or proceeds held under any
defeasance trust established in accordance with the Indenture, upon any payment
or distribution of assets or securities of Lodgian Financing Corp. of any kind
or character, whether in cash, property or securities, upon any dissolution or
winding up or total or partial liquidation or reorganization of Lodgian
Financing Corp., whether voluntary or involuntary, or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due upon all
Senior Indebtedness shall first be paid in full, in cash or cash equivalents,
before the Holders of the Notes or the Trustee on behalf of the Holders of the
Notes shall be entitled to receive (1) any payment by, or on behalf of, Lodgian
Financing Corp. on account of Senior Subordinated Obligations or (2) any payment
to acquire any of the Notes for cash, property or securities, or (3) any
distribution with respect to the Notes of any cash, property or securities.
Before any payment may be made by, or on behalf of, Lodgian Financing Corp.
on any Senior Subordinated Obligations (other than with the money, securities or
proceeds held under any defeasance trust established in accordance with the
Indenture), upon any such dissolution, winding up, liquidation or
reorganization, any payment or distribution of assets or securities of Lodgian
Financing Corp. of any kind or character, whether in cash, property or
securities, to which the Holders of the Notes or the Trustee on behalf of the
Holders of the Notes would be entitled, but for the subordination provisions of
the Indenture, shall be made by Lodgian Financing Corp. or by any receiver,
trustee in bankruptcy, liquidating trustee, agent or other similar Person making
such payment or distribution or by the Holders of the Notes or the Trustee if
received by them or it, directly to the holders of the Senior Indebtedness
(proportionately to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders) or their representatives or to any
trustee or trustees under any indenture pursuant to which any such Senior
Indebtedness may have been issued, as their respective interests appear, to the
extent necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents, after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness.
The words "cash, property or securities" do not include securities of
Lodgian Financing Corp. or any other corporation provided for by a plan of
reorganization or readjustment that are subordinated, at least to the extent
that the Notes are subordinated, to the payment of all Senior Indebtedness then
outstanding; PROVIDED that:
(1) this does not to cause the Notes to be treated in any case or
proceeding or similar event described above as part of the same class of
claims as the Senior Indebtedness or any class of claims PARI PASSU with, or
senior to, the Senior Indebtedness for any payment or distribution,
(2) if a new corporation results from such reorganization or
readjustment, such corporation assumes the Senior Indebtedness and
(3) the rights of the holders of the Senior Indebtedness are not,
without the consent of such holders, altered by such reorganization or
readjustment.
No direct or indirect payment by or on behalf of Lodgian Financing Corp. of
Senior Subordinated Obligations (other than with the money, securities or
proceeds held under any defeasance trust established in accordance with the
Indenture), whether pursuant to the terms of the Notes or upon acceleration or
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otherwise shall be made if, at the time of such payment, there exists a default
in the payment of all or any portion of the obligations on any Senior
Indebtedness of Lodgian Financing Corp. and such default shall not have been
cured or waived or the benefits of this sentence waived by or on behalf of the
holders of such Senior Indebtedness. In addition, during the continuance of any
other event of default with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated, upon receipt by the
Trustee of written notice from the trustee or other representative for the
holders of such Designated Senior Indebtedness (or the holders of at least a
majority in principal amount of such Designated Senior Indebtedness then
outstanding), no payment of Senior Subordinated Obligations (other than with the
money, securities or proceeds held under any defeasance trust established in
accordance with the Indenture) may be made by or on behalf of Lodgian Financing
Corp. upon or in respect of the Notes for a period (a "Payment Blockage Period")
commencing on the date of receipt of such notice and ending 179 days thereafter
(unless, in each case, such Payment Blockage Period shall be terminated by
written notice to the Trustee from such trustee of, or other representatives
for, such holders or by payment in full, in cash or cash equivalents, of such
Designated Senior Indebtedness or such event of default has been cured or
waived). Not more than one Payment Blockage Period may be commenced with respect
to the Notes during any period of 360 consecutive days. Notwithstanding anything
in the Indenture to the contrary, there must be 180 consecutive days in any
360-day period in which no Payment Blockage Period is in effect. No event of
default (other than an event of default pursuant to the financial maintenance
covenants under the Credit Agreement) that existed or was continuing (it being
acknowledged that any subsequent action that would give rise to an event of
default pursuant to any provision under which an event of default previously
existed or was continuing shall constitute a new event of default for this
purpose) on the date of the commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period shall be, or shall be made, the basis for the commencement of a second
Payment Blockage Period by the representative for, or the holders of, such
Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such event of default shall have been cured or waived
for a period of not less than 90 consecutive days.
To the extent any payment of Senior Indebtedness (whether by or on behalf of
Lodgian Financing Corp., as proceeds of security or enforcement of any right of
setoff or otherwise) is declared to be fraudulent or preferential, set aside or
required to be paid to any receiver, trustee in bankruptcy, liquidating trustee,
agent or other similar Person under any bankruptcy, insolvency, receivership,
fraudulent conveyance or similar law, then if such payment is recovered by, or
paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent
or other similar Person, the Senior Indebtedness or part thereof originally
intended to be satisfied shall be deemed to be reinstated and outstanding as if
such payment had not occurred. To the extent the obligation to repay any Senior
Indebtedness is declared to be fraudulent, invalid, or otherwise set aside under
any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law,
then the obligation so declared fraudulent, invalid or otherwise set aside (and
all other amounts that would come due with respect thereto had such obligation
not been so affected) shall be deemed to be reinstated and outstanding as Senior
Indebtedness for all purposes hereof as if such declaration, invalidity or
setting aside had not occurred.
GUARANTEES
Payment of the principal of, premium, if any, and interest on the Notes is
Guaranteed, jointly and severally, on an unsecured senior subordinated basis by
Lodgian and the Initial Subsidiary Guarantors. However, until Lodgian repays the
Impac I Debt in September 1999, the Note Guarantee of Lodgian, Inc. will be
junior solely to the guantees under the Impac loans and the Credit Agreement. In
addition, if any Restricted Subsidiary that is not a Subsidiary Guarantor
Guarantees any Indebtedness of Lodgian or any Restricted Subsidiary (other than
a Foreign Subsidiary), Lodgian will cause such Restricted Subsidiary to
Guarantee Lodgian Financing Corp.'s obligations under the Notes; provided that
the Restricted Subsidiaries of Lodgian Financing Corp. existing on the Closing
Date may guarantee Lodgian Financing
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Corp.'s obligations under the Credit Agreement. See "--Covenants--Limitation on
Issuances of Guarantees by Restricted Subsidiaries."
Payments under any Note Guarantee will be subordinated in right of payment
to all existing and future Senior Indebtedness of the Guarantor to the same
extent as the Notes are subordinated to Senior Indebtedness of Lodgian Financing
Corp.
The obligations of each Guarantor under its Note Guarantee will be limited
so as not to constitute a fraudulent conveyance under applicable Federal or
state laws. Each Guarantor that makes a payment or distribution under its Note
Guarantee will be entitled to contribution from any other Guarantor.
The Note Guarantee issued by any Subsidiary Guarantor will be automatically
and unconditionally released and discharged upon (1) any sale, exchange or
transfer to any Person (other than an Affiliate of the Company) of all of the
Capital Stock of such Subsidiary Guarantor or (2) the designation of such
Subsidiary Guarantor as an Unrestricted Subsidiary, in each case in compliance
with the terms of the Indenture.
SINKING FUND
There will be no sinking fund payments for the Notes.
REGISTRATION RIGHTS
The following is a summary of the material provisions of the Registration
Rights Agreement. You should read the proposed form of the Registration Rights
Agreement. A copy of the proposed form of Registration Rights Agreement is
available from Lodgian Financing Corp. upon request.
Lodgian Financing Corp. and each Guarantor have agreed with the placement
agents, for the benefit of the Holders, that they will use their best efforts,
at their cost, to file and cause to become effective a registration statement
with respect to a registered offer (the "Exchange Offer") to exchange the Notes
for an issue of senior subordinated notes of Lodgian Financing Corp. (the
"Exchange Notes"), guaranteed by the Guarantors, with terms identical to the
Notes (except that the Exchange Notes will not bear legends restricting
transfer).
The Exchange Offer will remain open for not less than 20 business days from
when we mail notice of the Exchange Offer to Holders. For each Note surrendered
to Lodgian Financing Corp. under the Exchange Offer, the Holder will receive an
Exchange Note of equal principal amount. Interest on each Exchange Note shall
accrue from the last Interest Payment Date on which interest was paid on the
Notes so surrendered or, if no interest has been paid on such Notes, from the
Closing Date. If Lodgian Financing Corp. effects the Exchange Offer, Lodgian
Financing Corp. will be entitled to close the Exchange Offer 20 business days
after the commencement thereof, PROVIDED that it has accepted all Notes validly
surrendered in accordance with the terms of the Exchange Offer. Notes not
tendered in the Exchange Offer will bear interest at the rate set forth on the
cover page of this memorandum and be subject to all of the terms and conditions
specified in the Indenture and to the transfer restrictions described in
"Transfer Restrictions."
In the event that applicable interpretations of the staff of the Securities
and Exchange Commission do not permit us to effect the Exchange Offer, or under
other specified circumstances, we will, at our cost, use our best efforts to
cause to become effective a shelf registration statement (the "Shelf
Registration Statement") with respect to resales of the Notes. Lodgian Financing
Corp. and the Guarantors will use their best efforts to keep such Shelf
Registration Statement effective until the expiration of the time period
referred to in Rule 144(k) under the Securities Act after the Closing Date, or
such shorter period that will terminate when all Notes covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement. Lodgian Financing Corp. and the Guarantors will, in the event of such
a shelf registration, provide to each Holder copies of the prospectus, notify
each Holder when the Shelf Registration Statement for the Notes has become
effective and take certain other actions as are required to permit resales of
the Notes. A Holder that sells its Notes pursuant to the Shelf Registration
Statement generally (1) will be required to be named as a selling security
holder in the related prospectus and to
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deliver a prospectus to purchasers, (2) will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
(3) will be bound by the provisions of the Registration Rights Agreement that
are applicable to such a Holder (including certain indemnification obligations).
In the event that the Exchange Offer is not consummated and a Shelf
Registration Statement is not declared effective on or prior to the date that is
six months after the Closing Date, the annual interest rate borne by the Notes
will be increased by .5% over the rate shown on the cover page of the memorandum
and if the Exchange Offer is not consummated or the Shelf Registration Statement
is not declared effective on or prior to the date that is nine months after the
Closing Date, the annual interest rate borne by the Notes shall be increased by
an additional .5%. Once the Exchange Offer is consummated or a Shelf
Registration Statement is declared effective, the annual interest rate borne by
the Notes shall be changed to again be the rate shown on the cover page of this
memorandum.
COVENANTS
OVERVIEW
In the Indenture, Lodgian has agreed to certain covenants that limit its and
its Restricted Subsidiaries' ability, among other things, to:
- incur additional debt;
- pay dividends, pay interest on the Convertible Debentures, acquire shares
of capital stock, make payments on subordinated debt or make investments;
- place limitations on distributions from Restricted Subsidiaries;
- issue or sell capital stock of Restricted Subsidiaries;
- issue guarantees;
- sell or exchange assets;
- enter into transactions with shareholders and affiliates;
- create liens; and
- effect mergers.
In addition, if a Change of Control occurs, each Holder of Notes will have
the right to require Lodgian Financing Corp. to repurchase all or a part of the
Holder's Notes at a price equal to 101% of their principal amount, plus any
accrued interest to the date of repurchase.
LIMITATION ON INDEBTEDNESS
(a) Lodgian will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes, the Note
Guarantees and other Indebtedness existing on the Closing Date); PROVIDED that
Lodgian, Lodgian Financing Corp. or any Subsidiary Guarantor may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness and
the receipt and application of the proceeds therefrom, the Fixed Charge Coverage
Ratio would be greater than (x) 1.85:1, for Indebtedness Incurred based on any
four fiscal quarters ended no later than September 30, 1999 and (y) for
Indebtedness Incurred based on any four fiscal quarters ended after September
30, 1999, (I) 2.0:1, for Indebtedness Incurred on or before June 30, 2001, (II)
2.25:1 for Indebtedness Incurred after June 30, 2001 and on or before December
31, 2002 and (III) 2.5:1 for Indebtedness Incurred after December 31, 2002.
Notwithstanding the foregoing, Lodgian and Lodgian Financing Corp. and, as
specified below, any other Restricted Subsidiary may Incur each and all of the
following:
(1) Indebtedness outstanding under the Credit Agreement in an aggregate
principal amount (together with refinancings thereof) at any time not to
exceed $300 million minus the amount of Impac I Debt then outstanding and
the amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant;
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(2) Indebtedness owed (A) to Lodgian, Lodgian Financing Corp. or any
Subsidiary Guarantor evidenced by a promissory note or (B) to any other
Restricted Subsidiary; PROVIDED that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to Lodgian or another
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (2);
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness outstanding under clause (2) or (9) or the Convertible
Debentures and CRESTS) and any refinancings thereof in an amount not to
exceed the amount so refinanced or refunded (plus premiums, accrued
interest, fees and expenses); PROVIDED that
(a) Indebtedness the proceeds of which are used to refinance or
refund the Notes or Indebtedness that is PARI PASSU with, or subordinated
in right of payment to, the Notes or a Note Guarantee shall only be
permitted under this clause (3) if (x) in case the Notes are refinanced
in part or the Indebtedness to be refinanced is PARI PASSU with the Notes
or a Note Guarantee, such new Indebtedness, by its terms or by the terms
of any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made PARI PASSU with, or subordinate in right
of payment to, the remaining Notes or the Note Guarantee, or (y) in case
the Indebtedness to be refinanced is subordinated in right of payment to
the Notes or a Note Guarantee, such new Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes or the Note Guarantee at
least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes or the Note Guarantee,
(b) such new Indebtedness, determined as of the date of Incurrence of
such new Indebtedness, does not mature prior to the Stated Maturity of
the Indebtedness to be refinanced or refunded, and the Average Life of
such new Indebtedness is at least equal to the remaining Average Life of
the Indebtedness to be refinanced or refunded, and
(c) such new Indebtedness is Incurred by Lodgian Financing Corp. or a
Guarantor or by the Restricted Subsidiary who is the obligor on the
Indebtedness to be refinanced or refunded;
(4) Indebtedness of Lodgian or Lodgian Financing Corp., to the extent
the net proceeds thereof are promptly (a) used to purchase Notes tendered in
an Offer to Purchase made as a result of a Change in Control or (b)
deposited to defease the Notes as described under "Defeasance";
(5) Guarantees of the Notes and Guarantees of Indebtedness of Lodgian,
Lodgian Financing Corp. or any Subsidiary Guarantor by any Restricted
Subsidiary provided the Guarantee of such Indebtedness is permitted by and
made in accordance with the "Limitation on Issuance of Guarantees by
Restricted Subsidiaries" covenant;
(6) Indebtedness of any Restricted Subsidiary in an aggregate principal
amount outstanding at any time (together with refinancings thereof) not to
exceed $18 million, less any amount of such Indebtedness permanently repaid
as provided under the "Limitation on Asset Sales" covenant;
(7) Purchase Money Indebtedness of Lodgian, Lodgian Financing Corp. or
any Subsidiary Guarantor in an aggregate amount outstanding at any time
(together with refinancings thereof) not to exceed $10 million;
(8) Indebtedness of Lodgian or Lodgian Financing Corp. issued in
exchange for, or the net proceeds of which are used to repurchase the
Convertible Debentures and CRESTS; provided that either
(a) after giving effect to the Incurrence of such Indebtedness and
the receipt and application of the proceeds therefrom, (x) the Fixed
Charge Coverage Ratio would be greater than 2.0:1 and (y) Lodgian or
Lodgian Financing Corp. could Incur at least $1.00 of Indebtedness under
the first
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paragraph of this "Limitation on Indebtedness" covenant; PROVIDED,
HOWEVER, that such Indebtedness (1) is expressly made subordinate in
right of payment to the Notes or Lodgian's Note Guarantee, as the case
may be, at least to the extent that the Convertible Debentures are
subordinated to Lodgian's Note Guarantee on the Closing Date and (2) does
not mature prior to the Stated Maturity of the Convertible Debentures,
and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Convertible Debentures, determined as of
the date of Incurrence of such Indebtedness; or
(b) such Indebtedness (w) is expressly made subordinate in right of
payment to the Notes or Lodgian's Note Guarantee, as the case may be, at
least to the extent that the Convertible Debentures are subordinated to
Lodgian's Note Guarantee on the Closing Date, (x) does not mature prior
to the Stated Maturity of the Convertible Debentures and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life
of the Convertible Debentures, determined as of the date of the
Incurrence of such Indebtedness, (y) permits interest on such
Indebtedness to be deferred on terms at least as favorable to the Holders
as the Convertible Debentures and (z) on a pro forma basis does not cause
the Fixed Charge Coverage Ratio to be less than the Fixed Charge Coverage
Ratio prior to the exchange or repurchase, assuming that the interest on
the Convertible Debentures constituted Consolidated Interest Expense;
(9) performance or completion guarantees arising in the ordinary course
of business in an aggregate amount outstanding at any time not to exceed 5%
of Adjusted Consolidated Net Tangible Assets (determined as of the last day
of the last fiscal quarter preceding the date of such guarantee for which
reports have been filed with the SEC or provided to the Trustee); and
(10) Indebtedness of Lodgian, Lodgian Financing Corp. or any Subsidiary
Guarantor (in addition to Indebtedness permitted under clauses (1) through
(9) above) in an aggregate principal amount outstanding at any time
(together with refinancings thereof) not to exceed $10 million, less any
amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that may be Incurred
pursuant to this "Limitation on Indebtedness" covenant will not be deemed to be
exceeded, with respect to any outstanding Indebtedness due solely to the result
of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (x) Indebtedness Incurred under the
Credit Agreement on or prior to the Closing Date shall be treated as Incurred
pursuant to clause (1) of the second paragraph of clause (a) of this "Limitation
on Indebtedness" covenant, (y) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (z) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant shall not be treated as Indebtedness. For
purposes of determining compliance with this "Limitation on Indebtedness"
covenant, in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above (other than Indebtedness
referred to in clause (x) of the preceding sentence), including under the first
paragraph of part (a), Lodgian, in its sole discretion, shall classify, and from
time to time may reclassify, such item of Indebtedness.
(d) Notwithstanding the foregoing, neither Lodgian nor any Restricted
Subsidiary will issue any Indebtedness in exchange for, or the net proceeds of
which will be used to, refinance or refund the Convertible Debentures or the
CRESTS unless (x) such Indebtedness is expressly made subordinate in right of
payment to Lodgian's Note Guarantees or the Note Guarantee at least to the
extent as the Convertible Debentures are subordinated to Lodgian's Note
Guarantee and (y) such new Indebtedness, determined as of the date of Incurrence
of such Indebtedness, does not mature prior to the Stated
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Maturity of the Convertible Debentures, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Convertible
Debentures.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
Lodgian will not, and will not permit Lodgian Financing Corp. or any
Subsidiary Guarantor to, Incur any Indebtedness that is subordinate in right of
payment to any Senior Indebtedness unless such Indebtedness is PARI PASSU with,
or subordinated in right of payment to, the Notes or any Note Guarantee;
PROVIDED that the foregoing limitation shall not apply to distinctions between
categories of Senior Indebtedness that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all such Senior
Indebtedness.
LIMITATION ON RESTRICTED PAYMENTS
Lodgian will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, (1) declare or pay any dividend or make any distribution on or
with respect to its Capital Stock (other than dividends or distributions payable
solely in shares of its Capital Stock (other than Disqualified Stock) or in
options, warrants or other rights to acquire shares of such Capital Stock) held
by Persons other than Lodgian or any of its Restricted Subsidiaries or make any
payment on the Convertible Debentures or the CRESTS (including payments pursuant
to the Lodgian Capital Trust Guarantee), (2) purchase, call for redemption or
redeem, retire or otherwise acquire for value any shares of Capital Stock of (A)
Lodgian, Lodgian Financing Corp., Lodgian Capital Trust or any Subsidiary
Guarantor (including options, warrants or other rights to acquire such shares of
Capital Stock) held by any Person or (B) a Restricted Subsidiary other than
Lodgian Financing Corp. or a Subsidiary Guarantor (including options, warrants
or other rights to acquire such shares of Capital Stock) held by any Affiliate
of Lodgian (other than a Wholly Owned Restricted Subsidiary) or any holder (or
any Affiliate of such holder) of 5% or more of the Capital Stock of Lodgian, (3)
make any voluntary or optional principal payment, or voluntary or optional
redemption, repurchase, defeasance, or other acquisition or retirement for
value, of Indebtedness of Lodgian Financing Corp. that is subordinated in right
of payment to the Notes or any Indebtedness of Lodgian or a Subsidiary Guarantor
that is subordinated in right of payment to a Note Guarantee or (4) make any
Investment, other than a Permitted Investment, in any Person (such payments or
any other actions described in clauses (1) through (4) above being collectively
"Restricted Payments") if, at the time of, and after giving effect to, the
proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing,
(B) Lodgian could not Incur at least $1.00 of Indebtedness under the
first paragraph of part (a) of the "Limitation on Indebtedness" covenant or
(C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after April 1, 1999 shall exceed the sum of:
(1) the excess of (x) 100% of the aggregate amount of Consolidated
EBITDA accrued on a cumulative basis during the period (taken as one
accounting period) beginning on April 1, 1999 and ending on the last day
of the last fiscal quarter preceding the Transaction Date for which
reports have been filed with the SEC or provided to the Trustee over (y)
2.0 times the aggregate amount of Consolidated Interest Expense accrued
on a cumulative basis during the period (taken as one accounting period)
beginning on April 1, 1999 and ending on the last day of the last fiscal
quarter preceding the Transaction Date for which reports have been filed
with the SEC or provided to the Trustee PLUS
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(2) the aggregate Net Cash Proceeds received by Lodgian after the
Closing Date from the issuance and sale permitted by the Indenture of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of Lodgian, including an issuance or sale permitted by the
Indenture of Indebtedness of Lodgian or any Restricted Subsidiary for
cash subsequent to the Closing Date upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of
Lodgian, or from the issuance to a Person who is not a Subsidiary of
Lodgian of any options, warrants or other rights to acquire Capital Stock
of Lodgian (in each case, exclusive of any Disqualified Stock or any
options, warrants or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the Stated Maturity
of the Notes) PLUS
(3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to Lodgian or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of any
such Investment (except, in each case, to the extent any such payment or
proceeds are included in the calculation of Adjusted Consolidated Net
Income), from the release of any Guarantee or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case
as provided in the definition of "Investments"), not to exceed, in each
case, the amount of Investments previously made by Lodgian or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend or redemption of any Capital Stock
within 60 days after the related date of declaration or call for redemption
if, at said date of declaration or call for redemption, such payment or
redemption would comply with the preceding paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Notes or any Note Guarantee including premium, if any, and
accrued interest, with the proceeds of, or in exchange for, Indebtedness
Incurred under clause (3) of the second paragraph of part (a) of the
"Limitation on Indebtedness" covenant;
(3) the repurchase, redemption or other acquisition of Capital Stock of
Lodgian, Lodgian Financing Corp., Lodgian Capital Trust or a Subsidiary
Guarantor (or options, warrants or other rights to acquire such Capital
Stock) in exchange for, or out of the proceeds of a substantially concurrent
offering of, shares of Capital Stock (other than Disqualified Stock) of
Lodgian or Lodgian Financing Corp. (or options, warrants or other rights to
acquire such Capital Stock; PROVIDED that such options, warrants or other
rights are not redeemable prior to the Stated Maturity of the Notes);
(4) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness which
is subordinated in right of payment to the Notes or any Note Guarantee in
exchange for, or out of the proceeds of, a substantially concurrent offering
of, shares of the Capital Stock (other than Disqualified Stock) of Lodgian
or Lodgian Financing Corp. (or options, warrants or other rights to acquire
such Capital Stock; PROVIDED that such options, warrants or other rights are
not redeemable prior to the Stated Maturity of the Notes);
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of Lodgian;
(6) Investments acquired in exchange for, or out of the proceeds of a
substantially concurrent offering of, Capital Stock (other than Disqualified
Stock) of Lodgian;
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(7) the declaration or payment of dividends on Capital Stock (other
than Disqualified Stock) of Lodgian in an aggregate annual amount not to
exceed 6% of the Net Cash Proceeds received by Lodgian after the Closing
Date from the sale of such Capital Stock;
(8) the payment of interest or liquidated damages on the Convertible
Debentures or the declaration or payment of dividends or liquidated damages
on the CRESTS; PROVIDED that the time of any such payment, Lodgian could not
defer any such payment;
(9) any purchase of any fractional shares of Common Stock in connection
with the conversion of the Convertible Debentures or CRESTS;
(10) Investments in any Person the primary business of which is
related, ancillary or complementary to the business of Lodgian and its
Restricted Subsidiaries on the date of such Investment; PROVIDED that the
aggregate amount of such Investments under this clause (10) does not exceed
(a) 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
last day of the last fiscal quarter preceding the date of such Investment
for which reports have been filed with the SEC or provided to the Trustee),
plus (b) the net reduction in Investments made pursuant to this clause (10)
resulting from distributions on or repayments of such Investments, including
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other distributions or other transfers of assets, in each case
to Lodgian or any Restricted Subsidiary, or from the Net Cash Proceeds from
the sale or other disposition of any such Investment (except, in each case,
to the extent of any gain on such sale or disposition that would be included
in the calculation of Adjusted Consolidated Net Income), from the release of
any Guarantee or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition
of "Investments"); PROVIDED that the net reduction in any such Investments
shall not exceed the amount of such Investments in such Person;
(11) the repurchase or other acquisition of Convertible Debentures and
CRESTS with the proceeds of, or in exchange for, Indebtedness Incurred under
clause (8) of the "Limitation on Indebtedness" covenant or Preferred Stock
of a Restricted Subsidiary issued under clause (5) of the "Limitation on the
Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant; or
(12) other Restricted Payments in an aggregate amount not to exceed $10
million;
PROVIDED that, except in the case of clauses (1) and (3), no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (2) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (3) or (4)
thereof, an Investment acquired in exchange for Capital Stock referred to in
clause (6) thereof and the repurchase or other acquisition of Convertible
Debentures and CRESTS referred to clause (11) thereof), and the Net Cash
Proceeds from any issuance of Capital Stock referred to in clauses (3), (4) and
(6), shall be included in calculating whether the conditions of clause (C) of
the first paragraph of this "Limitation on Restricted Payments" covenant have
been met with respect to any subsequent Restricted Payments. In the event the
proceeds of an issuance of Capital Stock of Lodgian are used for the redemption,
repurchase or other acquisition of the Notes, or Indebtedness that is PARI PASSU
with the Notes or any Note Guarantee, then the Net Cash Proceeds of such
issuance shall be included in clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant only to the extent such proceeds
are not used for such redemption, repurchase or other acquisition of
Indebtedness. For purposes of determining compliance with this "Limitation on
Restricted Payments" covenant, in the event that a Restricted Payment meets the
criteria of more than one of the types of Restricted Payments described in the
above clauses, including the first paragraph of this "Limitation on Restricted
Payments" covenant, Lodgian, in its sole discretion, may order and classify, and
from time to time may reclassify, such
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Restricted Payment if it would have been permitted at the time such Restricted
Payment was made and at the time of such reclassification.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
Lodgian will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
Lodgian or any other Restricted Subsidiary, (2) pay any Indebtedness owed to
Lodgian or any other Restricted Subsidiary, (3) make loans or advances to
Lodgian or any other Restricted Subsidiary or (4) transfer any of its property
or assets to Lodgian or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(1) existing on the Closing Date in the Credit Agreement, the Indenture
or any other agreements in effect on the Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements; PROVIDED that the
encumbrances and restrictions in any such extensions, refinancings, renewals
or replacements taken as a whole are no less favorable in any material
respect to the Holders than those encumbrances or restrictions that are then
in effect and that are being extended, refinanced, renewed or replaced;
(2) existing under or by reason of applicable law;
(3) with respect to any Person or the property or assets of such Person
acquired by Lodgian or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which
encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired;
(4) in the case of clause (4) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) existing
by virtue of any transfer of, agreement to transfer, option or right with
respect to, or Lien on, any property or assets of Lodgian or any Restricted
Subsidiary not otherwise prohibited by the Indenture or (C) arising or
agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract
from the value of property or assets of Lodgian or any Restricted Subsidiary
in any manner material to Lodgian or any Restricted Subsidiary;
(5) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary;
(6) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued if:
(A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant
contained in such Indebtedness or agreement,
(B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by Lodgian in good faith) and
(C) Lodgian determines that any such encumbrance or restriction will
not materially affect Lodgian Financing Corp.'s ability to make principal
or interest payments on the Notes; or
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(7) relating to a Subsidiary Guarantor and contained in the terms of
any Indebtedness or any agreement pursuant to which such Indebtedness was
issued if:
(A) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by Lodgian in good faith) and
(B) Lodgian determines that any such encumbrance or restriction will
not materially affect Lodgian Financing Corp.'s ability to make principal
or interest payments on the Notes.
Nothing contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent Lodgian or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of Lodgian or
any of its Restricted Subsidiaries that secure Indebtedness of Lodgian or any of
its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
Lodgian will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except:
(1) to Lodgian or a Wholly Owned Restricted Subsidiary;
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law;
(3) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and
any Investment in such Person remaining after giving effect to such issuance
or sale would have been permitted to be made under the "Limitation on
Restricted Payments" covenant if made on the date of such issuance or sale;
(4) sales of Common Stock (including options, warrants or other rights
to purchase shares of such Common Stock) of a Restricted Subsidiary by
Lodgian or a Restricted Subsidiary, PROVIDED that Lodgian or such Restricted
Subsidiary applies the Net Cash Proceeds of any such sale in accordance with
clause (A) or (B) of the "Limitation on Asset Sales" covenant described
below; or
(5) sales of Preferred Stock of a Restricted Subsidiary whose sole
assets consist of Indebtedness of Lodgian or Lodgian Financing Corp., in
exchange for or the proceeds of which are used to repurchase the Convertible
Debentures and CRESTS, PROVIDED such Indebtedness (a) is expressly made
subordinate in right of payment to the Notes or Lodgian's Note Guarantee, as
the case may be, at least to the extent that the Convertible Debentures are
subordinated to Lodgian's Note Guarantee on the Closing Date, (b) does not
mature prior to the Stated Maturity of the Convertible Debentures and the
Average Life of such new Indebtedness is at least equal to the remaining
Average Life of the Convertible Debentures, (c) on a pro forma basis does
not cause the Fixed Charge Coverage Ratio to be less than the Fixed Charge
Coverage Ratio prior to such sale, assuming the interest on such
Indebtedness and the Convertible Debentures constituted Consolidated
Interest Expense and (d) permits interest on such Indebtedness to be
deferred on terms at least as favorable to the Holders as the Convertible
Debentures.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
Lodgian will not permit any Restricted Subsidiary which is not a Subsidiary
Guarantor, directly or indirectly, to Guarantee any Indebtedness of Lodgian,
Lodgian Financing Corp. or any other Restricted Subsidiary (other than a Foreign
Subsidiary), unless (1) such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for a Guarantee (a
"Subsidiary
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Guarantee") of payment of the Notes by such Restricted Subsidiary and (2) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against Lodgian or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; PROVIDED that this covenant shall not apply to any
Guarantee existing on the Closing Date of Lodgian Finance Corp.'s obligations
under the Credit Agreement by a Restricted Subsidiary. The Subsidiary Guarantee
may be subordinated to the Senior Indebtedness of the Subsidiary Guarantor to
the same extent as the Notes are subordinated to the Senior Indebtedness of
Lodgian Financing Corp.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (x) any sale, exchange or transfer,
to any Person not an Affiliate of Lodgian, of all of Lodgian's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (y) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
Lodgian will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder (or any Affiliate of such holder) of
5% or more of any class of Capital Stock of Lodgian or with any Affiliate of
Lodgian or any Restricted Subsidiary, except upon fair and reasonable terms no
less favorable to Lodgian or such Restricted Subsidiary than could be obtained,
at the time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefor, in
a comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(1) transactions (A) approved by a majority of the disinterested
members of the Board of Directors or (B) for which Lodgian or a Restricted
Subsidiary delivers to the Trustee a written opinion of a nationally
recognized investment banking, accounting, valuation or appraisal firm
stating that the transaction is fair to Lodgian or such Restricted
Subsidiary from a financial point of view;
(2) any transaction solely between Lodgian and any of its Wholly Owned
Restricted Subsidiaries or solely among Wholly Owned Restricted
Subsidiaries;
(3) the payment of reasonable and customary regular fees to directors
of Lodgian who are not employees of Lodgian and indemnification arrangements
entered into by Lodgian in the ordinary course of business and consistent
with past practices of Lodgian;
(4) any payments or other transactions pursuant to any tax-sharing
agreement between Lodgian and any other Person with which Lodgian files a
consolidated tax return or with which Lodgian is part of a consolidated
group for tax purposes;
(5) any sale of shares of Capital Stock (other than Disqualified Stock)
of Lodgian or Lodgian Financing Corp.;
(6) development, management and administrative services and performance
and completion guarantees provided in the ordinary course of business by
Lodgian or any Restricted Subsidiary to any Person in which Lodgian or any
Restricted Subsidiary has an Investment; or
(7) any Permitted Investments or any Restricted Payments not prohibited
by the "Limitation on Restricted Payments" covenant.
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Notwithstanding the foregoing, any transaction or series of related transactions
covered by the first paragraph of this "Limitation on Transactions with
Shareholders and Affiliates" covenant and not covered by clauses (2) through (7)
of this paragraph, (a) the aggregate amount of which exceeds $1 million in
value, must be approved or determined to be fair in the manner provided for in
clause (1)(A) or (B) above and (b) the aggregate amount of which exceeds $5
million in value, must be determined to be fair in the manner provided for in
clause (1)(B) above.
LIMITATION ON LIENS
Lodgian will not, and will not permit Lodgian Financing Corp. or any
Subsidiary Guarantor to, Incur any Indebtedness secured by a Lien ("Secured
Indebtedness") which is not Senior Indebtedness unless contemporaneously
therewith effective provision is made to secure the Notes or the Note Guarantee
equally and ratably with (or, if the Secured Indebtedness is subordinated in
right of payment to the Notes or the Note Guarantees, prior to) such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
The foregoing limitation does not apply to:
(1) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Closing Date; PROVIDED that such Lien
is created solely for the purpose of securing Indebtedness Incurred, in
accordance with the "Limitation on Indebtedness" covenant, to finance the
cost (including the cost of improvement or construction) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property;
(2) any interest or title of a lessor in the property subject to any
Capitalized Lease;
(3) Liens on shares of Capital Stock of any Unrestricted Subsidiary to
secure Indebtedness of such Unrestricted Subsidiary; and
(4) Liens on cash set aside at the time of the Incurrence of any
Indebtedness, or government securities purchased with such cash, in either
case to the extent that such cash or government securities prefund the
payment of interest on such Indebtedness and are held in an escrow account
or similar arrangements to be applied for such purpose.
LIMITATION ON ASSET SALES
Lodgian will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (1) the consideration received by Lodgian or
such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (2) at least 75% of the consideration received
consists of (a) cash or Temporary Cash Investments, (b) the assumption of
Indebtedness of Lodgian or any Restricted Subsidiary (other than Indebtedness to
Lodgian or any Restricted Subsidiary), PROVIDED that Lodgian or such Restricted
Subsidiary is irrevocably and unconditionally released from all liability under
such Indebtedness or (c) Replacement Assets.
In the event and to the extent that the Net Cash Proceeds received by
Lodgian or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of Lodgian and its Subsidiaries has been filed with
the SEC or provided to the Trustee), then Lodgian shall or shall cause the
relevant Restricted Subsidiary to:
(1) within twelve months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets,
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(A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay Senior Indebtedness of Lodgian, Lodgian Financing Corp.
or of any Subsidiary Guarantor or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than Lodgian or any of
its Restricted Subsidiaries, or
(B) invest an equal amount, or the amount not so applied pursuant to
clause (A) (or enter into a definitive agreement committing to so invest
within 12 months after the date of such agreement), in Replacement
Assets, and
(2) apply (no later than the end of the 12-month period referred to in
clause (1)) such excess Net Cash Proceeds (to the extent not applied
pursuant to clause (1)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant.
The amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 12-month period as set forth in clause (1)
of the preceding sentence and not applied as so required by the end of such
period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, Lodgian
Financing Corp. must commence, not later than the fifteenth Business Day of such
month, and consummate an Offer to Purchase from the Holders (and if required by
the terms of any Indebtedness that is PARI PASSU with the Notes ("Pari Passu
Indebtedness"), from the holders of such Pari Passu Indebtedness) on a pro rata
basis an aggregate principal amount of Notes (and Pari Passu Indebtedness) equal
to the Excess Proceeds on such date, at a purchase price equal to 100% of the
principal amount thereof, plus, in each case, accrued interest (if any) to the
Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Lodgian Financing Corp. must commence, within 30 days of the occurrence of a
Change of Control, and consummate an Offer to Purchase for all Notes then
outstanding, at a purchase price equal to 101% of the principal amount thereof,
plus accrued interest (if any) to the Payment Date.
There can be no assurance that Lodgian Financing Corp. will have sufficient
funds available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of Lodgian Financing Corp. which might be
outstanding at the time).
Lodgian Financing Corp.'s ability to repurchase Notes upon a Change of
Control may be limited by the terms of its then existing contractual
obligations. In particular, the repurchase of the Notes upon a Change of Control
may constitute a default under the Credit Agreement. Any future credit
agreements or other agreements relating to Senior Indebtedness may contain
similar restrictive provisions.
The above covenant requiring Lodgian Financing Corp. to repurchase the Notes
will, unless consents are obtained, require Lodgian Financing Corp. to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not Lodgian is then required to file reports with the SEC,
Lodgian shall file with the SEC all such reports and other information as it
would be required to file with the SEC by Section 13(a) or 15(d) under the
Securities Exchange Act of 1934 if it were subject thereto. Lodgian shall supply
to the Trustee and to each Holder or shall supply to the Trustee for forwarding
to each such Holder, without cost to such Holder, copies of such reports and
other information.
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EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture:
(a) default in the payment of principal of (or premium, if any, on) any
Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise, whether or not such payment is prohibited by the
provisions described under "--Ranking--Terms of Subordination";
(b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days,
whether or not such payment is prohibited by the provisions described under
"--Ranking--Terms of Subordination";
(c) default in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of Lodgian or Lodgian Financing Corp. or the
failure by Lodgian Financing Corp. to make or consummate an Offer to
Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase
of Notes upon a Change of Control" covenant;
(d) Lodgian, Lodgian Financing Corp. or any Subsidiary Guarantor
defaults in the performance of or breaches any other covenant or agreement
in the Indenture or under the Notes (other than a default specified in
clause (a), (b) or (c) above) and such default or breach continues for a
period of 30 consecutive days after written notice by the Trustee or the
Holders of 25% or more in aggregate principal amount of the Notes;
(e) there occurs with respect to any issue or issues of Indebtedness of
Lodgian, Lodgian Financing Corp., any Subsidiary Guarantor or any
Significant Subsidiary having an outstanding principal amount of $5 million
or more in the aggregate for all such issues of all such Persons, whether
such Indebtedness now exists or shall hereafter be created, (I) an event of
default that has caused the holder thereof to declare such Indebtedness to
be due and payable prior to its Stated Maturity and such Indebtedness has
not been discharged in full or such acceleration has not been rescinded or
annulled within 30 days of such acceleration and/or (II) the failure to make
a principal payment at the final (but not any interim) fixed maturity and
such defaulted payment shall not have been made, waived or extended within
30 days of such payment default;
(f) any final judgment or order (not covered by insurance) for the
payment of money in excess of $5 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against
Lodgian, Lodgian Financing Corp., any Subsidiary Guarantor or any
Significant Subsidiary and shall not be paid or discharged, and there shall
be any period of 30 consecutive days following entry of the final judgment
or order that causes the aggregate amount for all such final judgments or
orders outstanding and not paid or discharged against all such Persons to
exceed $5 million during which a stay of enforcement of such final judgment
or order, by reason of a pending appeal or otherwise, shall not be in
effect;
(g) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of Lodgian, Lodgian Financing Corp., any
Subsidiary Guarantor or any Significant Subsidiary in an involuntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of Lodgian, Lodgian
Financing Corp., any Subsidiary Guarantor or any Significant Subsidiary or
for all or substantially all of the property and assets of Lodgian, Lodgian
Financing Corp., any Subsidiary Guarantor or any Significant Subsidiary or
(C) the winding up or liquidation of the affairs of Lodgian, Lodgian
Financing Corp., any Subsidiary Guarantor or any Significant Subsidiary and,
in each case, such decree or order shall remain unstayed and in effect for a
period of 30 consecutive days;
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(h) Lodgian, Lodgian Financing Corp., any Subsidiary Guarantor or any
Significant Subsidiary (A) commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case under
any such law, (B) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of Lodgian, Lodgian Financing Corp., any Subsidiary Guarantor or
any Significant Subsidiary or for all or substantially all of the property
and assets of Lodgian, Lodgian Financing Corp., any Subsidiary Guarantor or
any Significant Subsidiary or (C) effects any general assignment for the
benefit of creditors; or
(i) Lodgian or any Subsidiary Guarantor repudiates its obligations
under its Note Guarantee or, except as permitted by the Indenture, any Note
Guarantee is determined to be unenforceable or invalid or shall for any
reason cease to be in full force and effect.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to Lodgian, Lodgian Financing Corp.,
or any Subsidiary Guarantor) occurs and is continuing under the Indenture, the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes, then outstanding, by written notice to Lodgian Financing Corp. (and to
the Trustee if such notice is given by the Holders), may, and the Trustee at the
request of such Holders shall, declare the principal of, premium, if any, and
accrued interest on the Notes to be immediately due and payable. Upon a
declaration of acceleration, such principal of, premium, if any, and accrued
interest shall be immediately due and payable; PROVIDED that any such
declaration of acceleration shall not become effective until the earlier of (x)
five Business Days after receipt of the acceleration notice by the Bank Agent
and Lodgian Financing Corp. or (y) acceleration of the Indebtedness under the
Credit Agreement; PROVIDED FURTHER that such acceleration shall automatically be
rescinded and annulled without any further action required on the part of the
Holders in the event that any and all Events of Default specified in the
acceleration notice under the Indenture shall have been cured, waived or
otherwise remedied as provided in the Indenture prior to the expiration of the
period referred to in the preceding clauses (x) and (y). In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by Lodgian,
Lodgian Financing Corp. or the relevant Significant Subsidiary or waived by the
holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(g) or (h) above occurs with respect to Lodgian, Lodgian Financing Corp. or any
Subsidiary Guarantor, the principal of, premium, if any, and accrued interest on
the Notes then outstanding shall automatically become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder. The Holders of at least a majority in principal amount of the
outstanding Notes by written notice to Lodgian Financing Corp. and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (x) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (y) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless:
(1) the Holder gives the Trustee written notice of a continuing Event
of Default;
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(2) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer the Trustee indemnity satisfactory to
the Trustee against any costs, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request.
However, such limitations do not apply to the right of any Holder of a Note to
receive payment of the principal of, premium, if any, or interest on, such Note
or to bring suit for the enforcement of any such payment, on or after the due
date expressed in the Notes, which right shall not be impaired or affected
without the consent of the Holder.
Officers of Lodgian must certify, on or before a date not more than 90 days
after the end of each fiscal year, that a review has been conducted of the
activities of Lodgian and its Restricted Subsidiaries and Lodgian's and its
Restricted Subsidiaries' performance under the Indenture and that Lodgian has
fulfilled all obligations thereunder, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default and the nature
and status thereof. Lodgian will also be obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under the
Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Neither Lodgian nor Lodgian Financing Corp. will consolidate with, merge
with or into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially an
entirety in one transaction or a series of related transactions) to, any Person
or permit any Person to merge with or into it, unless:
(1) it shall be the continuing Person, or the Person (if other than it)
formed by such consolidation or into which it is merged or that acquired or
leased such property and assets (the "Surviving Person") shall be a
corporation organized and validly existing under the laws of the United
States of America or any jurisdiction thereof and shall expressly assume, by
a supplemental indenture, executed and delivered to the Trustee, all of its
obligations under the Indenture and the Notes;
(2) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro forma
basis, Lodgian or Lodgian Financing Corp. or the Surviving Person, as the
case may be, shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of Lodgian or Lodgian Financing Corp., as the
case may be, immediately prior to such transaction;
(4) immediately after giving effect to such transaction on a PRO FORMA
basis, Lodgian or Lodgian Financing Corp. or the Surviving Person, as the
case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that this
clause (4) shall not apply to a consolidation, merger or sale of all (but
not less than all) of the assets of Lodgian or Lodgian Financing Corp., as
the case may be, if all Liens and Indebtedness of Lodgian or Lodgian
Financing Corp. or the Surviving Person, as the case may be, and its
Restricted Subsidiaries outstanding immediately after such transaction would
have been permitted (and all such Liens and Indebtedness, other than Liens
and Indebtedness of Lodgian and its Restricted Subsidiaries outstanding
immediately prior to the transaction, shall be deemed to have been Incurred)
for all purposes of the Indenture;
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(5) it delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clauses (3) and (4))
and Opinion of Counsel, in each case stating that such consolidation, merger
or transfer and such supplemental indenture complies with this provision and
that all conditions precedent provided for herein relating to such
transaction have been complied with; and
(6) each Guarantor, unless such Guarantor is the Person with which
Lodgian or Lodgian Financing Corp. has entered into a transaction under this
"Consolidation, Merger and Sale of Assets" section, shall have by amendment
to its Note Guarantee confirmed that its Note Guarantee shall apply to the
obligations of Lodgian Financing Corp. or the Surviving Person in accordance
with the Notes and the Indenture;
PROVIDED, HOWEVER, that clauses (3) and (4) above do not apply if, in the good
faith determination of the Board of Directors of Lodgian, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of Lodgian or Lodgian
Financing Corp. and any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture will provide that Lodgian Financing
Corp. will be deemed to have paid and will be discharged from any and all
obligations in respect of the Notes on the 123rd day after the deposit referred
to below, and the provisions of the Indenture will no longer be in effect with
respect to the Notes (except for, among other matters, certain obligations to
register the transfer or exchange of the Notes, to replace stolen, lost or
mutilated Notes, to maintain paying agencies and to hold monies for payment in
trust) if, among other things:
(A) Lodgian Financing Corp. has deposited with the Trustee, in trust,
money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms
will provide money in an amount sufficient to pay the principal of, premium,
if any, and accrued interest on the Notes on the Stated Maturity of such
payments in accordance with the terms of the Indenture and the Notes,
(B) Lodgian Financing Corp. has delivered to the Trustee (1) either (x)
an Opinion of Counsel to the effect that Holders will not recognize income,
gain or loss for federal income tax purposes as a result of Lodgian
Financing Corp.'s exercise of its option under this "Defeasance" provision
and will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must be
based upon (and accompanied by a copy of) a ruling of the Internal Revenue
Service to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is no
longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (2) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the passage of 123 days following the deposit, the trust fund will not
be subject to the effect of Section 547 of the United States Bankruptcy Code
or Section 15 of the New York Debtor and Creditor Law,
(C) immediately after giving effect to such deposit on a PRO FORMA
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending on
the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any other
agreement or instrument to which Lodgian or any of its Subsidiaries is a
party or by which Lodgian or any of its Subsidiaries is bound,
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(D) Lodgian Financing Corp. is not prohibited from making payments in
respect of the Notes by the provisions described under "--Ranking--Terms of
Subordination," and
(E) if at such time the Notes are listed on a national securities
exchange, Lodgian Financing Corp. has delivered to the Trustee an Opinion of
Counsel to the effect that the Notes will not be delisted as a result of
such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (3) and (4) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (c) under "Events of Default" with respect to such clauses
(3) and (4) under "Consolidation, Merger and Sale of Assets," clause (d) under
"Events of Default" with respect to such other covenants and clauses (e) and (f)
under "Events of Default" shall be deemed not to be Events of Default upon,
among other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(2), (C), (D) and (E) of the preceding paragraph and the delivery by
Lodgian Financing Corp. to the Trustee of an Opinion of Counsel to the effect
that, among other things, the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and defeasance of
certain covenants and Events of Default and will be subject to federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event Lodgian
Financing Corp. exercises its option to omit compliance with certain covenants
and provisions of the Indenture with respect to the Notes as described in the
immediately preceding paragraph and the Notes are declared due and payable
because of the occurrence of an Event of Default that remains applicable, the
amount of money and/or U.S. Government Obligations on deposit with the Trustee
will be sufficient to pay amounts due on the Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, Lodgian
Financing Corp. will remain liable for such payments and Lodgian's and any
Subsidiary Guarantor's Note Guarantee with respect to such payments will remain
in effect.
MODIFICATION AND WAIVER
The Indenture may be amended, without the consent of any Holder, to:
(1) cure any ambiguity, defect or inconsistency in the Indenture;
(2) comply with the provisions described under "Consolidation, Merger
and Sale of Assets";
(3) comply with any requirements of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act;
(4) evidence and provide for the acceptance of appointment by a
successor Trustee; or
(5) make any change that, in the good faith opinion of the Board of
Directors, does not materially and adversely affect the rights of any
Holder.
Modifications and amendments of the Indenture may be made by Lodgian
Financing Corp. and the Trustee with the consent of the Holders of not less than
a majority in aggregate principal amount of the outstanding Notes; PROVIDED,
HOWEVER, that no such modification or amendment may, without the consent of each
Holder affected thereby:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,
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(2) change the optional redemption dates or optional redemption prices
of the Notes from that stated under the caption "Optional Redemption",
(3) reduce the principal amount of, or premium, if any, or interest on,
any Note,
(4) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Note,
(5) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption, on
or after the Redemption Date) of any Note,
(6) waive a default in the payment of principal of, premium, if any, or
interest on the Notes,
(7) release any Guarantor from its Note Guarantee, except as provided
in the Indenture,
(8) modify the subordination provisions in a manner adverse to the
Holders, or
(9) reduce the percentage or aggregate principal amount of outstanding
Notes the consent of whose Holders is necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
No recourse for the payment of the principal of, premium, if any, or
interest on any of the Notes or for any claim based thereon or otherwise in
respect thereof, and no recourse under or upon any obligation, covenant or
agreement of Lodgian in the Indenture, or in any of the Notes or because of the
creation of any Indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer, director, employee or controlling person of
Lodgian or of any successor Person thereof. Each Holder, by accepting the Notes,
waives and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of Lodgian Financing Corp., to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; PROVIDED, HOWEVER, that if it
acquires any conflicting interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form without interest coupons. Notes sold in offshore transactions in reliance
on Regulation S under the Securities Act will initially be represented by one or
more permanent global Notes in definitive, fully registered form without
interest coupons (each a "Regulation S Global Note") and will be deposited with
the Trustee as custodian for, and registered in the name of a nominee of, The
Depository Trust Company ("DTC") for the accounts of Euroclear and Cedelbank.
Prior to the 40th day after the Closing Date, beneficial interests in the
Regulation S Global Notes may only be held through Euroclear or Cedelbank, and
any resale or transfer of
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such interests to U.S. persons shall not be permitted during such period unless
such resale or transfer is made pursuant to Rule 144A or Regulation S.
Notes sold in reliance on Rule 144A will be represented by one or more
permanent global Notes in definitive, fully registered form without interest
coupons (each a "Restricted Global Note"; and together with the Regulation S
Global Notes, the "Global Notes") and will be deposited with the Trustee as
custodian for, and registered in the name of a nominee of, DTC.
Each Global Note (and any Notes issued for exchange therefor) will be
subject to certain restrictions on transfer set forth therein as described under
"Transfer Restrictions."
Notes transferred to institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act (an "Institutional
Accredited Investor") who are not qualified institutional buyers ("Non-Global
Purchasers") will be in registered form without interest coupons ("Certificated
Notes"). Upon the transfer of Certificated Notes initially issued to a
Non-Global Purchaser to a qualified institutional buyer or in accordance with
Regulation S, such Certificated Notes will, unless the relevant Global Note has
previously been exchanged in whole for Certificated Notes, be exchanged for an
interest in a Global Note. For a description of the restrictions on the transfer
of Certificated Notes, see "Transfer Restrictions."
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in a Restricted Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
Investors may hold their interests in a Regulation S Global Note directly
through Cedelbank or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such system. On or
after the 40th day following the Closing Date, investors may also hold such
interests through organizations other than Cedelbank or Euroclear that are
participants in the DTC system. Cedelbank and Euroclear will hold interests in
the Regulation S Global Notes on behalf of their participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture and, if applicable, those of Euroclear and Cedelbank.
Payments of the principal of, and interest on, a Global Note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof. Neither
Lodgian Financing Corp., the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Lodgian Financing Corp. expects that DTC or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. Lodgian Financing Corp. also expects
that payments by participants to owners of beneficial interests in such Global
Note held through such participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of
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customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedelbank will be effected in the ordinary
way in accordance with their respective rules and operating procedures.
Lodgian Financing Corp. expects that DTC will take any action permitted to
be taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Notes, DTC will exchange the applicable Global
Note for Certificated Notes, which it will distribute to its participants and
which may be legended as set forth under the heading "Transfer Restrictions."
Lodgian Financing Corp. understands that: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Indirect access to the DTC system is
available to others such as banks, brokers, dealers and trust companies and
certain other organizations that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
Although DTC, Euroclear and Cedelbank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Note among
participants of DTC, Euroclear and Cedelbank, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither Lodgian Financing Corp. nor the Trustee will
have any responsibility for the performance by DTC, Euroclear or Cedelbank or
their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by Lodgian
Financing Corp. within 90 days, Lodgian Financing Corp. will issue Certificated
Notes, which may bear the legend referred to under "Transfer Restrictions," in
exchange for the Global Notes. Holders of an interest in a Global Note may
receive Certificated Notes, which may bear the legend referred to under
"Transfer Restrictions," in accordance with the DTC's rules and procedures in
addition to those provided for under the Indenture.
DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used in this "Description of the Notes" for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary; PROVIDED that Indebtedness of such
Person which is redeemed, defeased, retired or otherwise repaid at the time of
or immediately upon consummation of the transactions by which such Person
becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of Lodgian and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED
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that the following items shall be excluded in computing Adjusted Consolidated
Net Income (without duplication):
(1) the net income (or loss) of any Person that is not a Restricted
Subsidiary;
(2) the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with
Lodgian or any of its Restricted Subsidiaries or all or substantially all of
the property and assets of such Person are acquired by Lodgian or any of its
Restricted Subsidiaries;
(3) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to such Restricted Subsidiary;
(4) any gains or losses (on an after-tax basis) attributable to sales
of assets outside the ordinary course of business of Lodgian and its
Restricted Subsidiaries;
(5) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
the "Limitation on Restricted Payments" covenant, (a) any amount paid or
accrued as dividends on Preferred Stock of Lodgian owned by Persons other
than Lodgian and any of its Restricted Subsidiaries and (b) any amount paid
as interest on the Convertible Debentures or dividends on the CRESTS; and
(6) all extraordinary gains and, for purposes of calculating the Fixed
Charge Coverage Ratio only, extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of Lodgian and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (1) all
current liabilities of Lodgian and its Restricted Subsidiaries (excluding
intercompany items) and (2) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent quarterly or annual consolidated balance sheet of
Lodgian and its Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the SEC or provided to the Trustee.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (1) an investment by Lodgian or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with
Lodgian or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of
Lodgian and its Restricted Subsidiaries on the date of such investment or (2) an
acquisition by Lodgian or any of its Restricted Subsidiaries of the property and
assets of any Person other than Lodgian or any of its Restricted Subsidiaries
that constitute substantially all of a division or line of business of such
Person; PROVIDED that the property and assets acquired are related, ancillary or
complementary to the businesses of Lodgian and its Restricted Subsidiaries on
the date of such acquisition.
"Asset Disposition" means the sale or other disposition by Lodgian or any of
its Restricted Subsidiaries (other than to Lodgian or another Restricted
Subsidiary) of (1) all or substantially all of the Capital Stock of any
Restricted Subsidiary or (2) all or substantially all of the assets that
constitute a division or line of business of Lodgian or any of its Restricted
Subsidiaries.
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"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by Lodgian or any of its Restricted Subsidiaries
to any Person other than Lodgian or any of its Restricted Subsidiaries of (1)
all or any of the Capital Stock of any Restricted Subsidiary, (2) all or
substantially all of the property and assets of an operating unit or business of
Lodgian or any of its Restricted Subsidiaries or (3) any other property and
assets (other than the Capital Stock or other Investment in an Unrestricted
Subsidiary) of Lodgian or any of its Restricted Subsidiaries outside the
ordinary course of business of Lodgian or such Restricted Subsidiary and, in
each case, that is not governed by the provisions of the Indenture applicable to
mergers, consolidations and sales of assets of Lodgian; PROVIDED that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets or (b) sales, transfers or other
dispositions of assets with a fair market value not in excess of $1.0 million in
any transaction or series of related transactions, (c) sales, transfers or other
dispositions of assets constituting a Permitted Investment or a Restricted
Payment permitted to be made under the "Limitation on Restricted Payments"
covenant, or (d) any sale, transfer, assignment or other disposition of any
property or equipment that has become damaged, worn out, obsolete or otherwise
unsuitable for use in connection with the business of Lodgian or its Restricted
Subsidiaries.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (2) the sum of all such principal payments.
"Bank Agent" means the agent for the lenders under the Credit Agreement or
its successors as agent for the lenders under the Credit Agreement.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (1) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 35% of the total voting power of the Voting Stock of Lodgian on a fully
diluted basis; or (2) individuals who on the Closing Date constitute the Board
of Directors (together with any new directors whose election by the Board of
Directors or whose nomination by the Board of Directors for election by
Lodgian's stockholders was approved by a vote of at least a majority of the
members of the Board of Directors then in office who either were members of the
Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income:
(1) Consolidated Interest Expense and accrued but unpaid interest on
the Convertible Debentures or accrued but unpaid dividends on the CRESTS;
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(2) income taxes;
(3) depreciation expense;
(4) amortization expense; and
(5) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an accrual
or reserve is, or is required by GAAP to be, made), less all non-cash items
increasing Adjusted Consolidated Net Income, all as determined on a
consolidated basis for Lodgian and its Restricted Subsidiaries in conformity
with GAAP;
PROVIDED that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (a) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (b) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by Lodgian or any
of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, (1) the aggregate
amount of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by Lodgian or any of its Restricted
Subsidiaries) paid or accrued by Lodgian and its Restricted Subsidiaries during
such period, (2) all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be
accrued by Lodgian and its Restricted Subsidiaries during such period and (3)
solely for calculating the Fixed Charge Coverage Ratio, the aggregate amount of
interest on the Convertible Debentures or dividends on the CRESTS paid by
Lodgian and its Restricted Subsidiaries during such period for such period to
the extent paid under clause (8) of the "Limitation on Restricted Payments"
covenant; EXCLUDING, HOWEVER, (1) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (3) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (3) of the definition thereof) and (2) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Notes, the establishment of the Credit Agreement and
any concurrent repayment of Indebtedness, all as determined on a consolidated
basis (without taking into account Unrestricted Subsidiaries) in conformity with
GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity plus, to the extent not included, any Preferred Stock of Lodgian as set
forth on the most recently available quarterly or annual consolidated balance
sheet of Lodgian and its Restricted Subsidiaries (which shall be as of a date
not more than 90 days prior to the date of such computation, and which shall not
take into account Unrestricted Subsidiaries), less any amounts attributable to
Disqualified Stock or any equity security convertible into or exchangeable for
Indebtedness, the cost of treasury stock and the principal amount of any
promissory notes receivable from the sale of the Capital Stock of Lodgian or any
of its Restricted Subsidiaries, each item to be determined in conformity with
GAAP (excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 52).
"Consolidated Operating Rental Expense" of any Person means, for any period,
the aggregate amount of rental expense with respect to any Operating Leases
deducted in computing net income of such Person during such period.
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"Convertible Debentures" means the 7% Convertible Debentures due 2010 issued
pursuant to the indenture dated June 17, 1998 among Servico, Inc., as issuer,
Lodgian, and Wilmington Trust Company, as trustee, as amended (including any
amendment and restatement thereof), supplemented, extended, renewed, replaced or
otherwise modified from time to time and including any agreement extending the
maturity of, refinancing or otherwise restructuring all or any portion of the
Indebtedness under such indenture or any successor agreement, as such agreement
may be amended, renewed, extended, substituted, replaced, restated or otherwise
modified from time to time.
"Credit Agreement" means the credit agreement to be dated as of the Closing
Date among Lodgian Financing Corp., the guarantors named therein and Morgan
Stanley Senior Funding, Inc. and any other lenders and parties thereto, together
with any agreements, instruments and documents executed or delivered pursuant to
or in connection with such credit agreement (including, without limitation, any
Guarantees and security documents), in each case as such credit agreement or
such agreements, instruments or documents may be amended (including any
amendment and restatement thereof), supplemented, extended, renewed, replaced or
otherwise modified from time to time and including any agreement extending the
maturity of, refinancing or otherwise restructuring (including, but not limited
to, the inclusion of additional borrowers thereunder that are Subsidiaries of
Lodgian) all or any portion of the Indebtedness under such agreement or any
successor agreement, as such agreement may be amended, renewed, extended,
substituted, replaced, restated or otherwise modified from time to time.
"CRESTS" means the 7% Convertible Redeemable Equity Structured Trust
Securities of Lodgian Capital Trust.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (1) any Indebtedness under the Credit
Agreement (except that any Indebtedness which represents a partial refinancing
of Indebtedness theretofore outstanding pursuant to the Credit Agreement, rather
than a complete refinancing thereof, shall only constitute Designated Senior
Indebtedness if such partial refinancing meets the requirements of clause (2)
below) and (2) any other Indebtedness constituting Senior Indebtedness that, at
the date of determination, has an aggregate principal amount outstanding of at
least $25 million and that is specifically designated, in the instrument
creating or evidencing such Senior Indebtedness as "Designated Senior
Indebtedness."
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (1) required to be redeemed prior to
the Stated Maturity of the Notes, (2) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (3) convertible into or exchangeable for Capital Stock referred
to in clause (1) or (2) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the Notes; PROVIDED that any Capital Stock that would
not constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the Stated Maturity of the Notes shall not constitute Disqualified
Stock if the "asset sale" or "change of control" provisions applicable to such
Capital Stock are no more favorable to the holders of such Capital Stock than
the provisions contained in "Limitation on Asset Sales" and "Repurchase of Notes
upon a Change of Control" covenants and such Capital Stock specifically provides
that such Person will not repurchase or redeem any such stock pursuant to such
provision prior to Lodgian Financing Corp.'s repurchase of such Notes as are
required to be repurchased pursuant to the "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants.
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"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"Fixed Charge Coverage Ratio" means, on any Transaction Date, the ratio of
(1) the aggregate amount of Consolidated EBITDA and one-third of Consolidated
Operating Rental Expense for the then most recent four fiscal quarters prior to
such Transaction Date for which reports have been filed with the SEC or provided
to the Trustee (the "Four Quarter Period") to (2) the aggregate Consolidated
Interest Expense and one-third of Consolidated Operating Rental Expense during
such Four Quarter Period. In making the foregoing calculation, (A) PRO FORMA
effect shall be given to any Indebtedness Incurred or repaid during the period
(the "Reference Period") commencing on the first day of the Four Quarter Period
and ending on the Transaction Date (other than Indebtedness Incurred under a
revolving credit or similar arrangement to the extent of the commitment
thereunder (or under any predecessor revolving credit or similar arrangement) in
effect on the last day of such Four Quarter Period unless any portion of such
Indebtedness is projected, in the reasonable judgment of the senior management
of Lodgian, to remain outstanding for a period in excess of 12 months from the
date of the Incurrence thereof), in each case as if such Indebtedness had been
Incurred or repaid on the first day of the Reference Period; (B) PRO FORMA
effect shall be given to any Operating Leases entered into during such Reference
Period as if they had been entered into on the first day of such Reference
Period; (C) Consolidated Interest Expense attributable to interest on any
Indebtedness (whether existing or being Incurred) computed on a PRO FORMA basis
and bearing a floating interest rate shall be computed as if the rate in effect
on the Transaction Date (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months or, if shorter, at least equal to the remaining term
of such Indebtedness) had been the applicable rate for the entire period; (D)
PRO FORMA effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving PRO FORMA effect to the application of proceeds of any Asset
Disposition) that occur during such Reference Period as if they had occurred and
such proceeds had been applied on the first day of such Reference Period; and
(E) PRO FORMA effect shall be given to asset dispositions and asset acquisitions
(including giving PRO FORMA effect to the application of proceeds of any asset
disposition) that have been made by any Person that has become a Restricted
Subsidiary or has been merged with or into Lodgian or any Restricted Subsidiary
during such Reference Period and that would have constituted Asset Dispositions
or Asset Acquisitions had such transactions occurred when such Person was a
Restricted Subsidiary as if such asset dispositions or asset acquisitions were
Asset Dispositions or Asset Acquisitions that occurred on the first day of such
Reference Period; PROVIDED that to the extent that clause (D) or (E) of this
sentence requires that PRO FORMA effect be given to an Asset Acquisition or
Asset Disposition, such PRO FORMA calculation shall be based upon the four full
fiscal quarters immediately preceding the Transaction Date of the Person, or
division or line of business of the Person, that is acquired or disposed for
which financial information is available.
"Foreign Subsidiary" means any Subsidiary of Lodgian that is an entity which
is a controlled foreign corporation under Section 957 of the Internal Revenue
Code.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes, the establishment of the Credit
Agreement and any concurrent repayment of Indebtedness and (ii) except as
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otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (1) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (2) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); PROVIDED that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor" means Lodgian, an Initial Subsidiary Guarantor or any other
Restricted Subsidiary that provides a Guarantee of Lodgian Financing Corp.'s
obligations under the Indenture and the Notes.
"Impac I Debt" means the loan in the aggregate principal amount of $132.459
million extended by Nomura Asset Capital Corporation to Impac Hotel I, L.L.C. in
March 1997.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; PROVIDED that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto, but excluding obligations with respect to letters of credit
(including trade letters of credit) securing obligations (other than
obligations described in (1) or (2) above or (5), (6) or (7) below) entered
into in the ordinary course of business of such Person to the extent such
letters of credit are not drawn upon or, if drawn upon, to the extent such
drawing is reimbursed no later than the third Business Day following receipt
by such Person of a demand for reimbursement);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except Trade
Payables;
(5) all Capitalized Lease Obligations;
(6) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED that the amount of such Indebtedness shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness;
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(7) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person; and
(8) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements (other
than Currency Agreements and Interest Rate Agreements designed solely to
protect Lodgian or its Restricted Subsidiaries against fluctuations in
foreign currency exchange rates or interest rates and that do not increase
the Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest rates
or by reason of fees, indemnities and compensation payable thereunder).
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, PROVIDED (A) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP, (B) that money borrowed and set
aside at the time of the Incurrence of any Indebtedness in order to prefund the
payment of the interest on such Indebtedness shall not be deemed to be
"Indebtedness" and (C) that Indebtedness shall not include (x) any liability for
federal, state, local or other taxes, (y) performance, surety or appeal bonds
provided in the ordinary course of business or (z) agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of Lodgian or any of its Restricted Subsidiaries pursuant to such
agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), so long as
the principal amount does not to exceed the gross proceeds actually received by
Lodgian or any Restricted Subsidiary in connection with such disposition.
"Initial Subsidiary Guarantors" means each wholly-owned subsidiary of
Lodgian Financing Corp.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers or suppliers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable, prepaid expenses or deposits on the balance sheet of
Lodgian or its Restricted Subsidiaries and endorsements for collection or
deposit arising in the ordinary course of business) or capital contribution to
(by means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, bonds, notes, debentures or other similar
instruments issued by, such Person and shall include (1) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary and (2) the retention of the
Capital Stock (or any other Investment) by Lodgian or any of its Restricted
Subsidiaries, of (or in) any Person that has ceased to be a Restricted
Subsidiary, including, without limitation, by reason of any transaction
permitted by clause (3) of the "Limitation on the Issuance and Sale of Capital
Stock of Restricted Subsidiaries" covenant. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant,
(a) the amount of or a reduction in an Investment shall be equal to the fair
market value thereof at the time such Investment is made or reduced and (b) in
the event Lodgian or a Restricted Subsidiary makes an Investment by transferring
assets to any Person and as part of such transaction receives Net Cash Proceeds,
the amount of such Investment shall be the fair market value of
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the assets less the amount of Net Cash Proceeds so received, provided that the
Net Cash Proceeds are applied in accordance with clause (A) or (B) of the
"Limitation on Asset Sales" covenant.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Lodgian Capital Trust" means Lodgian Capital Trust I, a statutory business
trust formed under the laws of the State of Delaware.
"Lodgian Capital Trust Declaration" means the amended and restated
declaration of trust dated June 17, 1998 among Lodgian (as successor of Servico,
Inc.) as sponsor, David Buddemeyer, Phillip R. Hale and Charles M. Diaz as the
initial regular trustees, Wilmington Trust Company as the initial property
trustee and initial Delaware trustee, Lodgian and the holders, from time to
time, of undivided beneficial ownership interest in the trust, as in effect on
the Closing Date.
"Lodgian Capital Trust Guarantee" means the Guarantee by Lodgian (as
successor of the original guarantor Servico, Inc.) of Lodgian Capital Trust's
obligations under the CRESTS, as in effect on the Closing Date.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(a) with respect to any Asset Sale, the proceeds of such Asset Sale in
the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or
cash equivalents and proceeds from the conversion of other property received
when converted to cash or cash equivalents, net of:
(1) brokerage commissions and other fees and expenses (including
fees and expenses of counsel and investment bankers) related to such
Asset Sale;
(2) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of Lodgian and its
Restricted Subsidiaries, taken as a whole;
(3) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (x) is secured by
a Lien on the property or assets sold or (y) is required to be paid as a
result of such sale; and
(4) appropriate amounts to be provided by Lodgian or any Restricted
Subsidiary as a reserve against any liabilities associated with such
Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated
with such Asset Sale, all as determined in conformity with GAAP; and
(b) with respect to any issuance or sale of Capital Stock, the proceeds
of such issuance or sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant
and other fees incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
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"Note Guarantee" means any Guarantee of the obligations of Lodgian Financing
Corp. under the Indenture and the Notes by any Guarantor.
"Offer to Purchase" means an offer to purchase Notes by Lodgian Financing
Corp. from the Holders commenced by mailing a notice to the Trustee and each
Holder stating:
(1) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis;
(2) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "Payment Date");
(3) that any Note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless Lodgian Financing Corp. defaults in the payment of the
purchase price, any Note accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest on and after the Payment Date;
(5) that Holders electing to have a Note purchased pursuant to the
Offer to Purchase will be required to surrender the Note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date;
(6) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and
(7) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered; PROVIDED that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples of
$1,000.
On the Payment Date, Lodgian Financing Corp. shall (a) accept for payment on a
pro rata basis Notes or portions thereof tendered pursuant to an Offer to
Purchase; (b) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and (c) deliver, or cause to
be delivered, to the Trustee all Notes or portions thereof so accepted together
with an Officers' Certificate specifying the Notes or portions thereof accepted
for payment by Lodgian Financing Corp. The Paying Agent shall promptly mail to
the Holders of Notes so accepted payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such Holders a
new Note equal in principal amount to any unpurchased portion of the Note
surrendered; PROVIDED that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or integral multiples of $1,000. Lodgian
Financing Corp. will publicly announce the results of an Offer to Purchase as
soon as practicable after the Payment Date. The Trustee shall act as the Paying
Agent for an Offer to Purchase. Lodgian Financing Corp. will comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable, in the event
that Lodgian Financing Corp. is required to repurchase Notes pursuant to an
Offer to Purchase.
"Operating Lease" means any lease of any property (whether real, personal or
mixed) other than a Capitalized Lease.
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"Permitted Investment" means:
(1) an Investment in Lodgian or a Restricted Subsidiary or a Person
which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey
all or substantially all its assets to, Lodgian or a Restricted Subsidiary;
PROVIDED that (a) such person's primary business is related, ancillary or
complementary to the businesses of Lodgian and its Restricted Subsidiaries
on the date of such Investment and (b) none of Lodgian Financing Corp.,
Lodgian or any Subsidiary Guarantor will transfer any hotel properties to a
Restricted Subsidiary other than a Subsidiary Guarantor and no Restricted
Subsidiary other than Lodgian Financing Corp. or a Subsidiary Guarantor will
acquire or otherwise develop any hotels other than hotels held by such
Subsidiary on the Closing Date;
(2) Temporary Cash Investments;
(3) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP;
(4) stock, obligations or securities received in satisfaction of
judgments;
(5) an Investment in an Unrestricted Subsidiary consisting solely of an
Investment in another Unrestricted Subsidiary;
(6) Interest Rate Agreements and Currency Agreements designed solely to
protect Lodgian or its Restricted Subsidiaries against fluctuations in
interest rates or foreign currency exchange rates; and
(7) Investments in any Person the primary business of which is related,
ancillary or complementary to the business of Lodgian and its Restricted
Subsidiaries on the date of such
Investment; PROVIDED that the aggregate amount of such Investments under
this clause (7) does not exceed (a) $20 million plus (b) the net reduction
in Investments made pursuant to this clause (7) resulting from distributions
on or repayments of such Investments, including payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other
distributions or other transfers of assets, in each case to Lodgian or any
Restricted Subsidiary, or from the Net Cash Proceeds from the sale or other
disposition of any such Investment (except, in each case, to the extent of
any gain on such sale or disposition that would be included in the
calculation of Adjusted Consolidated Net Income), from the release of any
Guarantee or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"); PROVIDED that the net reduction in any such Investments
shall not exceed the amount of such Investments in such Person.
"Purchase Money Indebtedness" means any Indebtedness, including Capitalized
Leases, which is Incurred to finance the acquisition, construction, installation
or improvement of any Replacement Assets and which is Incurred concurrently
with, or within six months following, such acquisition, construction,
installation or improvement.
"Replacement Assets" means, on any date, property or assets (other than
current assets) of a nature or type or that are used in a business (or an
Investment in a company having property or assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, Lodgian and its Restricted Subsidiaries
existing on such date.
"Restricted Subsidiary" means any Subsidiary of Lodgian other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
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"Senior Indebtedness" means the following obligations of Lodgian, Lodgian
Financing Corp. or any Subsidiary Guarantor, whether outstanding on the Closing
Date or thereafter Incurred: (1) all Indebtedness and all other monetary
obligations (including, without limitation, expenses, fees, principal, interest,
reimbursement obligations under letters of credit and indemnities payable in
connection therewith) under (or in respect of) the Credit Agreement or any
Interest Rate Agreement or Currency Agreement relating to the Indebtedness under
the Credit Agreement and (2) all Indebtedness and all other monetary obligations
of Lodgian, Lodgian Financing Corp. or any Subsidiary Guarantor (other than the
Notes and any Note Guarantee and the Convertible Debentures), including
principal and interest on such Indebtedness, unless such Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such
Indebtedness is issued, is PARI PASSU with, or subordinated in right of payment
to, the Notes or any Note Guarantee; PROVIDED that the term "Senior
Indebtedness" shall not include (a) any Indebtedness of Lodgian, Lodgian
Financing Corp. or any Subsidiary Guarantor that, when Incurred, was without
recourse to Lodgian, Lodgian Financing Corp. or such Subsidiary Guarantor, (b)
any Indebtedness of Lodgian, Lodgian Financing Corp. or any Subsidiary Guarantor
to a Subsidiary of Lodgian, or to a joint venture in which Lodgian or any
Restricted Subsidiary has an interest, (c) any Indebtedness of Lodgian, Lodgian
Financing Corp. or any Subsidiary Guarantor, to the extent not permitted by the
"Limitation on Indebtedness" covenant or the "Limitation on Senior Subordinated
Indebtedness" covenant; provided that Indebtedness under the Credit Agreement
shall be deemed Senior Indebtedness if Lodgian, Lodgian Financing Corp. or any
Subsidiary Guarantor, as the case may be, believed in good faith at the time of
incurrence that it was permitted to incur such Indebtedness under the Indenture
and delivers an officers' certificate to the lenders under the Credit Agreement
to such effect, (d) any repurchase, redemption or other obligation in respect of
Disqualified Stock, (e) any Indebtedness to any employee of Lodgian or any of
its Subsidiaries, (f) any liability for taxes owed or owing by Lodgian, Lodgian
Financing Corp. or any Subsidiary Guarantor, or (g) any Trade Payables.
"Senior Subordinated Obligations" means any principal of, premium, if any,
or interest on the Notes payable pursuant to the terms of the Notes or any Note
Guarantee or upon acceleration, including any amounts received upon the exercise
of rights of rescission or other rights of action (including claims for damages)
or otherwise, to the extent relating to the purchase price of the Notes or
amounts corresponding to such principal, premium, if any, or interest on the
Notes.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of Lodgian, accounted for more than 10% of the consolidated revenues of
Lodgian and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of Lodgian and
its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of Lodgian for such fiscal year.
"Stated Maturity" means (1) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (2) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Subsidiary Guarantor" means any Initial Subsidiary Guarantor and any other
Restricted Subsidiary which provides a Guarantee of Lodgian Financing Corp.'s
obligations under the Indenture and the Notes pursuant to the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant.
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"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof, in each case maturing within one
year;
(2) time deposit accounts, certificates of deposit and money market
deposits maturing within 180 days of the date of acquisition thereof issued
by a bank or trust company which is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $100 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank or trust company meeting the qualifications described in
clause (2) above;
(4) commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate of Lodgian
Financing Corp.) organized and in existence under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P;
(5) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
S&P or Moody's; and
(6) any mutual fund that has at least 95% of its assets continuously
invested in investments of the types described in clauses (1) through (5)
above.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness, the date such Indebtedness is to be Incurred and, with respect to
any Restricted Payment, the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (1) any Subsidiary of Lodgian other than
Lodgian Financing Corp. that at the time of determination shall be designated an
Unrestricted Subsidiary by the Board of Directors in the manner provided below;
and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may
designate any Restricted Subsidiary (including any newly acquired or newly
formed Subsidiary of Lodgian) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, Lodgian or any Restricted Subsidiary; PROVIDED that (a) any Guarantee by
Lodgian or any Restricted Subsidiary of any Indebtedness of the Subsidiary being
so designated shall be deemed an "Incurrence" of such Indebtedness and an
"Investment" by Lodgian or such Restricted Subsidiary (or both, if applicable)
at the time of such designation; (b) either (x) the Subsidiary to be so
designated has total assets of $1,000 or less or (y) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
"Limitation on Restricted Payments" covenant and (c) if applicable, the
Incurrence of Indebtedness and the Investment referred to in clause (a)
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of this proviso would be permitted under the "Limitation on Indebtedness" and
"Limitation on Restricted Payments" covenants. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED
that (i) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation and (ii) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are (1) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (2) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Notes, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specific payment of interest on or principal of any
such U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt; PROVIDED that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of interest on
or principal of the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
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CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax consequences of
the Exchange Offer, and of the purchase, beneficial ownership and disposition of
Exchange Notes. For purposes of this summary, a "U.S. Holder" means a beneficial
owner of an Old Note or an Exchange Note that is for U.S. federal income tax
purposes:
- an individual who is a citizen or resident of the United States;
- a corporation, partnership or other business entity created or organized
under the laws of the United States or any state or political subdivision
thereof (including the District of Columbia);
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust with respect to which a court within the United States is able to
exercise primary supervision over its administration, and one or more
United States persons have the authority to control all of its substantial
decisions.
An individual may, subject to certain exceptions, be deemed to be a resident
of the United States by virtue of being present in the United States for at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year (counting for
such purposes of all the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). A "Non-U.S. Holder" is a beneficial owner of an Old
Note or an Exchange Note that is not a U.S. Holder.
This summary is based on interpretations of the Internal Revenue Code of
1986, as amended (the "Code"), regulations issued thereunder, and rulings and
decisions currently in effect (or in some cases proposed), all of which are
subject to change. Any such change may be applied retroactively and may
adversely affect the federal tax consequences described herein. This summary
addresses only holders that own Old Notes or Exchange Notes as capital assets
and not as part of a "straddle" or a "conversion transaction" for U.S. federal
income tax purposes or as part of some other integrated investment. This summary
does not discuss all of the tax consequences that may be relevant to particular
investors or to investors subject to special treatment under the U.S. federal
income tax laws (such as life insurance companies, tax-exempt entities,
regulated investment companies, securities dealers, or investors whose
functional currency is not the U.S. dollar). Persons considering the exchange of
their Old Notes for Exchange Notes and persons considering the purchase of
Exchange Notes should consult their tax advisors concerning the application of
U.S. federal tax laws to their particular situations as well as any consequences
of the exchange of the Old Notes for Exchange Notes, and of the purchase,
beneficial ownership and disposition of Exchange Notes arising under the laws of
any state or other taxing jurisdiction.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER TO U.S. HOLDERS AND
NON-U.S. HOLDERS
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not be a taxable event for U.S. federal income tax purposes. U.S. Holders
and Non-U.S. Holders will not recognize any taxable gain or loss as a result of
such exchange and will have the same tax basis and holding period in the
Exchange Notes as they had in the Old Notes immediately before the exchange.
U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OWNERSHIP
OF EXCHANGE NOTES
For purposes of the following summary, interest and gain on the sale,
exchange or other disposition of an Exchange Note will be considered "U.S. trade
or business income" if such income or gain is:
- effectively connected with the conduct of a trade or business in the
United States; or
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- in the case of a treaty resident, attributable to a permanent
establishment (or, in the case of an individual, to a fixed base) in the
United States.
TREATMENT OF INTEREST. A Non-U.S. Holder that is not subject to U.S.
federal income tax as a result of any direct or indirect connection to the
United States other than its ownership of an Exchange Note will not be subject
to U.S. federal income or withholding tax in respect of interest income on the
Exchange Note if:
- the interest is not U.S. trade or business income;
- the Non-U.S. Holder provides an appropriate statement on Internal Revenue
Service ("IRS") Form W-8 or Form W-8BEN, together with all appropriate
attachments, signed under penalties of perjury, identifying the Non-U.S.
Holder and stating, among other things, that the Non-U.S. Holder is not a
United States person for U.S. federal income tax purposes; and
- the Non-U.S. Holder is not a "10-percent shareholder" or a "related
controlled foreign corporation" with respect to the Company as specially
defined for U.S. federal income tax purposes.
If an Exchange Note is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide a signed statement to eliminate withholding tax. However, in such case,
the signed statement must be accompanied by a copy of the IRS Form W-8 or Form
W-8BEN or the substitute form provided by the beneficial owner to the
organization or institution. For interest paid with respect to an Exchange Note
after December 31, 2000, a Non-U.S. Holder that is treated as a partnership for
U.S. federal tax purposes generally will be required to provide an IRS Form
W-8IMY and to attach an appropriate certification by each beneficial owner of
the Non-U.S. Holder (including in certain cases, such beneficial owner's
beneficial owners). Prospective investors, including foreign partnerships and
their partners, should consult their tax advisors regarding these possible
additional reporting requirements.
To the extent these conditions are not met, a 30% withholding tax will apply
to interest income on the Exchange Note, unless an income tax treaty reduces or
eliminates such tax or unless the interest is effectively connected with the
conduct of a trade or business within the United States by such Non-U.S. Holder
and the Non-U.S. Holder provides an appropriate statement to that effect. In the
latter case, such Non-U.S. Holder generally will be subject to U.S. federal
income tax with respect to all income from the Exchange Notes at regular rates
applicable to U.S. taxpayers. Additionally, in such event, Non-U.S. Holders that
are corporations could be subject to a branch profits tax on such income.
TREATMENT OF DISPOSITIONS OF EXCHANGE NOTES. In general, a Non-U.S. Holder
will not be subject to U.S. federal income tax on any amount received (other
than amounts in respect of accrued but unpaid interest) upon retirement or
disposition of an Exchange Note unless such Non-U.S. Holder is an individual
present in the United States for 183 days or more in the taxable year of the
sale, exchange or other disposition and certain other requirements are met, or
unless the gain is U.S. trade or business income. In the latter event, Non-U.S.
Holders generally will be subject to U.S. federal income tax with respect to
such gain at regular rates applicable to U.S. taxpayers. Additionally, in such
event, Non-U.S. Holders that are corporations could be subject to a branch
profits tax on such gain.
TREATMENT OF EXCHANGE NOTES FOR U.S. FEDERAL ESTATE TAX PURPOSES. An
individual Non-U.S. Holder (who is not domiciled in the United States for U.S.
federal estate tax purposes at the time of death) will not be subject to U.S.
federal estate tax in respect of an Exchange Note, provided the Non-U.S. Holder
does not at the time of death actually or constructively own 10% or more of the
combined voting power of all classes of stock of the Company and payments of
interest on such Exchange Note would not have been considered U.S. trade or
business income at the time of such Non-U.S. Holder's death.
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U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX FOR NON-U.S.
HOLDERS
Under certain circumstances, the Code requires "information reporting"
annually to the IRS and to each holder of Exchange Notes, and "backup
withholding" at a rate of 31% with respect to certain payments made on or with
respect to the Exchange Notes. Backup withholding generally does not apply with
respect to certain holders of Exchange Notes, including corporations, tax-exempt
organizations, qualified pension and profit sharing trusts and individual
retirement accounts.
A Non-U.S. Holder that provides an IRS Form W-8 or Form W-8BEN, together
with all appropriate attachments, signed under penalties of perjury, identifying
the Non-U.S. Holder and stating that the Non-U.S. Holder is not a United States
person will not be subject to IRS reporting requirements and U.S. backup
withholding. With respect to interest paid after December 31, 2000, IRS Forms
W-8BEN will be required from the beneficial owners of interests in a Non-U.S.
Holder that is treated as a partnership for U.S. federal income tax purposes.
The payment of the proceeds on the disposition of an Exchange Note to or
through the U.S. office of a broker generally will be subject to information
reporting and backup withholding at a rate of 31% unless the Non-U.S. Holder
either certifies its status as a Non-U.S. Holder under penalties of perjury on
IRS Form W-8 or Form W-8BEN (as described above) or otherwise establishes an
exemption. The payment of the proceeds on the disposition of an Exchange Note by
a Non-U.S. Holder to or through a non-U.S. office of a non-U.S. broker will not
be subject to backup withholding or information reporting unless the non-U.S.
broker is a "U.S. related person" (as defined below). The payment of proceeds on
the disposition of an Exchange Note by a Non-U.S. Holder to or through a
non-U.S. office of a U.S. broker or a U.S. related person generally will not be
subject to backup withholding but will be subject to information reporting
unless the Non-U.S. Holder certifies its status as a Non-U.S. Holder under
penalties of perjury or the broker has certain documentary evidence in its files
as to the Non-U.S. Holder's foreign status and the broker has no actual
knowledge to the contrary.
For this purpose, a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment (or for such part of the period that the broker has been in
existence) is derived from activities that are effectively connected with
the conduct of a U.S. trade or business; or
- for payments made after December 31, 2000, a foreign partnership if at any
time during its tax year one or more of its partners are United States
persons who, in the aggregate, hold more than 50% of the income or capital
interest of the partnership or if, at any time during its taxable year,
the partnership is engaged in the conduct of a U.S. trade or business.
Backup withholding is not an additional tax and may be refunded (or credited
against the Non-U.S. Holder's U.S. federal income tax liability, if any),
provided that certain required information is furnished. The information
reporting requirements may apply regardless of whether withholding is required.
Copies of the information returns reporting such interest and withholding also
may be made available to the tax authorities in the country in which a Non-U.S.
Holder is a resident under the provisions of an applicable income tax treaty or
agreement.
128
<PAGE>
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from Lodgian Financing or any
affiliate of Lodgian Financing) may exchange such Old Notes for Exchange Notes
pursuant to the Exchange Offer; PROVIDED, that each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. Lodgian Financing has agreed that for a period of 180
days after consummation of the Exchange Offer, it will make this Prospectus, as
it may be amended or supplemented from time to time, available to any
broker-dealer for use in connection with any such resale.
Lodgian Financing will not receive any proceeds from any sale of Exchange
Notes by broker-dealers or any other holder of Exchange Notes. Exchange Notes
received by broker-dealers for their own account pursuant to the Exchange Offer
may be sold from time to time in one or more transactions in the over-the-
counter market, in negotiated transactions, through the writing of options on
the Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or he purchasers of
any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 180 days after consummation of the Exchange Offer, Lodgian
Financing will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. Lodgian Financing has agreed to pay
all expenses incident to the Exchange Offer and to Lodgian Financing's
performance of, or compliance with, the Registration Rights Agreement (other
than commissions or concessions of any brokers or dealers) and will indemnify
the holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
129
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Exchange Notes
offered by this prospectus will be passed on for us by Cadwalader, Wickersham &
Taft, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
The consolidated financial statements of Impac Hotel Group, LLC as of
December 31, 1997 and 1996 and for each of the three-years in the period ended
December 31, 1997, included in this prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
130
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets as of June 30, 1999 (Unaudited) and December 31, 1998 and
1997............................................................................... F-3
Consolidated Statements of Operations for the Six Months Ended June 30, 1999 and 1998
(Unaudited) and the Years Ended December 31, 1998, 1997 and 1996................... F-4
Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30,
1999 (Unaudited) and the Years Ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998
(Unaudited) and the Years Ended December 31, 1998, 1997 and 1996................... F-6
Notes to Consolidated Financial Statements........................................... F-7
IMPAC HOTEL GROUP, LLC AND SUBSIDIARIES
Report of Independent Accountants.................................................... F-35
Consolidated and Combined Balance Sheets as of June 30, 1998 (Unaudited) and December
31, 1997 and 1996.................................................................. F-36
Consolidated and Combined Statements of Operations for the Six Months Ended June 30,
1998 and 1997 (Unaudited) and the Years Ended December 31, 1997, 1996 and 1995..... F-37
Consolidated and Combined Statements of Equity for the Six Months Ended June 30, 1998
(Unaudited) and the Years Ended December 31, 1997, 1996 and 1995................... F-38
Consolidated and Combined Statements of Cash Flows for the Six Months Ended June 30,
1998 and 1997 (Unaudited) and the Years Ended December 31, 1997, 1996 and 1995..... F-39
Notes to Financial Statements........................................................ F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Lodgian, Inc.
We have audited the accompanying consolidated balance sheets of Lodgian,
Inc. (formerly known as Servico, Inc) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lodgian, Inc.
(formerly known as Servico, Inc.) and subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
March 31, 1999, except for Note 15,
as to which the date is June 24, 1999
F-2
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF JUNE 30 ------------------------
1999 1998 1997
-------------- ------------ ----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 20,322 $ 19,185 $ 15,243
Cash, restricted..................................................... 6,127 6,302 --
Accounts receivable, net of allowances............................... 36,593 25,498 11,023
Inventories.......................................................... 9,175 9,263 4,485
Prepaid expenses..................................................... 14,090 8,697 7,469
Other current assets................................................. 10,217 9,996 3,684
-------------- ------------ ----------
Total current assets............................................... 96,524 78,941 41,904
Property and equipment, net............................................ 1,332,522 1,317,470 534,080
Deposits for capital expenditures...................................... 29,798 30,386 30,901
Other assets, net...................................................... 61,065 71,124 20,766
-------------- ------------ ----------
$ 1,519,909 $ 1,497,921 $ 627,651
-------------- ------------ ----------
-------------- ------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................... $ 47,756 $ 57,253 $ 7,543
Accrued liabilities.................................................. 52,687 50,633 27,355
Current portion of long-term obligations............................. 36,110 36,134 5,728
-------------- ------------ ----------
Total current liabilities.......................................... 136,553 144,020 40,626
Long-term obligations, less current portion............................ 833,442 816,644 323,320
Deferred income taxes.................................................. 68,002 63,469 10,615
Commitments and contingencies.......................................... -- -- --
Minority interests:
Preferred redeemable securities...................................... 175,000 175,000 --
Other................................................................ 15,922 15,021 13,555
Stockholders' equity:
Common stock, $.01 par value-shares authorized; 28,013,595,
27,981,501, 27,937,057 and 20,974,852 shares issued and outstanding
at June 30, 1999, December 31, 1998 and 1997, respectively......... 278 278 210
Additional paid-in capital........................................... 262,436 261,976 211,577
Retained earnings.................................................... 29,905 23,106 28,327
Accumulated other comprehensive loss................................. (1,629) (1,593) (579)
-------------- ------------ ----------
Total stockholders' equity......................................... 290,990 283,767 239,535
-------------- ------------ ----------
Total liabilities and stockholders' equity......................... $ 1,519,909 $ 1,497,921 $ 627,651
-------------- ------------ ----------
-------------- ------------ ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms.............................................. $ 211,663 $ 124,761 $ 267,862 $ 179,956 $ 156,564
Food and beverage.................................. 69,126 50,540 107,334 80,335 68,803
Other.............................................. 14,878 9,968 20,018 16,366 14,159
---------- ---------- ---------- ---------- ----------
295,667 185,269 395,214 276,657 239,526
Operating expenses:
Direct:
Rooms............................................ 57,122 34,072 75,316 49,608 43,667
Food and beverage................................ 50,541 38,460 81,643 60,919 52,761
General and administrative........................... 11,367 4,829 10,080 8,973 9,297
Depreciation and amortization........................ 27,500 14,758 31,114 23,023 18,677
Other................................................ 93,359 58,952 129,950 88,036 77,183
---------- ---------- ---------- ---------- ----------
Total operating expenses............................. 239,889 151,071 328,103 230,559 201,585
---------- ---------- ---------- ---------- ----------
Income from operations............................... 55,778 34,198 67,111 46,098 37,941
Other income (expenses):
Interest income and other.......................... 817 700 1,260 1,720 1,723
Gain on litigation settlement...................... -- -- -- -- 3,612
Loss on asset disposition.......................... -- (432) (432) -- --
Interest expense................................... (37,139) (16,132) (30,378) (25,909) (29,443)
Settlement on swap transactions.................... -- -- (31,492) -- --
Severance and other expenses....................... -- -- (3,400) -- --
Minority interests:
Preferred redeemable securities.................... (6,814) (311) (6,475) -- --
Other.............................................. (1,310) (823) (1,436) (960) (2,060)
---------- ---------- ---------- ---------- ----------
(Loss) income before income taxes and extraordinary
item............................................... 11,332 17,200 (5,242) 20,949 11,773
(Benefit) provision for income taxes................. 4,533 6,880 (2,097) 8,379 3,225
---------- ---------- ---------- ---------- ----------
(Loss) income before extraordinary item.............. 6,799 10,320 (3,145) 12,570 8,548
Extraordinary item:
Loss on extinguishment of indebtedness, net of
income tax benefit of $1,384, $2,500 and $232 in
1998, 1997 and 1996, respectively................ -- (1,095) (2,076) (3,751) (348)
---------- ---------- ---------- ---------- ----------
Net (loss) income.................................... 6,799 $ 9,225 $ (5,221) $ 8,819 $ 8,200
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings (loss) per common share:
(Loss) income before extraordinary item............ $ 0.25 $ 0.49 $ (.16) $ .83 $ .92
Extraordinary item................................. -- (0.05) (.10) (.25) (.04)
---------- ---------- ---------- ---------- ----------
Net (loss) income per common share................. $ 0.25 $ 0.44 $ (.26) $ .58 $ .88
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings (loss) per common share-assuming dilution:
(Loss) income before extraordinary item............ $ .25 $ 0.49 $ (.16) $ .80 $ .88
Extraordinary item................................. -- (0.05) (.10) (.24) (.04)
---------- ---------- ---------- ---------- ----------
Net (loss) income per common share-assuming
dilution......................................... $ 0.25 $ 0.44 $ (.26) $ .56 $ .84
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS
SHARES AMOUNT CAPITAL EARNINGS LOSS EQUITY
------------- ----------- ---------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995................ 8,846,269 $ 88 $ 51,424 $ 11,308 $ -- $ 62,820
401(k) Plan contribution.................. 25,536 1 465 -- -- 466
Exercise of stock options................. 497,800 5 2,008 -- -- 2,013
Tax benefit from exercise of stock
options................................. -- -- 1,239 -- -- 1,239
Net income................................ -- -- -- 8,200 -- 8,200
------------- ----- ---------- --------- ------- ------------
Balance at December 31, 1996................ 9,369,605 94 55,136 19,508 -- 74,738
Issuance of common stock.................. 11,500,000 115 156,085 -- -- 156,200
401(k) Plan contribution.................. 49,847 -- 282 -- -- 282
Exercise of stock options................. 86,600 1 437 -- -- 438
Tax benefit from exercise of stock
options................................. -- -- 175 -- -- 175
Purchase of common stock.................. (31,200) -- (538) -- -- (538)
Net income................................ -- -- -- 8,819 -- 8,819
Currency translation adjustments.......... -- -- -- -- (579) (579)
------------- ----- ---------- --------- ------- ------------
Comprehensive income...................... -- -- -- -- -- 8,240
------------- ----- ---------- --------- ------- ------------
Balance at December 31, 1997................ 20,974,852 210 211,577 28,327 (579) 239,535
Issuance of common stock in connection
with purchase of Impac.................. 9,400,000 94 82,626 -- -- 82,720
401(k) Plan contribution.................. 88,205 -- 430 -- -- 430
Exercise of stock options................. 134,900 1 1,143 -- -- 1,144
Tax benefit from exercise of stock
options................................. -- -- 245 -- -- 245
Purchase of common stock.................. (2,660,900) (27) (34,045) -- -- (34,072)
Net loss.................................. -- -- -- (5,221) -- (5,221)
Currency translation adjustments.......... -- -- -- -- (1,014) (1,014)
------------- ----- ---------- --------- ------- ------------
Comprehensive loss........................ -- -- -- -- -- (6,235)
------------- ----- ---------- --------- ------- ------------
Balance at December 31, 1998................ 27,937,057 278 261,976 23,106 (1,593) 283,767
401(k) Plan contribution (unaudited)...... 61,538 -- 400 -- -- 400
Net income................................ -- -- -- (6,799) -- (6,799)
------------- ----- ---------- --------- ------- ------------
Exercise of stock options................. 15,000 -- 60 -- -- 60
Currency translation adjustments.......... -- -- -- -- (36) (36)
------------- ----- ---------- --------- ------- ------------
Comprehensive income...................... -- -- -- -- -- (6,737)
Balance at June 30, 1999 (unaudited)........ 28,013,595 $ 278 $ 262,436 $ 29,905 $ (1,629) $ 290,990
------------- ----- ---------- --------- ------- ------------
------------- ----- ---------- --------- ------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net (loss) income................................................... $ 6,799 $ 9,225 $ (5,221) $ 8,819 $ 8,200
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization..................................... 27,500 10,899 31,114 23,023 18,677
Loss on extinguishment of indebtedness............................ -- 1,825 3,460 6,251 580
Deferred income taxes............................................. 4,533 6,891 (726) 2,216 1,252
Minority interests--other......................................... 901 823 1,430 960 2,060
401(k) Plan contributions......................................... 400 147 430 282 548
Provision for (recoveries of) losses on receivables............... -- 10 77 (69) 27
Equity in (profit) loss of unconsolidated entities................ -- -- (782) (107) 63
Gain on litigation settlement..................................... -- -- -- -- (3,868)
Gain on recovery of investments................................... -- -- -- -- (134)
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable............................................. (11,095) (5,456) (6,563) (2,017) (824)
Inventories..................................................... 88 (832) (1,883) (1,458) (761)
Other assets.................................................... (1,397) (3,252) (18,412) 425 1,875
Accounts payable................................................ (9,497) 3,366 14,913 1,174 200
Accrued liabilities............................................. 2,054 9,664 11,464 2,522 3,075
--------- --------- --------- --------- ---------
Net cash provided by operating activities........................... 20,286 33,310 29,301 42,021 30,970
Investing activities:
Acquisitions of property and equipment............................ (1,929) (53,491) (67,717) (143,406) (70,312)
Acquisition of Impac.............................................. -- -- -- --
Proceeds from sale of assets...................................... 11,100 2,373 -- -- --
Capital improvements, net......................................... (44,259) (29,795) (118,667) (48,252) (26,323)
Purchase of minority interests.................................... -- -- -- (11,748) --
Net deposits for capital expenditures............................. 588 15,741 3,860 (17,247) (7,074)
Deposit for asset purchase........................................ -- -- -- -- --
Other............................................................. -- 1,361 -- -- --
Purchase of marketable securities................................. -- -- -- (500) --
Payments on notes receivable issued to related parties............ -- -- -- 470 1,200
Decrease in investment in unconsolidated entities................. -- -- -- 17 2,198
Notes receivable issued to related parties........................ -- -- -- -- (1,670)
Net proceeds from litigation settlement........................... -- -- -- -- 3,868
Net proceeds from recovery of investments......................... -- -- -- -- 556
--------- --------- --------- --------- ---------
Net cash used in investing activities............................. (34,500) (63,811) (182,524) (220,666) (97,557)
Financing activities:
Proceeds from issuance of long-term obligations................... 29,640 234,703 600,284 191,560 166,317
Proceeds from issuance of common stock............................ 60 977 1,144 156,638 2,013
Principal payments of long-term obligations....................... (12,866) (158,734) (390,026) (167,647) (92,216)
Payments of deferred loan costs................................... (1,360) (7,151) (20,165) (4,652) (6,533)
(Distributions to) contributions from minority interests.......... (123) 142 -- (946) 5,078
Payments for repurchase of common stock........................... -- (15,644) (34,072) (538) --
--------- --------- --------- --------- ---------
Net cash provided by financing activities......................... 15,351 54,293 157,165 174,415 74,659
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents................ 1,137 23,792 3,942 (4,230) 8,072
Cash and cash equivalents at beginning of period.................... 19,185 15,243 15,243 19,473 11,401
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period.......................... $ 20,322 $ 39,035 $ 19,185 $ 15,243 $ 19,473
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental cash flow information
Cash paid during the year for:
Interest, net of amount capitalized............................... $ 35,623 $ 14,388 $ 31,512 $ 22,109 $ 23,147
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income taxes paid, net of refunds................................. $ -- $ 592 $ 5,210 $ 1,091 $ 2,531
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosure of non cash investing and financing
activities:
Non cash acquisition and related financing of property and
equipment....................................................... $ -- $ 58,061 $ 696,851 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Issuance of stock in connection with acquisition of Impac......... $ -- $ 58,061 $ 82,700 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
On December 11, 1998 Servico, Inc. (Servico) merged with Impac Hotel Group,
LLC (Impac), pursuant to which Servico and Impac formed a new company Lodgian,
Inc. ("Lodgian" or the "Company"). This transaction has been accounted for under
the purchase method of accounting, whereby Servico is considered the acquiring
company. For further discussion of the merger see Note 2.
As a result of the merger, Lodgian its wholly owned subsidiaries and
consolidated partnerships (collectively, the "Company"), own or manage hotels in
35 states, Canada and Europe. At December 31, 1998 and 1997, the Company owned,
either wholly or partially, or managed 144 and 71 hotels, respectively.
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of Lodgian, its wholly
owned subsidiaries and partnerships in which Lodgian exercises control over the
partnerships' assets and operations. Lodgian believes it has control of
partnerships when the Company manages and has control of the partnerships'
assets and operations, has the ability and authority to enter into financing
arrangements on behalf of the entity or to sell the assets of the entity within
reasonable business guidelines.
An unconsolidated entity (owning 1 hotel) and a joint venture which owns and
operates six hotels in Belgium and the Netherlands, in which the Company
exercises significant influence over operating and financial policies, are
accounted for on the equity method. The Company's investments in unconsolidated
entities was $10,091,000 December 31, 1998, and is included in other assets, net
in the accompanying consolidated balance sheets. All significant intercompany
accounts and transactions have been eliminated in consolidation.
QUARTERLY FINANCIAL STATEMENTS
The unaudited quarterly consolidated financial statements for June 30, 1999
and 1998 do not include all disclosures provided in the annual consolidated
financial statements. These quarterly statements should be read in conjunction
with the accompanying annual audited consolidated financial statement and the
footnotes thereto. Results for the quarterly period ended June 30, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999. However, the accompanying quarterly financial statements
reflect all adjustments which are in the opinion of management, of a normal and
recurring nature necessary for a fair presentation of the financial position and
results of operations of the Company. Unless otherwise stated, all information
subsequent to December 31, 1998 is unaudited.
INVENTORIES
Inventories consist primarily of food and beverage, linens, china, tableware
and glassware and are valued at the lower of cost (computed on the first-in,
first-out method) or market.
MINORITY INTERESTS--OTHER
Minority interests represent the minority interests' proportionate share of
equity or deficit of partnerships which are accounted for by the Company on a
consolidated basis. The Company generally allocates to minority interests their
share of any profits or losses in accordance with the provisions of the
applicable agreements. However, if the loss applicable to a minority interest
exceeds its total investment and advances, such excess is charged to the
Company.
F-7
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MINORITY INTERESTS--PREFERRED REDEEMABLE SECURITIES
Minority interests-preferred redeemable securities, represents Convertible
Redeemable Equity Structure Trust Securities ("CRESTS"). The CRESTS bear
interest at 7% and are convertible into shares of the Company's common stock.
For further discussion of the CRESTS, see Note 5.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. 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.
The Company capitalizes interest costs incurred during the renovation and
construction of capital assets. During the years ended December 31, 1998, 1997
and 1996, the Company capitalized $3,499,000, $1,650,000 and $644,000 of
interest, respectively.
Management periodically evaluates the Company's property and equipment to
determine if there has been any impairment in the carrying value of the assets
in accordance with Financial Accounting SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of". SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
DEFERRED COSTS
Deferred franchise, financing, and other deferred costs of $41,336,000 and
$16,371,000 at December 31, 1998 and 1997, respectively, are included in other
assets, net of accumulated amortization of $3,061,000 and $2,509,000 at December
31, 1998 and 1997, respectively, which is computed using the straight-line
method, over the terms of the related franchise, loan or other agreements The
straight-line method of amortizing deferred financing costs approximates the
interest method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Restricted cash, consists
of amounts reserved for capital improvements, debt service, taxes and insurance.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of current assets and current liabilities are assumed to be
equal to their reported carrying amounts. The fair values of the Company's
long-term debt are estimated using discounted cash flow analysis, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. In the opinion of management, the carrying value of long-term debt
approximates market value as of December 31, 1998 and 1997. The fair market
value of the Company's CRESTS which is $78,750,000 at December 31, 1998, is
based on quoted market prices. Management has estimated the fair value of the
Company's interest rate protection agreements to be approximately $5,000,000 at
December 31, 1998 based on dealer quotes.
F-8
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Concentration of credit risk associated with cash and cash equivalents is
considered low due to the credit quality of the issuers of the financial
instruments held by the Company and due to their short duration to maturity.
Accounts receivable are primarily from major credit card companies, airlines and
other travel related companies. The Company performs ongoing evaluations of its
significant customers and generally does not require collateral. The Company
maintains an allowance for doubtful accounts at a level which management
believes is sufficient to cover potential credit losses. At December 31, 1998
and 1997, these allowances were $979,000 and $300,000, respectively.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
The Company adopted SFAS 128 "Earnings Per Share" effective for the year
ended December 31, 1998. Basic earnings per share is calculated based on the
weighted average number of common shares outstanding during the periods and
include common stock contributed or to be contributed by the Company to its
employees 401(k) Plan (the "401(k)"). Dilutive earnings per common share include
the Company's outstanding stock options and shares convertible under the
Company's CRESTS, if dilutive.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options is equal to the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. Under Financial SFAS 123, "Accounting for Stock-Based Compensation",
net income and earnings per share are not materially different from amounts
reported, therefore, no pro forma information has been presented.
The Financial Accounting Standards Board is expected to issue an
interpretation of APB 25 (the "Interpretation") in the third quarter of 1999.
Two of the key areas affected by the proposal are the accounting for stock
option repricings and options issued to non-employee directors. The
interpretation would be applied prospectively to transactions that occur after
December 15, 1998.
The Interpretation will require that once an option granted to an employee
is repriced, that option would be accounted for as if it were a variable plan,
giving rise to compensation expense for subsequent changes in stock price, from
the date the option is repriced to the date it is exercised. Under the proposal,
no compensation expense would be recorded on the date of the repricing. However,
compensation would be recorded quarterly through the date of exercise to the
extent that the fair market value of the common stock is in excess of the
exercise price of the options adjusted for the repricing. The interpretation
requires, in measuring compensation expense, the use of the higher of the
repriced exercise price of the options or the fair market value of the stock on
the date the interpretation is effective.
Additionally, under the proposed Interpretation, options granted to
non-employee directors subsequent to December 15, 1998, would no longer be
accounted for under APB 25's intrinsic value method. Instead, such options would
be accounted for under the fair value method.
The Company repriced options totaling 1,408,400 on December 18, 1998 that
will be subject to these requirements when the new Interpretation becomes
effective.
F-9
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$2,162,000, $1,867,000 and $1,613,000 in advertising costs during 1998, 1997 and
1996, respectively.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with SFAS 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet dates. Income statement amounts have been translated using
the average rate for the year. The gains and losses resulting from the changes
in exchange rates from year to year have been reported in other comprehensive
income. The effects on the statements of operations of transaction gains and
losses is insignificant for all years presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted the SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
superseded SFAS 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. It is the belief of management that the Company operates under one
reporting segment-hotel ownership and management. Therefore, the adoption of
SFAS 131 did not have a material impact on the Company's financial statement
disclosures.
As of January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's results of operations or
shareholders' equity. SFAS 130 requires the Company's foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income.
2. MERGER, ACQUISITIONS AND RELATED ITEMS
On December 11, 1998, Servico merged with Impac in a transaction accounted
for under the purchase method of accounting, pursuant to APB 16, "Business
Combinations", whereby Servico is considered the acquiring company. The
operations of Impac are included in the consolidated statement of operations
from the date of acquisition. Under the terms of the Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement"), Servico's existing
shareholders received one share of Lodgian
F-10
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. MERGER, ACQUISITIONS AND RELATED ITEMS (CONTINUED)
common stock for each of Servico stock held by them (approximately 18,440,000
million shares). The purchase price of Impac approximated $104,367,000,
consisting of $15 million in cash, the issuance of 9.4 million shares of common
stock of Lodgian at $8.80, of which 1.4 million shares are contingent upon the
completion of construction of five hotels, and acquisition related costs of
approximately $6,647,000. The purchase price has been allocated to the fair
value of the net assets acquired as follows (in thousands):
<TABLE>
<S> <C>
Cash............................................................................. $ 7,027
Inventory........................................................................ 2,685
Accounts receivable.............................................................. 12,239
Property and equipment........................................................... 616,000
Goodwill and other assets........................................................ 12,089
Accounts payable................................................................. (58,432)
Long term obligations............................................................ (429,466)
Deferred income taxes............................................................ (47,900)
Accrued liabilities.............................................................. (9,875)
---------
Total purchase price............................................................. $ 104,367
---------
---------
</TABLE>
In connection with the purchase, of Impac, the Company recorded goodwill of
approximately $11 million, included in other assets above, which is being
amortized over 20 years.
The allocation of the purchase price is tentative pending completion of
valuations of the property and equipment acquired. The allocation may change
upon the completion of these valuations.
In connection with the merger with Impac, Servico incurred approximately
$3,400,000 of expenses which consisted primarily of expenses associated with the
closing and relocation of Servico's West Palm Beach, Florida corporate
headquarters to the Company's headquarters in Atlanta, Georgia and termination
and relocation of certain Servico employees. These costs have been expensed as
incurred and are included in severance and other expenses in the 1998
consolidated statement of operations. Substantially all of these costs have been
paid by December 31, 1998.
On June 1, 1998, the Company acquired the issued and outstanding units of
AMI Operating Partners, L.P. (AMI), in a transaction accounted for under the
purchase method of accounting. The purchase price of AMI approximated $74
million which included cash of $16 million and the assumption of $58 million in
debt. The operations of AMI are included in the consolidated statement of
operations from the date of acquisition. The purchase price was principally
allocated to the 15 hotel properties acquired.
The pro forma unaudited results of operations for the years ended December
31, 1998 and 1997, assuming the purchase of Impac had been consummated on
January 1, 1997, follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues.................................................................................. $ 545,794 $ 396,516
Net (loss) income before extraordinary item............................................... (19,070) 2,917
Net loss.................................................................................. (21,146) (8,837)
Net loss per common share:
Basic and diluted....................................................................... (.75) (.38)
</TABLE>
F-11
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. MERGER, ACQUISITIONS AND RELATED ITEMS (CONTINUED)
During November 1998, the President and Chief Executive Officer of Servico
announced his resignation effective the date of the merger with Impac. In
connection with his resignation, Mr. Buddemeyer was provided a severance package
approximating $1.3 million. This amount was expensed during the fourth quarter
of 1998 and is included in severance and other expenses in the 1998 consolidated
statement of operations. Approximately $164,000 of this amount relates to
compensation expense associated with the extension of the terms of his stock
options, pursuant to APB 25.
F-12
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
3. PROPERTY AND EQUIPMENT
At December 31, 1998 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
USEFUL LIVES
(YEARS) 1998 1997
------------- ------------ ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Land...................................................................... -- $ 168,303 $ 48,798
Buildings and improvements................................................ 10-40 976,608 430,363
Furnishings and equipment................................................. 3-10 187,055 99,487
----- ------------ ----------
1,331,966 578,648
Less accumulated depreciation and amortization............................ (104,528) (75,976)
Construction in progress.................................................. 90,032 31,408
------------ ----------
$ 1,317,470 $ 534,080
------------ ----------
------------ ----------
</TABLE>
During the year ended December 31, 1997, the Company purchased 12 hotels for
an aggregate purchase price of $140,300,000 which were paid for by the delivery
of mortgage notes totaling $72,655,000 and cash for the balance. The 12 hotels
purchased, containing an aggregate of 3,002 guest rooms, are operated under
license agreements with nationally recognized franchisors and are managed by the
Company. In addition, Company increased its ownership interests in the
partnerships, owning three hotels, from 51% to 100% for approximately
$11,800,000.
4. ACCRUED LIABILITIES
At December 31, 1998 and 1997, accrued liabilities consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Salaries and related costs.................................................................. $ 26,798 $ 10,775
Real estate taxes........................................................................... 9,095 4,118
Interest.................................................................................... 4,370 1,969
Advance deposits............................................................................ 3,799 1,666
Sales taxes................................................................................. 5,412 2,523
Other....................................................................................... 1,159 6,304
--------- ---------
$ 50,633 $ 27,355
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. LONG-TERM OBLIGATIONS AND PREFERRED REDEEMABLE SECURITIES
Long-term obligations consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Mortgage notes payable with interest at a variable rate of LIBOR (5% at December 31, 1998
plus 3.25%). The notes are payable through 2000......................................... $ 265,000 $ --
Credit facilities, of $396 million with interest LIBOR + 2.25% to 2.75% maturing through
2001. At maturity, each loan converts to term loans amortizing over a 20 year period.... 323,744 --
Mortgage notes with an interest rate of 9% payable through 2000........................... 72,000 --
Mortgage notes with fixed rates ranging from 8.6% to 10.7% payable through 2010........... 164,109 152,469
Mortgage notes with variable rates of interest............................................ -- 166,817
Other..................................................................................... 27,925 9,762
---------- ----------
852,778 329,048
Less current portion of long-term obligations............................................. (36,134) (5,728)
---------- ----------
$ 816,644 $ 323,320
---------- ----------
---------- ----------
</TABLE>
Substantially, all of the Company's property and equipment are pledged as
collateral for long-term obligations of which approximately $403,249,000 has
been guaranteed by Lodgian, Inc. Certain of the mortgage notes are subject to a
prepayment penalty if repaid prior to their maturity.
On December 11, 1998, the Company consummated financing agreements, which
resulted in net proceeds of approximately $337 million. The net proceeds were
primarily used to pay the costs of the merger with Impac, escrow funds for
renovations on certain properties and to repay, prior to maturity, approximately
$142,205,000 in debt secured by 27 of its hotels. As a result, the Company
recorded an extraordinary loss on early extinguishment of debt of approximately
$934,000 (net of income tax benefit of $622,000) relating to the write-off of
unamortized deferred financing costs. Approximately $31.5 million of the $337
million relates to the settlement on two swap transactions entered into by the
Company with its lender. For further discussion of swap transaction see Note 6.
In June 1998, the Company issued $175 million of Convertible Redeemable
Equity Structures Trust Securities ("CRESTS"). The CRESTS bear interest at 7%
and are convertible into shares of the Company's common stock at an initial
conversion price of $21.42 per share. The sale of the CRESTS generated $168.5
million in net proceeds, substantially, all of which were used to repay existing
debt prior to maturity. As a result, the Company recorded an extraordinary loss
on early extinguishment of debt of approximately $1,142,000 (net of income tax
benefit of $761,000) relating to the write off of unamortized financing costs.
The CRESTS are included in the accompany consolidated balance sheet as Minority
Interests-Preferred Redeemable Securities. The interest expense incurred on the
CRESTS have been included as "Minority Interests--Preferred Redeemable
Securities" in the Consolidated Statement of Operations.
During 1997 Lodgian completed a secondary offering of 11.5 million shares of
common stock at $14.50 per share, which resulted in net proceeds to Lodgian of
$156,000,000. The Company repaid, prior to maturity, approximately $128,000,000
in debt secured by 21 of its hotels and, as a result, recorded an extraordinary
loss on early extinguishment of debt of approximately $3,800,000 (net of income
tax benefit of $2,500,000) relating to the write-off of unamortized loan costs
associated with the debt. Seventeen of
F-14
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. LONG-TERM OBLIGATIONS AND PREFERRED REDEEMABLE SECURITIES (CONTINUED)
these hotels have subsequently been used to secure approximately $81,200,000 in
new variable rate mortgage notes which generated approximately $78,300,000 of
net proceeds for use in the acquisition of new properties. The Company has also
refinanced eight other properties generating approximately $3,100,000 in net
proceeds.
The Company has entered into an interest rate protection agreement on $54
million related to one of the above credit facilities. Pursuant to the terms of
this agreement, when the loan matures in 2001 and converts to term loans, the
interest rate will be based on a benchmark treasury rate of 7.235%. In the event
the company determines that it is in its best interest to "break" that interest
rate lock, it may be required to pay a significant fee to the lender.
Maturities of long-term obligations for each of the five years after
December 31, 1998 and thereafter, are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................................. $ 36,134
2000.............................................................. 325,049
2001.............................................................. 16,597
2002.............................................................. 13,243
2003.............................................................. 47,542
Thereafter........................................................ 414,213
---------
$ 852,778
---------
---------
</TABLE>
6. SETTLEMENT ON SWAP TRANSACTIONS
During August 1998, the Company entered into treasury rate lock transactions
with notional amounts of $175 million and $200 million (collectively, the
"Swaps") with a lender for the purpose of hedging their interest rate exposure
on two anticipated financing transactions. During September 1998, the Company
determined that it was not probable that it would consummate the anticipated
transactions and recognized a loss in the consolidated statement of operations
of $31.5 million related to the settlement of the Swaps. The obligation related
to the settlement of the Swaps was included in the $337 million financing
transaction discussed in Note 5.
7. STOCKHOLDERS' EQUITY
During 1998, in accordance with previously announced share buyback programs,
the Company has repurchased in open market transactions and retired 2,660,900
shares of its common stock.
8. INCOME TAXES
Provision (benefit) for income taxes for the Company is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------------------- ----------------------------------- ------------------------
<CAPTION>
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED
--------- --------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal............................ $ (1,140) $ (481) $ (1,621) $ 3,289 $ 3,186 $ 6,475 $ 1,322 $ 1,170
State and local.................... (423) (53) (476) 1,693 211 1,904 651 82
--------- --------- --------- ----------- ----------- --------- ----------- -----------
$ (1,563) $ (534) $ (2,097) $ 4,982 $ 3,397 $ 8,379 $ 1,973 $ 1,252
--------- --------- --------- ----------- ----------- --------- ----------- -----------
--------- --------- --------- ----------- ----------- --------- ----------- -----------
<CAPTION>
<S> <C>
TOTAL
---------
<S> <C>
Federal............................ $ 2,492
State and local.................... 733
---------
$ 3,225
---------
---------
</TABLE>
F-15
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. INCOME TAXES (CONTINUED)
The components of the cumulative effect of temporary differences in the
deferred income tax liability and asset balances at December 31, 1998 and 1997,
are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
NON-CURRENT NON-CURRENT
CURRENT -------------------- CURRENT --------------------
TOTAL ASSET LIABILITY TOTAL ASSET LIABILITY
--------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Property and equipment................................... $ 78,523 $ -- $ 78,523 $ 21,151 $ -- $ 21,151
Net operating loss carryforward.......................... (16,015) (605) (15,410) (7,905) (605) (7,300)
Alternative minimum tax credits.......................... (999) -- (999) (3,739) -- (3,739)
Self-insurance reserve................................... (1,360) (1,360) -- (878) (878) --
Vacation pay accrual..................................... (745) (745) -- (681) (681) --
Other.................................................... 1,240 (115) 1,355 413 (90) 503
--------- --------- --------- --------- --------- ---------
$ 60,644 $ (2,825) $ 63,469 $ 8,361 $ (2,254) $ 10,615
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The difference between income taxes using the effective income tax rate and
the federal income tax statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax at statutory federal rate........................................ $ (1,782) $ 7,123 $ 4,003
State income taxes, net............................................................. (315) 1,256 483
Tax benefit with respect to legal settlement........................................ -- -- (1,261)
--------- --------- ---------
$ (2,097) $ 8,379 $ 3,225
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of December 31, 1998, the Company had net operating loss carry forwards
of approximately $45,300,000 for federal income tax purposes which expire in
years 2005 through 2018. The full amount of the income tax benefit of this net
operating loss carryforward has been reflected in the Consolidated Financial
Statements of the Company in prior years.
9. RELATED PARTY TRANSACTIONS
The Company's President was a shareholder of Impac Hotel Development
("IHD"), which provided acquisition and property development services to Impac
for a development fee of four percent of the total project cost of each property
acquired or developed. Impac agreed to terminate this agreement prior to the
consummation of the Merger so that Impac and its subsidiaries will have no
further obligations under the agreement after the Merger other than the payment
of up to a four percent development fee (not to exceed $2.5 million in the
aggregate) in the event Lodgian acquires or develops any of the hotels or
properties identified in the Merger Agreement as Impac's acquisition pipeline.
F-16
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Numerator:
(Loss) income before extraordinary item................... $ 6,799 $ 10,320 $ (3,145) $ 12,570 $ 8,548
Extraordinary item........................................ -- -- (2,076) (3,751) (348)
Effect of dilutive securitites:...........................
Minority interest-preferred redeemable securitities..... -- 187 -- -- --
--------- --------- --------- --------- ---------
Net (loss) income......................................... $ 6,799 $ 10,507 $ (5,221) $ 8,819 $ 8,200
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Denominator:
Denominator for basic earnings per share--
weighted-average shares................................. 26,909 20,871 20,245 15,183 9,295
Effect of dilutive securities:
Employee stock options.................................. -- 403 -- 457 456
Convertible preferred securities........................ -- 359 -- -- --
--------- --------- --------- --------- ---------
Denominator for dilutive earnings per share-- adjusted
weighted-average shares................................. 26,909 21,633 20,245 15,640 9,751
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share:
(Loss) income before extraordinary item................... 0.25 0.49 $ (.16) $ .83 $ .92
Extraordinary item........................................ -- (0.05) (.10) (.25) (.04)
--------- --------- --------- --------- ---------
Net (loss) income......................................... 0.25 $ 0.44 $ (.26) $ .58 $ .88
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share:
Income before extraordinary item.......................... 0.25 $ 0.49 $ (.16) $ .80 $ .88
Extraordinary item........................................ (0.05) (.10) (.24) (.04)
--------- --------- --------- --------- ---------
Net (loss) income......................................... 0.25 $ 0.44 $ (.26) $ .56 $ .84
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
All prior-period earnings per share amounts have been restated to conform to
the SFAS 128 "Earnings per share".
The computation of diluted EPS for the year ended December 31, 1998, 1997,
and 1996, did not include shares associated with the assumed conversion of the
CRESTS or stock options totaling 8,169,935 because their inclusion would have
been antidilutive.
11. COMMITMENTS AND CONTINGENCIES
Six of the Company's hotels are subject to long-term ground leases expiring
from 2014 through 2075 which provide for minimum payments as well as incentive
rent payments and most of the Company's hotels have noncancellable operating
leases, mainly for operating equipment. The land covered by one lease can be
purchased by the Company for approximately $2,600,000. For the years ended
December 31, 1998, 1997 and 1996, lease expense for the five noncancellable
ground leases was approximately $2,400,000, $1,624,000 and $1,381,000,
respectively.
F-17
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1998, the future minimum commitments for noncancellable
ground leases are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 3,438
2000............................................................... 3,444
2001............................................................... 3,427
2002............................................................... 3,434
2003............................................................... 2,405
Thereafter......................................................... 73,429
---------
$ 89,577
---------
---------
</TABLE>
The Company has entered into license agreements with various hotel chains
which require annual payments for license fees, reservation services and
advertising fees. The license agreements generally have an original ten year
term. The majority of the Company's license agreements have five to ten years
remaining on the term. The licensors may require the Company to upgrade its
facilities at any time to comply with the licensor's then current standards.
Upon the expiration of the term of a license, the Company may apply for a
license renewal. In connection with the renewal of a license, the licensor may
require payment of a renewal fee, increased license, reservation and advertising
fees, as well as substantial renovation of the facility. Payments made in
connection with these agreements totaled approximately $19,268,000, $14,498,000
and $12,401,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The license agreements are subject to cancellation in the event of a
default, including the failure to operate the hotel in accordance with the
quality standards and specifications of the licensors. The Company believes that
the loss of a license for any individual hotel would not have a material adverse
effect on the Company's financial condition and results of operations. The
Company believes it will be able to renew its current licenses or obtain
replacements of a comparable quality.
Twenty-five hotels which the Company owns are operated under license
agreements that require the Company to make certain capital improvements in
accordance with a specified time schedule. Further, in connection with the
financing of the Company's hotels (see Note 4) and the acquisition of other
hotels (see Note 2), the Company has agreed to make certain capital improvements
and had approximately $30 million escrowed for such improvements which is
included in other assets on the accompanying balance sheet. The Company
estimates its remaining obligations for all the above commitments to be
approximately $85 million of which approximately $50 million is expected to be
spent in 1999 and the balance during 2000 and 2001.
The Company has maintenance agreements, primarily on a one to three year
basis, which resulted in expenses of approximately $3,557,000, $2,497,000 and
$2,106,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
A wholly-owned subsidiary of Lodgian, Inc. has provided a guarantee of the
debt of a joint venture in which the Company accounts for under the equity
method of accounting. As of December 31, 1998, the balance of this obligation
approximated $80 million. Assets with a carrying value of approximately $100
million collateralize this obligation.
The Company is a party to legal proceedings arising in the ordinary course
of its business, the impact of which would not, either individually or in the
aggregate, in management's opinion, based upon the facts
F-18
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
known by management and the advice of counsel, have a material adverse effect on
the Company's financial condition or results of operations.
12. EMPLOYEE BENEFITS PLANS AND STOCK OPTION PLAN
The Company makes contributions to several multi-employer pension plans for
employees of various subsidiaries covered by collective bargaining agreements.
These plans are not administered by the Company and contributions are determined
in accordance with provisions of negotiated labor contracts. Certain withdrawal
penalties may exist, the amount of which are not determinable at this time. The
cost of such contributions during the years ended December 31, 1998, 1997 and
1996, was approximately $500,000, $412,000 and $499,000, respectively.
The Company adopted, the 401(k) for the benefit of its non-union employees
under which participating employees may elect to contribute up to 10% of their
compensation. The Company may match an employee's elective contributions to the
401(k), subject to certain conditions, with shares of the Company's common stock
equal to up to 100% of the amount of such employee's elective contributions.
These employer contributions vest at a rate of 20% per year beginning in the
third year of employment. The cost of these contributions during the years ended
December 31, 1998, 1997 and 1996, was $430,000, $282,000 and $548,000,
respectively. The 401(k) does not require a contribution by the Company.
The Company has also adopted the Lodgian, Inc. Stock Option Plan, as
amended, (the "Option Plan"). In accordance with the Option Plan, options to
acquire up to 3,250,000 shares of common stock may be granted to employees,
directors, independent contractors and agents as determined by a committee
appointed by the Board of Directors. Options may be granted at an exercise price
not less than fair market value on the date of grant. These options will
generally vest over five years.
In addition, in August 1997 each non-employee director was awarded an option
to acquire 20,000 shares of common stock at an exercise price equal to the fair
market price on date of grant. Such options became exercisable upon date of
grant and were granted outside of the Lodgian Stock Option plan.
On December 18, 1998, the Company re-priced its options. See discussion of
impact of pending accounting pronouncement related to stock option repricings in
Note 1.
The following table indicates all options granted and their status:
<TABLE>
<CAPTION>
OPTION PRICE
-------------------------------------
<S> <C> <C>
NUMBER OF SHARES RANGE PER SHARE
----------------- ------------------
Balance December 31, 1995.................................................. 1,137,200 $ 4.00 -- $ 9.50
Granted.................................................................. 216,500 10.75 -- 16.13
Exercised................................................................ (497,800) 4.00 -- 9.50
Forfeited................................................................ (38,900) 8.63 -- 10.75
-----------------
Balance December 31, 1996.................................................. 817,000 4.00 -- 16.13
Granted.................................................................. 977,700 15.25 -- 16.81
Exercised................................................................ (86,600) 4.00 -- 10.75
Forfeited................................................................ (19,400) 8.63 -- 10.75
-----------------
Balance December 31, 1997.................................................. 1,688,700 4.00 -- 16.81
Granted.................................................................. 755,000 6.13 --
Exercised................................................................ (134,900) 4.00 -- 16.75
Forfeited................................................................ (27,900) 8.63 -- 16.75
-----------------
Balance December 31, 1998.................................................. 2,280,900 4.00 -- 6.15
-----------------
-----------------
</TABLE>
F-19
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. EMPLOYEE BENEFITS PLANS AND STOCK OPTION PLAN (CONTINUED)
At December 31, 1998, there were 911,280 options exercisable. The income tax
benefit, if any, associated with the exercise of stock options is credited to
additional paid-in capital.
13. CERTAIN OTHER EVENTS
In January 1996, the Company entered into an agreement with its former Chief
Executive Officer in connection with his resignation from the Company and its
Board of Directors. This agreement provided for payments totaling approximately
$830,000 over a twenty-four month period, the cost of which is included in other
operating expenses for the year ended December 31, 1996.
In March 1996, the Company received approximately $3,900,000 in connection
with the settlement of a lawsuit brought on behalf of Servico, against a bank
group and law firm, based on alleged breaches prior to 1990 of their duties to
the Company. This amount, less approximately $300,000 of associated expenses, is
included in other income for the year ended December 31, 1996.
14. SUBSEQUENT EVENTS
In March 1999, a lender released $15 million of an original $23 million
escrow initiated at the time their $265 million loan was closed. This holdback
related to future capital improvements. Simultaneously, the lender issued the
Company a commitment for $15 million to replenish this escrow at a future date
subject to the same terms and conditions as the original loan.
On March 30, 1999, the board of directors adopted a Shareholder Rights Plan
and declared one Right on each outstanding share of the Company's common stock.
The dividend will be paid on April 19, 1999 to stockholders of record on April
14, 1999. Initially the Rights will trade with the common stock of the Company
and will not be exercisable. The Right will separate from the common stock and
become exercisable upon the occurrence of events typical of shareholder rights
plans. In general, such separation will occur when any person or group of
affiliated persons acquires or makes an offer to acquire 15% or more of the
Company's common stock. Thereafter, separate Right Certificates will be
distributed and each Right will entitle its holder to purchase one-hundredth of
a share of the Company's Participating Preferred Stock for an exercise price of
$25. Each one-hundredth of a share of Preferred Stock has economic and voting
terms equivalent to those of one share of the Company's common stock.
15. OTHER SUBSEQUENT EVENTS AND SUPPLEMENTAL GUARANTOR INFORMATION
On June 1, 1999, a contractor hired by Servico to perform work on six
properties in New York, Illinois and Texas filed a summons with notice against
us in the Supreme Court of the State of New York, claiming breach of contract
and quantum meruit, among other things. The contractor is seeking damages in the
aggregate amount of $45 million. The contractor is required to file a formal
complaint.
We have filed an appearance to the summons and will vigorously defend our
position. We believe we have valid defenses and counterclaims and that any
possible outcome will not have a material adverse effect on our financial
position or results of operations.
In connection with the Company's offer to sell $200 million principal amount
of Senior Subordinated Notes due 2009 (the "Notes"), certain of the Company's
subsidiaries (the "Subsidiary Guarantors") will fully and unconditionally
guarantee, on a joint and several basis, 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
F-20
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
15. OTHER SUBSEQUENT EVENTS AND SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
material to investors. The subsidiaries of the Company that are not Subsidiary
Guarantors are referred to in this note as the "Non-Guarantor Subsidiaries."
The following supplemental consolidating condensed financial statements
present balance sheets as of June 30, 1999 (Unaudited), December 31, 1998 and
1997 and statements of operations and of cash flows for the six months ended
June 30, 1999 (Unaudited) and 1998 (Unaudited) and for the years ended December
31, 1998, 1997 and 1996. In the consolidating condensed financial statements,
Lodgian, Inc. or Servico, Inc. (the "Parent") accounts for its investments in
wholly-owned subsidiaries using the equity method.
F-21
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
ASSETS PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 1,941 $ 5,944 $ 12,437 $ -- $ 20,322
Restricted cash......................... -- -- 6,127 -- 6,127
Accounts receivable, net of
allowances............................ -- 10,256 26,337 -- 36,593
Other current assets.................... 2,634 16,721 14,127 -- 33,482
------------ ----------- ------------- ------------ ------------
Total current assets...................... 4,575 32,921 59,028 -- 96,524
Property and equipment, net............... -- 329,544 1,002,978 -- 1,332,522
Deposits for capital expenditures......... -- -- 29,798 -- 29,798
Investment in consolidated entities....... 138,037 -- -- (138,037) --
Due from to affiliates.................... 138,712 (123,874) (14,838) -- --
Other assets, net......................... 21,060 31,345 8,660 -- 61,065
------------ ----------- ------------- ------------ ------------
$ 302,384 $ 269,936 $ 1,085,626 $ (138,037) $1,519,909
------------ ----------- ------------- ------------ ------------
------------ ----------- ------------- ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable, trade................. $ 120 $ 9,196 $ 38,440 $ -- $ 47,756
Accrued liabilities..................... -- 16,967 35,720 -- 52,687
Current portion long-term obligations... -- 18,829 17,281 -- 36,110
------------ ----------- ------------- ------------ ------------
Total current liabilities................. 120 44,992 91,441 -- 136,553
Long-term obligations, less current
portion................................. 7,722 245,171 580,549 -- 833,442
Deferred income taxes..................... 1,923 (5,273) 71,352 -- 68,002
Minority interests:
Preferred redeemable securities......... -- -- 175,000 -- 175,000
Other................................... -- -- 15,922 -- 15,922
Stockholder's equity:
Common stock............................ 278 34 672 (706) 278
Additional paid-in capital.............. 262,436 10,184 538 (10,722) 262,436
Retained earnings (accumulated
deficit).............................. 29,905 (23,543) 141,979 (118,436) 29,905
Members' equity......................... -- -- 8,173 (8,173) --
Accumulated other comprehensive loss.... -- (1,629) -- -- (1,629)
------------ ----------- ------------- ------------ ------------
Total stockholders' equity................ 292,619 (14,954) 151,362 (138,037) 280,990
------------ ----------- ------------- ------------ ------------
Total liabilities and stockholders'
equity.................................. $ 302,384 $ 269,936 $ 1,085,626 $ (138,037) $1,519,909
------------ ----------- ------------- ------------ ------------
------------ ----------- ------------- ------------ ------------
</TABLE>
F-22
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
ASSETS PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 1,648 $ 5,864 $ 11,673 $ -- $ 19,185
Restricted cash............................ -- -- 6,302 -- 6,302
Accounts receivable, net of allowances..... -- 6,228 19,270 -- 25,498
Other current assets....................... 3,023 31,495 (6,562) -- 27,956
---------- ----------- ------------- ------------ ------------
Total current assets......................... 4,671 43,587 30,683 -- 78,941
Property and equipment, net.................. -- 336,556 980,914 -- 1,317,470
Deposits for capital expenditures............ -- -- 30,386 -- 30,386
Investment in consolidated entities.......... 74,056 -- -- (74,056) --
Due from (to) affiliates..................... 178,948 (145,507) (33,441) -- --
Other assets, net............................ 38,095 24,121 8,908 -- 71,124
---------- ----------- ------------- ------------ ------------
$ 295,770 $ 258,757 $ 1,017,450 $ (74,056) $1,497,921
---------- ----------- ------------- ------------ ------------
---------- ----------- ------------- ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable, trade.................... $ 132 $ 11,054 $ 46,067 $ -- $ 57,253
Accrued liabilities........................ -- 11.852 38,781 -- 50,633
Current portion long-term obligations...... -- 829 35,305 -- 36,134
---------- ----------- ------------- ------------ ------------
Total current liabilities.................... 132 23,735 120,153 -- 144,020
Long-term obligations, less current
portion.................................... 7,722 258,462 550,460 -- 816,644
Deferred income taxes........................ 2,556 (6,533) 67,446 -- 63,469
Minority interests:
Preferred redeemable securities............ -- -- 175,000 -- 175,000
Other...................................... -- -- 15,021 -- 15,021
Stockholder's equity:
Common stock............................... 278 34 492 (526) 278
Additional paid-in capital................. 261,976 9,687 718 (10,405) 261,976
Retained earnings (accumulated deficit).... 23,106 (25,035) 79,987 (54,952) 23,106
Members equity............................. -- -- 8,173 (8,173) --
Accumulated other comprehensive loss....... -- (1,593) -- -- (1,593)
---------- ----------- ------------- ------------ ------------
Total stockholders' equity................... 285,360 (16,907) 89,370 (74,056) 283,767
---------- ----------- ------------- ------------ ------------
Total liabilities and stockholders' equity... $ 295,770 $ 258,757 $ 1,017,450 $ (74,056) $1,497,921
---------- ----------- ------------- ------------ ------------
---------- ----------- ------------- ------------ ------------
</TABLE>
F-23
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 14,208 $ 1,811 $ (776) $ -- $ 15,243
Restricted cash........................... -- -- -- -- --
Accounts receivable, net of allowances.... -- 4,539 6,484 -- 11,023
Other current assets...................... 2,344 4,071 9.223 -- 15,638
----------- ----------- ------------- ------------ ------------
Total current assets........................ 16,552 10,421 14,931 -- 41,904
Property and equipment, net................. -- 245,083 288,997 -- 534,080
Deposits for capital expenditures........... -- 25,467 5,434 -- 30,901
Due from (to) affiliates.................... 212,806 (117,222) (95,584) -- --
Investment in consolidated entities......... 3,715 -- -- (3,715) --
Other assets, net........................... 11,779 8,951 36 -- 20,766
----------- ----------- ------------- ------------ ------------
$ 244,852 $ 172,700 $ 213,814 $ (3,715) $ 627,651
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable, trade................... $ 4 $ 2,925 $ 4,614 $ -- $ 7,543
Accrued liabilities....................... 989 10,390 15,976 -- 27,355
Current portion long-term obligations..... 79 930 4,719 -- 5,728
----------- ----------- ------------- ------------ ------------
Total current liabilities................... 1,072 14,245 25,309 -- 40,626
Long-term obligations, less current
portion................................... 986 162,937 159,397 -- 323,320
Deferred income taxes....................... 2,680 347 7,588 -- 10,615
Minority interests.......................... -- -- 13,555 -- 13,555
Stockholder's equity:
Common stock.............................. 210 32 488 (520) 210
Additional paid-in capital................ 211,577 9,685 538 (10,223) 211,577
Retained earnings (accumulated deficit)... 28,327 (13,967) 6,939 7,028 28,327
Accumulated other comprehensive loss...... -- (579) -- -- (579)
----------- ----------- ------------- ------------ ------------
Total stockholders' equity.................. 240,114 (4,829) 7,965 (3,715) 239,535
----------- ----------- ------------- ------------ ------------
Total liabilities and stockholders' equity.. $ 244,852 $ 172,700 $ 213,814 $ (3,715) $ 627,651
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
</TABLE>
F-24
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues
Rooms....................................... $ -- $ 64,915 $ 146,748 $ -- $ 211,663
Food and beverage........................... -- 23,155 45,971 -- 69,126
Other....................................... -- 4,766 10,112 -- 14,878
--------- ----------- ------------- ------------ ------------
Total revenues.......................... -- 92,836 202,831 -- 295,667
--------- ----------- ------------- ------------ ------------
Operating expenses
Direct:
Rooms..................................... -- 17,715 39,407 -- 57,122
Food and beverage......................... -- 16,771 33,770 -- 50,541
Other hotel operating expenses............ -- 2,667 5,549 -- 8,216
General and administrative.................. -- -- 11,367 -- 11,367
Depreciation and amortization............... -- 8,535 18,965 -- 27,500
Other....................................... 29,470 55,673 85,143
--------- ----------- ------------- ------------ ------------
Total operating expenses................ -- 75,158 164,731 -- 239,889
--------- ----------- ------------- ------------ ------------
Income from operations........................ -- 17,678 38,100 -- 55,778
Other income (expenses):
Other income................................ -- (78) 895 -- 817
Interest expense............................ -- (14,506) (22,633) -- (37,139)
Equity in earnings of consolidated
subsidiaries.............................. 11,332 -- -- (11,332)
Minority interests:
Preferred redeemable securities............. -- -- (6,814) -- (6,814)
Other....................................... -- -- (1,310) -- (1,310)
--------- ----------- ------------- ------------ ------------
Income before income taxes.................... 11,332 3,094 8,238 (11,332) 11,332
Provision for income taxes.................... 4,533 1,238 3,295 (4,533) 4,533
--------- ----------- ------------- ------------ ------------
Net Income.................................... $ 6,799 $ 1,856 $ 4,943 $ (6,799) $ 6,799
--------- ----------- ------------- ------------ ------------
--------- ----------- ------------- ------------ ------------
</TABLE>
F-25
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net cash flows operating activities.......................... $ -- $ 10,888 $ 9,398 $ 20,286
Investing activities:
Acquisitions of property and equipment..................... -- -- (1,929) (1,929)
Capital improvements, net.................................. -- (1,425) (42,834) (44,259)
Net deposits for capital expenditures...................... -- 8,241 (7,653) 588
Net proceeds from sale of assets............................. -- -- 11,100 11,100
--------- ----------- ------------- ------------
Net cash flows from investing activities:.................... -- 6,816 (41,316) (34,500)
Financing activities:
Proceeds from issuance of long-term obligations............ -- 15,000 14,640 29,640
Principal payments of long-term obligations................ -- (2,821) (10,045) (12,866)
Proceeds from issuance of common stock..................... 60 -- -- 60
Proceeds from related parties, net......................... 233 (29,103) 28,870 --
(Distributions to) contributions from minority interest.... -- -- (123) (123)
Payment of deferred loan costs............................. -- (700) (660) (1,360)
--------- ----------- ------------- ------------
Net cash flows from financing activities..................... 293 (17,624) 32,682 15,351
--------- ----------- ------------- ------------
Change in cash and cash equivalents.......................... 293 80 764 1,137
Cash and cash equivalents at beginning of period............. 1,648 5,864 11,673 19,185
--------- ----------- ------------- ------------
Cash and cash equivalents at end of period................... $ 1,941 $ 5,944 $ 12,437 $ 20,322
--------- ----------- ------------- ------------
--------- ----------- ------------- ------------
</TABLE>
F-26
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms....................................... $ -- $ 55,578 $ 69,183 $ -- $ 124,761
Food and beverage........................... -- 20,633 29,907 -- 50,540
Other....................................... -- 4,744 5,224 -- 9,968
--------- ----------- ------------- ------------ ------------
Total revenues.......................... -- 80,955 104,314 -- 185,269
--------- ----------- ------------- ------------ ------------
Operating expenses:
Direct:
Rooms..................................... -- 15,572 18,500 -- 34,072
Food and beverage......................... -- 15,697 22,763 -- 38,460
Other..................................... -- 2,638 2,680 -- 5,318
General and administrative.................. -- -- 4,829 -- 4.829
Depreciation and amortization............... -- 6,079 8,679 -- 14,758
Other hotel operating expenses.............. -- 26,563 27,071 -- 53,634
--------- ----------- ------------- ------------ ------------
Total operating expenses................ -- 66,549 84,522 -- 151,071
--------- ----------- ------------- ------------ ------------
Income from operations........................ -- 14,406 19,792 -- 34,196
Other income (expenses):
Other income................................ -- -- 268 -- 268
Interest expense............................ -- (7,682) (8,450) -- (16,132)
Equity in earnings of consolidated
subsidiaries.............................. 17,200 -- -- 17,200 --
Minority interests............................
Preferred redeemable securities............. -- -- (311) -- (311)
Other -- -- (823) -- (823)
--------- ----------- ------------- ------------ ------------
Income before income taxes and extraordinary
item........................................ 17,200 6,724 10,476 (17,200) 17,200
Provision for income taxes.................... 6,880 2,690 4,190 (6,880) 6,880
--------- ----------- ------------- ------------ ------------
Income before extraordinary item.............. 10,320 4,034 6,286 (10,320) 10,320
Extraordinary item, net of taxes.............. -- -- (1,095) -- (1,095)
--------- ----------- ------------- ------------ ------------
Net income.................................... $ 10,320 $ 4,034 $ 5,191 $ (10,320) $ 9,225
--------- ----------- ------------- ------------ ------------
--------- ----------- ------------- ------------ ------------
</TABLE>
F-27
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES CONSOLIDATED
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net cash flows from operating activities................... $ 4,939 $ 10,095 $ 18,276 $ 33,310
Investing activities:
Acquisitions of property and equipment................... -- (36,950) (16,541) (53,491)
Capital improvements, net................................ -- (12,423) (17,372) (29,795)
Net deposits for capital expenditures.................... -- 14,614 1,127 15,741
Net proceeds from sale of assets......................... -- -- 2,373 2,373
Other.................................................... -- -- 1,361 1,361
---------- ----------- ------------- ------------
Net cash flows from investing activities:.................. -- (34,759) (29,052) (63,811)
Financing activities:
Proceeds from issuance of long-term obligations.......... 6,963 48,475 179,265 234,703
Principal payments of long-term obligations.............. -- (88,070) (70,664) (158,734)
Proceeds from issuance of common stock................... 977 -- -- 977
Contributions from minority interest..................... -- -- 142 142
Payments of deferred loans costs......................... -- -- (7,151) (7,151)
Repurchase of common stock............................... (15,644) -- -- (15,644)
Proceeds from related parties, net....................... 16,894 65,430 82,324 --
---------- ----------- ------------- ------------
Net cash flows from financing activities................... 9,190 25,835 19,268 54,293
---------- ----------- ------------- ------------
Change in cash and cash equivalents........................ 14,129 1,171 8,492 23,792
Cash and cash equivalents at beginning of period........... 14,208 1,811 (776) 15,243
---------- ----------- ------------- ------------
Cash and cash equivalents at end of period................. $ 28,337 $ 2,982 $ 7,716 $ 39,035
---------- ----------- ------------- ------------
---------- ----------- ------------- ------------
</TABLE>
F-28
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms....................................... $ -- $ 118,041 $ 149,821 $ -- $ 267,862
Food and beverage........................... -- 42,849 64,485 -- 107,334
Other....................................... -- 9,633 10,385 -- 20,018
--------- ----------- ------------- ------ ------------
Total revenues............................ -- 170,523 224,691 -- 395,214
--------- ----------- ------------- ------ ------------
Operating expenses:
Direct:
Rooms..................................... -- 34,001 41,315 -- 75,316
Food and beverage......................... -- 32,891 48,752 -- 81,643
General and administrative.................. 527 -- 9,553 -- 10,080
Other....................................... 435 63,174 66,341 -- 129,950
Depreciation and amortization............... -- 12,550 18,564 -- 31,114
--------- ----------- ------------- ------ ------------
Total operating expenses.................. 962 142,616 184,525 -- 328,103
--------- ----------- ------------- ------ ------------
(Loss) income from operations................. (962) 27,907 40,166 -- 67,111
Other income (expenses):
Other income................................ 2,864 -- (2,036) -- 828
Other expenses.............................. -- (29,033) (5,859) -- (34,892)
Interest expense............................ (1,557) (16,079) (12,742) -- (30,378)
Equity in loss of consolidated
subsidiaries.............................. (5,587) -- -- 5,587 --
Minority interests:
Preferred redeemable securities............. -- -- (6,475) -- (6,475)
Other....................................... -- -- (1,436) -- (1,436)
--------- ----------- ------------- ------ ------------
(Loss) income before income taxes and
extraordinary item.......................... (5,242) (17,205) 11,618 5,587 (5,242)
(Benefit) provision for income taxes.......... (2,097) (6,882) 4,647 2,235 (2,097)
--------- ----------- ------------- ------ ------------
(Loss) income before extraordinary items...... (3,145) (10,323) 6,971 3,352 (3,145)
--------- ----------- ------------- ------ ------------
Extraordinary items, net of taxes............. -- -- (2,076) -- (2,076)
--------- ----------- ------------- ------ ------------
Net (loss) income............................. $ (3,145) $ (10,323) $ 4,895 $ 3,352 $ (5,221)
--------- ----------- ------------- ------ ------------
--------- ----------- ------------- ------ ------------
</TABLE>
F-29
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net cash flows from operating activities.................... $ 20,394 $ 9,529 ($ 622) 29,301
Investing activities:
Acquisitions of property and equipment.................. -- (56,589) (11,128) (67,717)
Capital improvements, net............................... -- (47,434) (71,233) (118,667)
Other................................................... -- 25,467 (21,607) 3,860
--------- ----------- ------------- ------------
Net cash flows from investing activities.................... -- (78,556) (103,968) (182,524)
Financing activities:
Proceeds from issuance of long-term obligations......... 6,736 251,662 341,886 600,284
Principal payments of long-term obligations............. -- (162,937) (227,089) (390,026)
Other................................................... (39,690) (15,645) 2,242 (53,093)
--------- ----------- ------------- ------------
Net cash flows from financing activities.................... (32,954) 73,080 117,039 157,165
--------- ----------- ------------- ------------
Change in cash and cash equivalents......................... (12,560) 4,053 12,449 3,942
Cash and cash equivalents at beginning of year.............. 14,208 1,811 (776) 15,243
--------- ----------- ------------- ------------
Cash and cash equivalents at end of year.................... $ 1,648 $ 5,864 $ 11,673 $ 19,185
--------- ----------- ------------- ------------
--------- ----------- ------------- ------------
</TABLE>
F-30
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms.................................... $ -- $ 62,618 $ 117,338 $ -- $ 179,956
Food and beverage........................ -- 24,629 55,706 -- 80,335
Other.................................... -- 5,135 11,231 -- 16,366
----------- ----------- ------------- ------------ ------------
Total revenues......................... -- 92,382 184,275 -- 276,657
----------- ----------- ------------- ------------ ------------
Operating expenses:
Direct:
Rooms.................................. -- 17,338 32,270 -- 49,608
Food and beverage...................... -- 18,911 42,008 -- 60,919
General and administrative............... 424 -- 8,549 -- 8,973
Other.................................... 283 31,694 56,059 -- 88,036
Depreciation and amortization............ -- 8,022 15,001 -- 23,023
----------- ----------- ------------- ------------ ------------
Total operating expenses............... 707 75,965 153,887 -- 230,559
----------- ----------- ------------- ------------ ------------
(Loss) income from operations.............. (707) 16,417 30,388 -- 46,098
Other income (expenses):
Other income............................. 1,928 (6,850) 6,642 -- 1,720
Interest expense......................... (8) (9,972) (15,929) -- (25,909)
Equity in earnings of consolidated
subsidiaries........................... 19,736 -- -- (19,736) --
Minority interests......................... -- -- (960) -- (960)
----------- ----------- ------------- ------------ ------------
Income (loss) before income taxes and
extraordinary item....................... 20,949 (405) 20,141 (19,736) 20,949
Provision (benefit) for income taxes....... 8,380 (162) 8,056 (7,895) 8,379
----------- ----------- ------------- ------------ ------------
Income (loss) before extraordinary item.... 12,569 (243) 12,085 (11,841) 12,570
Extraordinary item, net of taxes........... -- -- (3,751) -- (3,751)
----------- ----------- ------------- ------------ ------------
Net income (loss).......................... $ 12,569 $ (243) $ 8,334 $ (11,841) $ 8,819
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
</TABLE>
F-31
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES CONSOLIDATED
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net cash flows from operating activities.................. $ (152,267) $ 118,520 $ 75,768 $ 42,021
Investing activities:
Acquisitions of property and equipment................ -- (118,700) (24,706) (143,406)
Capital improvements, net............................. -- (11,007) (37,245) (48,252)
Other................................................. -- (23,420) (5,588) (29,008)
----------- ----------- ------------- ------------
Net cash flows from investing activities.................. -- (153,127) (67,539) (220,666)
Financing activities:
Proceeds from issuance of long-term obligations....... -- 64,989 126,571 191,560
Principal payments of long-term obligations........... (6,387) (26,644) (134,616) (167,647)
Proceeds from issuance of common stock................ 156,638 -- -- 156,638
Other................................................. (31) (2,749) (3,356) (6,136)
----------- ----------- ------------- ------------
Net cash flows from financing activities.................. 150,220 35,596 (11,401) 174,415
----------- ----------- ------------- ------------
Change in cash and cash equivalents....................... (2,047) 989 (3,172) (4,230)
Cash and cash equivalents at beginning of year............ 16,255 822 2,396 19,473
----------- ----------- ------------- ------------
Cash and cash equivalents at end of year.................. $ 14,208 $ 1,811 $ (776) $ 15,243
----------- ----------- ------------- ------------
----------- ----------- ------------- ------------
</TABLE>
F-32
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms....................................... $ -- $ 53,642 $ 102,922 $ -- $ 156,564
Food and beverage........................... -- 20,916 47,887 -- 68,803
Other....................................... -- 3,987 10,172 -- 14,159
--------- ----------- ------------- ------------ ------------
Total revenues............................ -- 78,545 160,981 -- 239,526
--------- ----------- ------------- ------------ ------------
Operating expenses:
Direct:
Rooms..................................... -- 15,115 28,552 -- 43,667
Food and beverage......................... -- 16,016 36,745 -- 52,761
General and administrative.................. 546 -- 8,751 -- 9,297
Other....................................... 646 26,016 50,521 -- 77,183
Depreciation and amortization............... -- 6,551 12,126 -- 18,677
--------- ----------- ------------- ------------ ------------
Total operating expenses.................. 1,192 63,698 136,695 -- 201,585
--------- ----------- ------------- ------------ ------------
(Loss) income from operations................. (1,192) 14,847 24,286 -- 37,941
Other income (expenses):
Other income................................ 1,949 (2,005) 5,391 -- 5,335
Interest expense............................ (169) (13,196) (16,078) -- (29,443)
Equity in earnings of consolidated
subsidiaries.............................. 11,185 -- -- (11,185) --
Minority interests............................ -- -- (2,060) -- (2,060)
--------- ----------- ------------- ------------ ------------
Income (loss) before income taxes and
extraordinary item.......................... 11,773 (354) 11,539 (11,185) 11,773
Provision (benefit) for income taxes.......... 4,709 (141) 3,131 (4,474) 3,225
--------- ----------- ------------- ------------ ------------
Income (loss) before extraordinary item....... 7,064 (213) 8,408 (6,711) 8,548
Extraordinary item, net of tax................ -- -- (348) -- (348)
--------- ----------- ------------- ------------ ------------
Net income (loss)............................. $ 7,064 $ (213) $ 8,060 $ (6,711) $ 8,200
--------- ----------- ------------- ------------ ------------
--------- ----------- ------------- ------------ ------------
</TABLE>
F-33
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net cash flows from operating activities.................... $ 7,741 ($ 9,189) $ 32,418 $ 30,970
Investing activities:
Acquisitions of property and equipment.................. -- (7,100) (63,212) (70,312)
Capital Improvements, net............................... -- (7,741) (18,582) (26,323)
Other................................................... -- 726 (1,648) (922)
--------- ----------- ------------- ------------
Net cash flows from investing activities.................... -- (14,115) (83,442) (97,557)
Financing activities:
Proceeds from issuance of long-term obligations......... 343 56,868 109,106 166,317
Principal payments of long-term obligations............. -- (22,128) (70,088) (92,216)
Other................................................... 5,074 (11,400) 6,884 558
--------- ----------- ------------- ------------
Net cash flows from financing activities.................... 5,417 23,340 45,902 74,659
--------- ----------- ------------- ------------
Change in cash and cash equivalents......................... 13,158 36 (5,122) 8,072
Cash and cash equivalents at beginning of year.............. 3,097 786 7,518 11,401
--------- ----------- ------------- ------------
Cash and cash equivalents at end of year.................... $ 16,255 $ 822 $ 2,396 $ 19,473
--------- ----------- ------------- ------------
--------- ----------- ------------- ------------
</TABLE>
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Impac Hotel Group, L.L.C.
We have audited the accompanying consolidated and combined balance sheets of
Impac Hotel Group, L.L.C. and its Predecessors and Impac Hotel Development,
Inc., as defined in Note 1, as of December 31, 1997 and 1996, and the related
consolidated and combined statements of operations, equity and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated and combined financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated and combined financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
and combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the consolidated and combined
financial position of Impac Hotel Group L.L.C. and its Predecessors and Impac
Hotel Development, Inc. as of December 31, 1997 and 1996 and the consolidated
and combined results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
April 10, 1998, except
for Note 9 as to which
the date is December 11, 1998
F-35
<PAGE>
IMPAC HOTEL GROUP, L.L.C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 864 $ 10,877 $ 5,199
Cash, restricted.......................................................... 4,687 5,271 --
Accounts receivable, net.................................................. 8,078 5,886 2,583
Inventories............................................................... 607 585 335
Other current assets...................................................... 4,094 2,807 310
----------- ---------- ----------
Total current assets.................................................... 18,330 25,426 8,427
Property and equipment, net................................................. 426,637 378,204 175,910
Other assets, net........................................................... 18,152 14,150 7,329
----------- ---------- ----------
$ 463,119 $ 417,780 $ 191,666
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................................... $ 23,548 $ 15,156 $ 8,463
Accrued liabilities....................................................... 9,003 9,031 6,429
Accrued merger related costs.............................................. 2,900 1,200 --
Current portion of long-term obligations.................................. -- -- 1,163
----------- ---------- ----------
Total current liabilities............................................... 35,451 25,387 16,055
Long-term obligations, less current portion................................. 400,071 355,236 155,851
Commitments and contingencies............................................... -- -- --
Minority interests.......................................................... 248 187 --
Equity:
Impac Hotel Group, L.L.C. and Predecessors:
Partners' and stockholders' equity...................................... -- -- 18,798
Members' equity......................................................... 33,613 41,559 --
Impac Hotel Development, Inc.:
Stockholders' equity (deficit).......................................... (6,264) (4,589) 962
----------- ---------- ----------
Total equity.......................................................... 27,349 36,970 19,760
----------- ---------- ----------
$ 463,119 $ 417,780 $ 191,666
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS.
F-36
<PAGE>
IMPAC HOTEL GROUP, L.L.C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
--------- ---------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Rooms.................................................. $ 57,608 $ 39,873 $ 90,139 $ 52,043 $ 42,442
Food and beverage...................................... 14,072 10,498 23,429 11,813 9,800
Other.................................................. 4,204 2,459 6,291 3,957 3,334
--------- ---------- ---------- --------- ---------
Total revenue........................................ 75,884 52,830 119,859 67,813 55,576
--------- ---------- ---------- --------- ---------
Operating expenses:
Direct:
Rooms................................................ 14,054 10,419 28,303 16,840 12,965
Food and beverage.................................... 11,403 8,455 19,322 9,734 7,365
Other:
Administrative and general........................... 5,756 3,451 10,212 4,306 2,439
Property management.................................. 7,550 5,655 13,273 7,642 5,517
Advertising and promotion............................ 7,351 4,004 9,064 3,415 2,880
Utilities............................................ 4,007 3,172 7,143 4,140 3,286
Repairs and maintenance.............................. 3,981 3,023 6,573 3,455 3,289
Depreciation and amortization........................ 7,367 4,894 11,136 5,814 3,978
Property taxes and insurance......................... 3,407 2,431 4,779 2,957 2,214
Other................................................ 2,591 3,061 4,114 3,338 3,836
--------- ---------- ---------- --------- ---------
Total operating expenses........................... 67,467 48,565 113,919 61,641 47,769
--------- ---------- ---------- --------- ---------
Income from operations................................... 8,417 4,265 5,940 6,172 7,807
Other income (expenses):
Other income, primarily gain on sale of hotels......... 184 22 271 19,701 5,049
Minority interests..................................... (61) (6) 220 -- --
Interest expense....................................... (14,170) (8,870) (21,265) (11,809) (7,237)
Merger related costs................................... (3,084) -- (1,255) -- --
--------- ---------- ---------- --------- ---------
Total other income (expenses)...................... (17,131) (8,854) (22,029) 7,892 (2,188)
--------- ---------- ---------- --------- ---------
Income (loss) before extraordinary item.................. (8,714) (4,589) (16,089) 14,064 5,619
Extraordinary item--
Loss on extinguishment of indebtedness................. -- (13,332) (13,332) -- --
--------- ---------- ---------- --------- ---------
Net income (loss)........................................ $ (8,714) $ (17,921) $ (29,421) $ 14,064 $ 5,619
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS.
F-37
<PAGE>
IMPAC HOTEL GROUP, L.L.C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
IMPAC HOTEL GROUP,
L.L.C. IMPAC HOTEL
AND PREDECESSORS DEVELOPMENT,
------------------------ INC.
PARTNERS' ----------------
AND STOCKHOLDERS'
STOCKHOLDERS' MEMBERS' EQUITY
EQUITY EQUITY (DEFICIT) TOTAL
------------ ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............................. $ 5,282 -- $ 95 $ 5,377
Net income (loss)...................................... 6,088 -- (469) 5,619
Contributions, net..................................... 12,724 -- 300 13,024
Distributions.......................................... (10,385) -- -- (10,385)
Loans to partners...................................... -- -- (227) (227)
------------ ---------- -------- ----------
Balance at December 31, 1995............................. 13,709 -- (301) 13,408
Net income (loss)...................................... 15,055 -- (991) 14,064
Contributions, net..................................... 19,464 -- 2,561 22,025
Distributions.......................................... (29,430) -- 666 (28,764)
Loans to partners...................................... -- -- (973) (973)
------------ ---------- -------- ----------
Balance at December 31, 1996............................. 18,798 -- 962 19,760
Transfer of equity into Impac Hotel Group, L.L.C....... (18,798) $ 18,798 -- --
Purchase of limited partners' interest................. -- 22,700 -- 22,700
Net loss............................................... -- (26,410) (3,011) (29,421)
Issuance of membership units, net...................... -- 37,810 -- 37,810
Distributions to members............................... -- (6,039) (1,580) (7,619)
Membership units retired............................... -- (5,300) -- (5,300)
Loans to members....................................... -- -- (960) (960)
------------ ---------- -------- ----------
Balance at December 31, 1997............................. -- 41,559 (4,589) 36,970
Net loss (unaudited)................................... -- (8,039) (675) (8,714)
Issuance of membership units, net (unaudited).......... -- 93 -- 93
Distributions to members (unaudited)................... -- -- (1,000) (1,000)
------------ ---------- -------- ----------
Balance at June 30, 1998 (unaudited)..................... $ -- $ 33,613 $ (6,264) $ 27,349
------------ ---------- -------- ----------
------------ ---------- -------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS.
F-38
<PAGE>
IMPAC HOTEL GROUP, L.L.C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Operating activities:
Net income (loss)........................................ $ (8,714) $ (17,921) $ (29,421) $ 14,064 $ 5,619
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization.......................... 7,367 4,894 11,136 5,814 3,978
Minority interest...................................... 61 6 (220) -- --
Gain on sales of hotel properties...................... -- -- -- (19,369) (5,354)
Loss on extinguishment of indebtedness................. -- 13,332 13,332 -- --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable.................................. (2,192) (6,120) (3,303) (109) 713
Inventories.......................................... (22) (250) (250) (66) (45)
Other assets......................................... (1,287) (642) (1,853) (441) (2,543)
Accounts payable and accrued expenses................ 10,064 6,302 11,255 4,151 5,280
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) operating
activities....................................... 5,277 (399) 676 4,044 7,648
----------- ----------- ----------- ---------- ----------
Investing activities:
Acquisition and development of hotel properties.......... (16,692) (84,675) (148,094) (60,860) (29,708)
Capital improvements..................................... (38,734) (32,760) (41,949) (50,463) (27,610)
Deposit on hotel purchase................................ (4,165) -- -- -- --
Proceeds from sales of hotel properties.................. 55,494 18,972
Cash, restricted......................................... 584 (4,535) (5,271) -- --
Loans to members......................................... -- (585) (960) -- --
Loans to partners........................................ -- -- -- (973) (227)
----------- ----------- ----------- ---------- ----------
Net cash used in investing activities.............. (59,007) (122,555) (196,274) (56,802) (38,573)
----------- ----------- ----------- ---------- ----------
Financing activities:
Proceeds from issuance of long-term obligations.......... 44,835 294,970 354,957 83,151 45,084
Payments of deferred loan costs.......................... -- (8,624) (12,391) (2,366) (1,451)
Payments of franchise fees and other deferred costs...... (211) (307) (453) (688) (197)
Capital contributions, net............................... 93 11,752 37,810 22,025 13,024
Equity distributions..................................... (1,000) (3,368) (7,619) (28,764) (10,385)
Repayment of long-term obligations....................... -- (156,214) (156,695) (19,815) (13,245)
Retirement of membership units........................... -- (5,300) (5,300) -- --
Prepayment penalties..................................... -- (8,640) (8,640) -- --
Contribution by joint venture partner.................... -- 407 407 -- --
Loan from members........................................ -- -- -- -- --
Repayment of related party loans......................... -- (800) (800) -- --
Proceeds from issuance of related party notes............ -- -- -- 400 400
----------- ----------- ----------- ---------- ----------
Net cash provided by financing activities.......... 43,717 123,876 201,276 53,943 33,230
----------- ----------- ----------- ---------- ----------
Net change in cash and cash equivalents.................... (10,013) 922 5,678 1,185 2,305
Cash and cash equivalents at beginning of period........... 10,877 5,199 5,199 4,014 1,709
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents at end of period................. $ 864 $ 6,121 $ 10,877 $ 5,199 $ 4,014
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Supplemental disclosures of cash flow information--
Cash payments for interest............................... $ 15,708 $ 9,447 $ 21,370 $ 12,633 $ 6,938
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS.
F-39
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The principal activity of Impac Hotel Group, L.L.C. ("Impac") is to either
acquire and renovate or develop, and operate hotels. The predecessors of Impac,
prior to the formation of Impac Hotel Group, L.L.C., consisted of 22 limited
partnerships and four corporations which each owned between one and six hotels,
("Initial Hotels") and two operating corporations, Impac Hotel Management, Inc.
("Impac, Inc.") and Impac Development and Construction, Inc. ("IDC")
(collectively, the "Predecessors"). Impac and IDC are engaged in the hotel
management business and the hotel design and construction business,
respectively. Impac Inc., which managed all of the Initial Hotels, was owned by
Charles Cole, 25%; Robert Cole, 32.5%; Nancy Wolff (a member of the immediate
Cole family), 10%; and an employee, 32.5%. IDC, a construction company, was also
controlled by the Cole Family by virtue of its ownership of 50.4% of IDC's
outstanding stock. The four hotel companies were controlled by the Cole Family
by virtue of its ownership of between 52% and 65% of each hotel corporation's
outstanding stock. The Cole Family also controlled each of the 22 corporate
general partners of each of the 22 limited partnerships through the ownership of
in excess of 66% of the outstanding stock of each general partner. Under the
terms of each limited partnership agreement, the general partner of each
partnership had control over the decisions of the limited partnerships including
the operation, sale or financing of the partnerships' assets, and the general
partner could not be replaced by the limited partners. By virtue of such
ownership and management of the hotels, the Cole family controlled each of the
Predecessors. On February 26, 1997 Impac was formed by the Cole Family, with
Robert Cole as manager, as a limited liability company under the laws of the
state of Georgia. As Manager, Mr. Cole had and continues to have authority over
Impac's business and affairs. All of the Initial Hotels were acquired by Impac
through the issuance of membership units in Impac in exchange for either all of
the interests in limited partnerships or all of the assets of the corporations.
In addition, Impac acquired, in exchange for membership interests, all of the
assets of Impac, Inc. and IDC. This reorganization, which was accounted for as a
reorganization of entities under common control, was completed on March 12,
1997. The acquisition of the 22 partnerships was recorded as a purchase by the
Cole Family of the minority interests in the Predecessor entities. The
acquisition of the assets (subject to all of the liabilities) of the four
corporations which owned Initial Hotels, Impac, Inc. and IDC has been recorded
as a reorganization at historical cost.
In accordance with Impac's Operating Agreement, profits and losses, as
defined, are allocated among the members in proportion to their ownership
interests.
Impac and its Predecessors owned 45, 26 and 19 hotels as of December 31,
1997, 1996 and 1995, respectively. During the years ended December 31, 1996 and
1995 the Predecessors of Impac sold seven and three hotels, respectively.
The principal activity of Impac Hotel Development, Inc. ("IHD") is to
analyze prospective hotel acquisitions for Impac and Predecessors. The
principals of Impac, Inc. own a majority of the outstanding stock of IHD. IHD
was not acquired by Impac in the reorganization previously described.
BASIS OF PRESENTATION
The accompanying consolidated and combined financial statements of Impac and
its subsidiaries and IHD ("Companies") are prepared on the basis of generally
accepted accounting principles. The accounts and activities of Impac and IHD are
presented on a combined basis due to their common control and
F-40
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
because the entities are subject to a merger as described in Note 9. All
material intercompany balances are eliminated in the consolidation and
combination.
The accompanying combined financial statements of the Predecessors and IHD
are presented on a combined basis due to the common control that existed during
those periods. The combined financial statements include the partnerships and
corporations that were acquired by Impac as well as the financial position and
results of operations of hotel properties that were sold prior to the
reorganization but were under the common control of Impac, Inc. during the
periods presented. All material intercompany balances are eliminated in the
combination.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Companies consider highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents.
CASH, RESTRICTED
Cash, restricted consists of amounts reserved for capital improvements, debt
service, taxes, and insurance.
INVENTORIES
Inventories consist primarily of food and beverage, linens, china,
tableware, and glassware and are stated at the lower of cost (computed on the
first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Impac
capitalizes interest costs incurred during the construction of property and
during major renovations upon the acquisition of hotels. During the years ended
December 31, 1997, 1996 and 1995, Impac capitalized interest of approximately
$1,100,000, $1,200,000 and $300,000, respectively.
Management monitors the operating results of Impac's property and equipment
and periodically reviews the carrying value of each property to determine if
circumstances exist indicating an impairment other than temporary in the
carrying value of the assets or that depreciation periods should be modified. If
facts or circumstances indicate a potential impairment exists, Impac compares
projected cash flows (undiscounted, without interest charges) of the specific
hotel property to its carrying amount. Should a shortfall result, Impac would
adjust the carrying amount of the property to the present value of such
projected cash flows with a corresponding charge to earnings. Impac does not
believe there are any factors or circumstances indicating impairment of any of
its investments in property and equipment.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of
property and equipment, the asset and related depreciation are removed from the
accounts and the gain or loss is included in operations.
F-41
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COSTS
Deferred costs of $13.5 million and $6.4 million at December 31, 1997 and
1996, which are included in other assets, primarily consist of deferred loan
costs, franchise fees and other deferred costs, net of accumulated amortization
of approximately $660,000 and $290,000 at December 31, 1997 and 1996,
respectively. Amortization of deferred costs is computed using the straight-line
method over the terms of the related loan, franchise, or other agreement. The
straight line method of amortizing deferred financing costs approximates the
effective interest method. Impac wrote off approximately $4.7 million of
deferred loan costs in connection with the refinancing of its long-term
obligations, which is included in loss on extinguishment of indebtedness.
INCOME TAXES
Impac is a limited liability company and is not subject to income taxes. The
Predecessors were each either general or limited partnerships or S corporations
and IHD is an S corporation and similarly not subject to income taxes. The
results of these entities operations are included in the tax returns of the
members, partners or S corporation shareholders.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk associated with cash and cash equivalents is
considered low due to the credit quality of the issuers of the financial
instruments held by Impac and due to their short duration to maturity. Accounts
receivable are primarily from major credit card companies, airlines and other
travel related companies. Impac performs ongoing evaluations of its significant
customers and generally does not require collateral. Impac maintains an
allowance for doubtful accounts at a level which management believes is
sufficient to cover potential credit losses. At December 31, 1997 and 1996,
these allowances were $548,000 and $405,000, respectively.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred.
USE OF ESTIMATES
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, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts from prior years have been reclassified to conform with the
June 30, 1998 presentation.
F-42
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
USEFUL LIVES ----------- ----------------------
(YEARS) 1998 1997 1996
------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Land...................................... $ 60,606 $ 60,012 $ 30,981
Buildings and improvements................ 35-39 265,436 231,710 112,079
Furnishings and equipment................. 5-15 58,753 55,709 28,490
----- ----------- ---------- ----------
384,795 347,431 171,550
Less accumulated depreciation............. (28,853) (21,860) (11,410)
----------- ---------- ----------
355,942 325,571 160,140
Construction in progress.................. 70,695 52,633 15,770
----------- ---------- ----------
$ 426,637 $ 378,204 $ 175,910
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
At December 31, 1997, Impac had 6 hotels under development and 18 hotels
which had been recently acquired and were under renovation. Construction in
progress consists of amounts expended to develop and renovate these hotels.
Impac developed and opened or began development on a total of 9 hotels during
1997 for a cost of approximately $50 million.
During the year ended December 31, 1997, Impac acquired and opened 18 hotels
in various transactions and acquired one additional hotel through a joint
venture in which Impac acquired a 60% interest. The activities of the joint
venture were consolidated with Impac for the period commencing on the date the
joint venture interests were acquired through December 31, 1997. Such
acquisitions were each made for cash using newly contributed equity and debt.
The aggregate purchase price for these hotels and the partnership interest was
approximately $107 million.
In connection with the reorganization on March 12, 1997, Impac recorded a
step-up of land and building, reflecting an increase in their basis of
approximately $4.8 million and $17.9 million, respectively.
During the year ended December 31, 1996, the Predecessors acquired or
developed and opened 14 hotels in various transactions. Each of the acquisitions
were made for cash using newly contributed equity and debt. The aggregate
purchase price for these hotels was approximately $64 million.
Unaudited pro forma results of operations assuming the 1997 and 1996
acquisitions were completed on January 1, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues............................................................ $ 139,630 $ 114,096
Income (loss) before extraordinary item............................. (14,432) 12,088
Net income (loss)................................................... (27,764) 12,088
</TABLE>
F-43
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Salaries and related costs................................... 2,150 $ 2,750 $ 1,960
Real estate taxes............................................ 1,832 1,486 468
Interest..................................................... 2,021 2,042 1,090
Advanced deposits............................................ 444 263 246
Sales taxes.................................................. 1,454 1,813 1,751
Other........................................................ 1,102 677 914
----------- --------- ---------
$ 9,003 $ 9,031 $ 6,429
----------- --------- ---------
----------- --------- ---------
</TABLE>
4. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Credit facility with a financial institution............ $ 298,075 $ 265,262 $ --
Subordinated promissory note payable to a bank.......... 78,500 71,018 --
Other mortgages and notes............................... 23,496 18,956 156,214
Loans to a related party................................ -- -- 800
----------- ---------- ----------
400,071 355,236 157,014
Less: current portion of long-term obligations.......... -- -- 1,163
----------- ---------- ----------
$ 400,071 $ 355,236 $ 155,851
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-44
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM OBLIGATIONS (CONTINUED)
CREDIT FACILITY
At June 30, 1998 and December 31, 1997, Impac had a credit facility
("Facility") with a financial institution that consisted of the following loans
which are collateralized by substantially all of the Company's hotel properties
(in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
(UNAUDITED)
Loan, totaling $132.5 million, with interest at LIBOR
(6.00% at December 31, 1997) plus 2.25%, maturing in
1999, and requiring interest only payments to maturity.......... $ 132,459 $ 132,459
Loan, totaling $163.5 million, with interest at LIBOR
plus 2.75%, maturing in 2000, and requiring interest
only payments to maturity....................................... 137,245 107,727
Loan, totaling $100 million, with interest at LIBOR
plus 2.75%, maturing in 2001, and requiring interest
only payments to maturity....................................... 28,371 25,076
----------- ------------
$ 298,075 $ 265,262
----------- ------------
----------- ------------
</TABLE>
Loan advances, not to exceed the maximum loan amounts, are to be made to
Impac for approved construction projects and acquisitions. Impac is required to
pay a fee equal to 1% of funds advanced at the time of advance. Each of the
loans, upon maturity, converts to a term loan that requires payments of interest
and principal sufficient to amortize the loan over a 20 year period. These loans
will bear interest at a predetermined fixed rate and will be collateralized by
the hotel properties securing the respective loans. Upon conversion of the loans
to term loans, Impac is required to pay a securitization fee of 1% of the
balance of the loans. Impac is required to fund 2% of its gross revenues in
restricted cash balances to be used for capital improvements.
The Facility contains certain covenants, including maintenance of certain
financial ratios, certain reporting requirements and other customary
restrictions, the violation of which could cause the amounts of outstanding
principal, interest and fees to be immediately due and payable. In addition, the
Facility does not allow distributions to be made to the unitholders until after
the payment of debt service payments and the funding of certain reserve accounts
including tax, insurance and capital reserves. On December 31, 1997, management
believes that Impac was in compliance with all debt covenants.
The loans require payment of penalties and yield maintenance amounts when
certain payments of principal are made prior to specified dates.
SUBORDINATED PROMISSORY NOTE
Impac has a subordinated promissory note ("Note") with a bank totaling $78.5
million which is subordinated to the Facility agreement. Advances on the Note,
totaling $78.5 and $71 million at June 30, 1998 and December 31, 1997,
respectively, are used for the acquisition and development of hotel properties.
The Note is unsecured, matures in March 2000, and bears interest at a fixed
interest rate of 10%. Interest only payments are required to maturity. In
addition, variable interest payments are required
F-45
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM OBLIGATIONS (CONTINUED)
to be made upon the achievement of certain performance measures related to the
cash flow of substantially all of Impac's hotel properties, and upon the
occurrence of certain events (defined as "Participation Events" in the Note
agreement, including the sale or refinancing of properties, an equity offering
by Impac or the merger or reorganization of Impac).
Fixed and variable interest on the Note included in interest expense is $4.3
million for the year ended December 31, 1997. Impac prepaid approximately
$660,000 in participation interest which is included in other current assets.
Upon the occurrence of a Participation Event, if the fixed interest and the
variable interest are not sufficient to provide the holder of the Note with a
cumulative internal rate of return with respect to their investment in the Note
equal to 15% per annum, then additional payment of interest shall be paid with
respect to the Note in an amount sufficient to provide the holder with a
cumulative internal rate of return equal to 15%, provided that such additional
payment of interest shall not exceed 100% of net cash flow from the operations
of the Hotel properties, plus 100% of net proceeds from Participation Events.
The members are not required to make contributions in order for the holder to
obtain a 15% internal rate of return.
The Note contains certain covenants, including maintenance of certain
financial ratios, certain reporting requirements and other customary
restrictions. In addition, the Note does not allow distributions to unitholders
at any time that there is an event of default, as defined in the Note Agreement,
or if Impac fails to maintain a debt service coverage ratio of at least 1.20.
Any event of default under the terms of the Facility constitute an event of
default under the Note. On December 31, 1997, management believes that Impac was
in compliance with all debt covenants.
OTHER DEBT
Impac and Predecessors had mortgage loans totaling $19.1 million
(unaudited), $14.6 million and $156.2 million at June 30, 1998 and December 31,
1997 and 1996, respectively. The mortgage loans outstanding at December 31, 1997
require interest only payments and are due during 1998 and 1999. The mortgage
loans will convert to amortizing term loans which mature in 2020 through 2024.
All mortgage loans outstanding at December 31, 1996 were paid out with proceeds
from the Facility and the Note. Interest rates on Impac's mortgage loans vary
and are either fixed or variable. At December 31, 1997, mortgage loan interest
rates ranged from 2% to 8.5%.
Impac also has two promissory notes totaling $4.4 million at June 30, 1998
(unaudited) and December 31, 1997 that bear interest at 14%. These notes require
interest only payments and mature in 2001.
Impac refinanced its long-term obligations in March, 1997. Prior to the
refinancing with the Facility and the Note, the Predecessors generally financed
each hotel with separate mortgage debt. Such debt was collateralized by a single
hotel without recourse to other entities or the property owners. Interest rates
on mortgage notes varied by lender and were either fixed or variable. In
connection with the previously described refinancing, all separate mortgage debt
was satisfied. Prepayment penalties paid upon the retirement of the mortgages
and the write-off of remaining deferred loan costs associated with the satisfied
mortgage notes of approximately $13.3 million are included as an extraordinary
item in the accompanying statement of operations for the year ended December 31,
1997.
F-46
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. EQUITY
Equity consisted of the following (in thousands except share amounts):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Impac Hotel Group, L.L.C. and Predecessors:
Member units, 11,559,527 issued and outstanding.......... $ 33,613 $ 41,559 $ --
Partners' and Stockholders' equity....................... -- -- 18,798
----------- --------- ---------
33,613 41,559 18,798
----------- --------- ---------
Impac Hotel Development, Inc.:
Common stock, no par value; 2,000 shares authorized,
issued and outstanding................................. 299 299 299
Additional paid-in capital............................... 153 1,153 3,323
Retained deficit......................................... (5,146) (4,471) (1,460)
Loans to members......................................... (1,570) (1,570) --
Loans to partners........................................ -- -- (1,200)
----------- --------- ---------
(6,264) (4,589) 962
----------- --------- ---------
Total.................................................... $ 27,349 $ 36,970 $ 19,760
----------- --------- ---------
----------- --------- ---------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Impac has franchise and license agreements with various hotel chains which
require monthly payments for license fees, reservation services and advertising
fees. Such agreements are generally for periods from 10 to 20 years. A licensor
may require Impac to upgrade its facilities at any time to comply with the
licensor's then current standards. Upon the expiration of the term of a license,
Impac may apply for a license renewal. In connection with a renewal of a
license, a licensor may require payment of a renewal fee, increased license,
reservation and advertising fees, as well as substantial renovation of the
hotel. Impac is required under its franchise agreements to remit varying
percentages of gross room revenue generally ranging from 6% to 7.5% to the
various franchisors for franchising, royalties, reservations, sales and
advertising services. Additional sales and advertising costs are incurred at the
local property level.
The license agreements are subject to cancellation in the event of a
default, including the failure to operate the hotel in accordance with the
quality standards and specifications of the licensor. Impac believes that the
loss of a license for any individual hotel would not have a material adverse
effect on the Impac's financial condition and results of operations. Impac
believes it will be able to renew its current licenses or obtain replacements of
a comparable quality.
Impac's hotels have noncancelable operating leases, mainly for operating
equipment, and Impac leases certain office space. Lease expense for the years
ended December 31, 1997, 1996 and 1995 was approximately $625,000, $350,000 and
$600,000.
The Companies are a party to legal proceedings, including employment related
claims, arising in the ordinary course of its business, the impact of which
would not, either individually or in the aggregate, in management's opinion,
based upon the facts known by management and the advice of counsel, have a
F-47
<PAGE>
IMPAC HOTEL GROUP, L. L. C. AND PREDECESSORS
AND IMPAC HOTEL DEVELOPMENT, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
material adverse effect on the Company's financial condition or results of
operations. The Companies, prior to December 10, 1997, did not have insurance
coverage, except for directors and officers' insurance, in connection with the
employment related claims.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of accounts receivable and payable and accrued expenses are
assumed to be equal to their reported carrying amounts due to their short
maturity. The carrying amount of long-term obligations approximates their fair
value based on the rate of interest charged and Impac's incremental borrowing
rate.
8. RELATED PARTY TRANSACTIONS
IHD loaned certain employees funds to purchase units in Impac. Such loans
are included as a component of stockholders' equity in the consolidated and
combined financial statements. Certain of these loans to members of
approximately $590,000 were satisfied through a charge to administrative and
general expenses during 1997.
IHD incurred fees of approximately $100,000, $580,000, $160,000 and $575,000
during six months ended June 30, 1998 and the years ended December 31, 1997,
1996 and 1995, respectively, to a related party for interior design consulting
services and for equity placement fees in connection with the acquisition of
hotels. All fees are recorded as operating expenses in the statement of
operations.
9. SUBSEQUENT EVENTS
On December 11, 1998, Servico merged with Impac and IHD in a transaction
accounted for under the purchase method of accounting, pursuant to APB 16,
"Business Combinations" whereby Servico is considered the acquiring company.
Under the terms of the Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement"), Servico's existing shareholders received one share of
Lodgian common stock for each of Servico stock held by them (approximately
18,440,000 million shares). The purchase price of Impac and IHD approximated
$104,367,000, consisting of $15 million in cash, the issuance of 9.4 million
shares of common stock of Lodgian at $8.80, of which 1.4 million shares are
contingent upon the completion of construction of five hotels, and acquisition
related costs of approximately $6,647,000.
The Company has incurred legal, accounting, consulting and investment
bankers fees relating to the proposed merger totaling $3,084,000 (unaudited)
during the six months ended June 30, 1998 and $1,255,000 during the year ended
December 31, 1997. Approximately $2,900,000 (unaudited) and $1,200,000 of these
expenses are unpaid and included in accrued merger costs on the accompanying
balance sheet as of June 30, 1998 and December 31, 1997, respectively. In
addition, the Company, upon completion of the merger, owed investment bankers an
additional amount totaling $2,100,000. This amount has not been accrued in the
accompanying financial statements.
F-48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION OR TO MAKE ANY
REPRESENTATION TO YOU THAT IS NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. YOU SHOULD NOT UNDER ANY CIRCUMSTANCES ASSUME THAT THE INFORMATION IN
THIS PROSPECTUS IS CORRECT ON ANY DATE AFTER THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary........................................ 5
Risk Factors................................... 18
Use of Proceeds................................ 27
Capitalization................................. 28
Unaudited Pro Forma Consolidated Financial
Data......................................... 29
Selected Historical Financial Information of
Lodgian...................................... 32
Selected Historical Financial Information of
Impac........................................ 35
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 36
The Exchange Offer............................. 47
Business....................................... 55
Management..................................... 68
Security Ownership of Certain Beneficial Owners
and Management............................... 74
Certain Relationships and Related
Transactions................................. 76
Description of Certain Indebtedness and
Preferred Stock.............................. 77
Description of the Notes....................... 89
Certain U.S. Federal Tax Considerations........ 126
Plan of Distribution........................... 129
Legal Matters.................................. 130
Experts........................................ 130
Index to Consolidated Financial Statements..... F-1
</TABLE>
UNTIL OCTOBER 31, 1999 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
LODGIAN FINANCING CORP.
EXCHANGE OFFER
FOR
12 1/4% SENIOR SUBORDINATED NOTES
DUE 2009
GUARANTEED BY:
LODGIAN, INC.
AND THE SUBSIDIARIES OF
LODGIAN FINANCING CORP.
---------------------
PROSPECTUS
---------------------
SEPTEMBER 21, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
