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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1999
REGISTRATION NO. 333-82859
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
<TABLE>
<S> <C>
LODGIAN, INC. LODGIAN CAPITAL TRUST I
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
7011 N/A
(Primary Standard Industrial Code (Primary Standard Industrial Code
Classification Number) Classification Number)
52-2093696 NONE
(I.R.S. Employer Identification (I.R.S. Employer Identification
No.) No.)
</TABLE>
--------------------------
3445 PEACHTREE ROAD N.E., SUITE 700
ATLANTA, GEORGIA 30326
(404) 364-9400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
ROBERT S. COLE
CHIEF EXECUTIVE OFFICER
3445 PEACHTREE ROAD N.E., SUITE 700
ATLANTA, GEORGIA 30326
(404) 364-9400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO
DENNIS J. BLOCK, ESQ.
CADWALADER, WICKERSHAM & TAFT
100 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 504-5555
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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SUBJECT TO COMPLETION, DATED AUGUST 30, 1999
PROSPECTUS
3,500,000 SHARES
LODGIAN CAPITAL TRUST I
7% CONVERTIBLE REDEEMABLE EQUITY STRUCTURED TRUST SECURITIES ("CRESTS-SM-")
(LIQUIDATION AMOUNT $50 PER CRESTS)
GUARANTEED TO THE EXTENT SET FORTH HEREIN AND CONVERTIBLE INTO SHARES OF COMMON
STOCK OF
LODGIAN, INC.
------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES OR ACCEPT AN OFFER TO BUY THESE SECURITIES UNTIL THIS
PROSPECTUS IS DELIVERED IN FINAL FORM. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN
ANY STATE WHERE SUCH OFFER OR SALE IS NOT PERMITTED.
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/ / This Prospectus relates to the offer and sale from time to time by certain
holders named herein or by their transferees, pledgees, donees or their
successors of the CRESTS of Lodgian Capital Trust I and the shares of the
common stock, par value $.01 per share, of Lodgian, Inc. issuable upon
conversion of the CRESTS.
/ / The holders of the CRESTS receive distributions at a fixed annual rate of
$3.50 per CRESTS, subject to increase if certain events occur.
/ / The Trust will make distributions on March 31, June 30, September 30 and
December 31 of each year.
/ / The Trust invested the proceeds from the sale of the CRESTS into an
equivalent amount of Convertible Debentures of Lodgian, Inc. The Convertible
Debentures will mature on June 30, 2010, unless previously redeemed.
/ / Lodgian, Inc. may defer payments of interest on the Convertible Debentures,
and the Trust in turn would defer distributions on the CRESTS, for up to 20
consecutive quarterly periods.
/ / The CRESTS are convertible, at the option of the holders, into shares of
common stock of Lodgian, Inc. 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. Lodgian has the option to redeem the Convertible Debentures
in whole or in part for cash on and after 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, plus accrued and unpaid interest.
/ / Lodgian, Inc. has guaranteed, to the extent the Trust has available funds,
payments of distributions on the CRESTS and payments upon liquidation of the
Trust or the redemption of the CRESTS.
/ / If the Trust liquidates, the holders of the CRESTS will receive a
liquidation amount of $50 per CRESTS, plus accumulated and unpaid
distributions.
/ / The CRESTS are designated for trading in the PORTAL Market.
/ / The Common Stock of Lodgian, Inc. is listed under the symbol "LOD" on the
New York Stock Exchange.
INVESTMENT IN THE CRESTS INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 14 OF THIS PROSPECTUS.
---------------------
"CONVERTIBLE REDEEMABLE EQUITY STRUCTURED TRUST SECURITIES-SM-" AND
"CRESTS-SM-" ARE SERVICE MARKS OWNED BY BANC OF AMERICA SECURITIES LLC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE OFFERED SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 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-1 (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 "Declaration" refers to the Amended and Restated Declaration of Trust
relating to the Trust among Servico, as Sponsor, Wilmington Trust Company,
as Property Trustee (the "Property Trustee") and as Delaware Trustee (the
"Delaware Trustee"), and the Regular Trustees named therein (collectively
with the Property Trustee and the Delaware Trustee, the "Trustees");
- the "Indenture" refers to the Indenture, dated as of June 17, 1998,
between Servico, Inc. ("Servico") and Wilmington Trust Company, as trustee
(the "Debenture Trustee"), as amended and supplemented by the Supplemental
Indenture dated as of June 17, 1998;
- the "Notes" refers to the 12 1/4% Senior Subordinated Notes due 2009
issued on July 23, 1999;
- the "Trust" refers to Lodgian Capital Trust I;
- "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 CRESTS AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS MEMORANDUM.
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, 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 third parties. 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
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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 franchisors, such as Bass Hotels and Resorts, have launched
quality improvement initiatives under which
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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, Lodgian Financing Corp., a subsidiary of Lodgian, issued
and sold 12 1/4% Senior Subordinated Notes due 2009. Lodgian, Inc., as well as
the wholly-owned subsidiaries of Lodgian Financing, have guaranteed the Notes.
Concurrently with the closing of the offering of the 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
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Lodgian Financing and certain of Lodgian Financing's existing subsidiaries and
by mortgages on each of the hotel properties owned through Lodgian Financing.
We used the net proceeds of the offering of the 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.
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.
THE TRUST
The Trust is a statutory business trust formed under the Delaware Business
Trust Act, as amended. The Trust used the proceeds derived from the issuance of
the CRESTS to purchase the Convertible Debentures. The assets of the Trust
consist solely of the Convertible Debentures; thus, payments under the
Convertible Debentures will be the sole revenue of the Trust. The Trust was
formed for the exclusive purpose of (i) issuing and selling the Trust Securities
representing a beneficial ownership in the Trust, (ii) investing the gross
proceeds from such sales in the Convertible Debentures and (iii) engaging in
only those other activities necessary or incidental thereto.
The CRESTS were issued and sold on June 15, 1998 to NationsBank Montgomery
Securities LLC and were simultaneously sold by the NationsBank in transactions
exempt from the registration requirements of the Securities Act of 1933, as
amended, in the United States to persons reasonably believed by NationsBanc to
be qualified institutional buyers in reliance on Rule 144A under the Securities
Act. We directly or indirectly own all of the common securities issued by the
Trust.
The principal executive office of the Company and the Trust is located at
3445 Peachtree Road N.E., Suite 700, Atlanta, Georgia 30326; telephone: (404)
364-9400.
5
<PAGE>
SUMMARY TERMS OF THE OFFERED SECURITIES
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 MEMORANDUM PRIOR TO INVESTING IN THE CRESTS. SEE "DESCRIPTION
OF THE CRESTS."
<TABLE>
<S> <C>
CRESTS and Common Securities
Generally....................... The CRESTS represent undivided beneficial ownership
interests in the Trust. We own all of the common
securities of the Trust (the "Common Securities," and
together with the CRESTS, the "Trust Securities"). The
Common Securities and the CRESTS rank equally and
payments are made on a proportional basis on each;
however, in certain circumstances (e.g., a default with
respect to the Convertible Debentures), the holders of
the CRESTS are entitled to be paid distributions on the
CRESTS and other payments in the event the CRESTS are
redeemed or the Trust is liquidated prior to any similar
payments on the Common Securities of the Trust. See
"Description of the CRESTS--Subordination of Common
Securities."
Distributions on CRESTS........... The holders of the CRESTS receive distributions on the
CRESTS at a fixed annual rate of $3.50 per CRESTS,
subject to increase if certain events occur.
Distributions are paid quarterly on each March 31, June
30, September 30 and December 31 of each year. Payment
of distributions began on September 30, 1998. The
distribution rate and payment dates for the CRESTS
correspond to the interest rate and payment dates on the
Convertible Debentures, which are the sole assets of the
Trust. See "Description of the CRESTS--Distributions."
Convertible Debentures............ The Trust invested the proceeds from the sale of the
CRESTS into an equivalent amount of our Convertible
Debentures. The Convertible Debentures will mature on
June 30, 2010, unless previously redeemed. We have
guaranteed the payments of the principal and interest on
the Convertible Debentures.
The Convertible Debentures are subordinate and junior in
right of payment to all of our senior indebtedness. See
"Risk Factors--Risks Relating to the CRESTS--Ranking of
Subordinated Obligations Under the Guarantee and the
Convertible Debentures" and "Description of the
Convertible Debentures--Subordination."
Conversion into Common Stock...... The CRESTS are convertible, at the option of the
holders, into shares of Common Stock at a price equal to
$21.42 per share of Common Stock (or 2.3343 shares of
Common Stock per CRESTS). The conversion price and ratio
are subject to adjustment upon certain events. A
holder's right to convert the CRESTS terminates on June
28, 2010 or two days prior to the date the Trust redeems
the CRESTS (unless the Property Trustee defaults in
making such redemption payments). On July 8, 1999, the
last reported sale price of Common Stock on
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
the NYSE was $6.56 per share. See "Description of the
CRESTS--Conversion Rights."
Redemption........................ 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 such Convertible
Debentures plus accumulated and unpaid distributions to
the date of redemption. We have the option to redeem the
Convertible Debentures in whole or in part for cash on
and after 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 and declining
annually to 100% on June 30, 2008, plus accrued and
unpaid interest to the redemption date. We may exercise
this option only if the redemption price (excluding any
accrued and unpaid interest) is paid solely out of the
sale proceeds from our equity securities.
We have the option to redeem the Convertible Debentures
in whole or in part for cash on and after July 3, 2002
at a price equal to 100% of the aggregate principal
amount of the Convertible Debentures to be redeemed
(together with accrued and unpaid interest). We may
exercise this option by notice given on any date only if
(1) for any 20 trading days within any 30 consecutive
trading days ending on such notice date, the closing
price of the Common Stock on the NYSE exceeds $25.71 per
share (subject to adjustments in certain circumstances)
and (2) on or prior to the date the notice of redemption
is given, we have entered into an agreement with a
nationally recognized investment banking firm to issue
and sell at least the same number of shares of Common
Stock as are issuable upon conversion of the unconverted
Convertible Debentures. See "Description of the
CRESTS--Redemption" and "Description of the Convertible
Debentures--Optional Redemption."
Guarantee......................... We have guaranteed, to the extent the Trust has
available funds, payments of distributions on the CRESTS
and payments upon liquidation of the Trust or the
redemption of the CRESTS. If we do not make principal or
interest payments on the Convertible Debentures, the
Trust will have insufficient funds to pay distributions
due on the CRESTS, in which event the guarantee will not
apply to such distributions until the Trust has
sufficient available funds. Our obligations under the
guarantee, taken together with our obligations under the
Declaration, the Convertible Debentures and the
Indenture, are a full and unconditional guarantee of the
Trust's obligations under the CRESTS. See "Relationship
Among the CRESTS, the Convertible Debentures and the
Guarantee--Full and Unconditional Guarantee." The
obligations to perform our obligations under the
guarantee are subordinate to all of our
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
liabilities and rank equally with the most senior
preferred stock which we may issue and with any
guarantee which we may issue in respect of any preferred
stock of any of our affiliates. See "Risk Factors--Risk
Factors Relating to the CRESTS--Ranking of Subordinated
Obligations Under the Guarantee and the Convertible
Debentures" and "Descriptions of the Guarantee."
Right to Defer Interest........... We may defer payments of interest on the Convertible
Debentures by extending the interest payment period on
the Convertible Debentures. 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 such extended period; however, such
distributions would continue to accumulate at the
applicable annual rate, compounded quarterly. Prior to
such extension period terminating, we may further defer
payments of interest by extending the interest payment
period. However, the total extension period (together
with all extensions) may not exceed 20 consecutive
quarterly periods or extend beyond June 30, 2010. Upon
any extension period terminating and our paying all
amounts due, we may elect a new extension period,
subject to the above requirements. If we defer our
interest payments, then, subject to limited exceptions,
we may not, and will not permit our subsidiaries to, (i)
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 our capital
stock, or (ii) pay any principal, interest or premium
on, or repay, repurchase or redeem any of our 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. During any extension period, holders of the
CRESTS will be required to continue to include their pro
rata share of the stated interest in their gross income
as original issue discount ("OID") for United States
federal income tax purposes, prior to receiving cash
payments attributable to such deferred interest. See
"Description of the Convertible Debentures--Option to
Extend Interest Payment Period."
Special Event..................... Current U.S. tax laws provide that the Trust is not
subject to United States federal income tax with respect
to income received or accrued on the Convertible
Debentures, we can deduct the interest it pays on the
Convertible Debentures, and the Trust is not subject to
more than a DE MINIMIS amount of other taxes or other
governmental charges. Additionally, the Trust is not
considered an "investment company" that is required to
register under the Investment Company Act of 1940. Upon
an unfavorable change in any of these laws
(collectively, a "Special Event"), then we may, if
certain conditions are met, dissolve the Trust and cause
the Trust to distribute the Convertible Debentures in
exchange for the CRESTS.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Alternatively, we may redeem all the Convertible
Debentures within 90 days following the occurrence of
such Special Event for cash at a redemption price equal
to 100% of the aggregate principal amount of the
Convertible Debentures to be redeemed (together with
accrued and unpaid interest to the redemption date), and
cause a mandatory redemption of the CRESTS. See
"Description of the CRESTS--Redemption--Special Event
Distribution or Redemption of Convertible Debentures."
Liquidation of the Trust.......... If the Trust liquidates, after satisfaction of the
claims of the Trust's creditors, if any, the holders of
the CRESTS will receive a liquidation amount of $50 per
CRESTS (plus accumulated and unpaid distributions on
such CRESTS to the date of payment). The Trust may elect
to pay this $50 liquidation amount by distributing an
equivalent amount of Convertible Debentures in exchange
for the CRESTS as described above. If the Trust has
insufficient assets available to pay the full
liquidation amount, then the Trust will pay any
available amounts on a pro rata basis to all the holders
of the CRESTS. The holders of the Common Securities are
entitled to receive distributions upon any such
liquidation pro rata with the holders of the CRESTS,
unless a default with respect to the Convertible
Debentures occurs and is continuing. In that event, the
CRESTS will have a priority over the Common Securities.
See "Description of the CRESTS-- Liquidation
Distribution Upon Dissolution."
Voting Rights..................... The holders of the CRESTS have limited voting rights and
are not entitled to vote to appoint, remove or replace,
or to increase or decrease the number of, the Trustees
who conduct the Trust's business and affairs. Such
voting rights are vested exclusively in the Company, as
holder of the Common Securities of the Trust. See
"Description of the CRESTS--Voting Rights; Amendment of
Declaration."
ERISA Matters..................... Generally, employee benefit plans that are subject to
the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"), as well
as individual retirement accounts and Keogh plans
subject to Section 4975 of the Code ("Plans"), may
purchase CRESTS, subject to the investing fiduciary's
determination that the investment in CRESTS satisfies
ERISA's fiduciary standards and other requirements
applicable to investments by the Plans. See "ERISA
Considerations."
Use of Proceeds................... The holders named herein and their transferees,
pledgees, donees or successors (the "Selling
Shareholders") of the CRESTS, the Convertible Debentures
and the Common Stock issuable upon conversion of the
CRESTS (the "Offered Securities") will receive all of
the proceeds from the sale of the Offered Securities.
Neither we nor the Trust will receive any proceeds from
the sale of the Offered Securities. See "Use of
Proceeds."
</TABLE>
9
<PAGE>
RISK FACTORS
An investment in the CRESTS involves various risks, and investors should
carefully consider the matters discussed under "Risk Factors" before making an
investment in the CRESTS.
10
<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. Operating results for the six months ended June
30, 1999 are not necessarily indicative of the results that might be expected
for the entire fiscal year.
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 Notes and the 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.
11
<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) (63,619) (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 2.2x 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
JUNE 30,
AS OF DECEMBER 31, 1999
-------------------------------
<S> <C> <C> <C> <C>
1996 1997 1998 ACTUAL
--------- --------- --------- -----------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property and equipment, net......................................... $ 364,922 $ 534,080 $1,317,470 $1,332,522
Total assets........................................................ 439,786 627,651 1,497,921 1,519,909
Long-term obligations, less current portion......................... 284,880 323,320 816,644 833,442
Minority interests:
Preferred redeemable securities................................... -- -- 175,000 175,000
Other............................................................. 19,627 13,555 15,021 15,922
Total stockholders' equity.......................................... 74,738 239,535 283,767 290,990
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
12
<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 swap 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 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.
13
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH BELOW, IN ADDITION
TO THE OTHER INFORMATION APPEARING IN THIS PROSPECTUS. IN ADDITION, BECAUSE
HOLDERS OF THE CRESTS MAY RECEIVE CONVERTIBLE DEBENTURES IN EXCHANGE FOR THEIR
CRESTS UPON LIQUIDATION OF THE TRUST, PROSPECTIVE PURCHASERS OF THE CRESTS ARE
ALSO MAKING AN INVESTMENT DECISION WITH REGARD TO THE CONVERTIBLE DEBENTURES AND
SHOULD CAREFULLY REVIEW ALL THE INFORMATION REGARDING THE CONVERTIBLE DEBENTURES
CONTAINED HEREIN.
RISK FACTORS RELATING TO THE COMPANY
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND PREVENT US FROM FULFILLING OUR OBLIGATION UNDER THE CRESTS
We have a substantial amount of debt. As of June 30, 1999, we had
outstanding debt of $869.6 million (excluding the CRESTS) and the ability to
borrow an additional $12.8 million under our existing credit agreements.
Our substantial indebtedness could interfere with the ability to pay
interest and principal on the CRESTS and may have important consequences for our
operations, including:
- we may not have sufficient funds to pay interest on, and principal of, our
debt;
- 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 (including for the
CRESTS);
- 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, $633.3 million of our debt 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 CRESTS, and this debt and the CRESTS 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.
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 and on our CRESTS 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. 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 CRESTS.
See "Management's Discussion and Analysis of
14
<PAGE>
Financial Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of Certain Indebtedness" and "Description of the CRESTS."
OUR DEBT INSTRUMENTS RESTRICT OUR ABILITY TO ENTER INTO CERTAIN TRANSACTIONS
Certain of our indebtedness requires us to maintain debt service coverage
ratios. See "Description of Certain Indebtedness" and "Description of the
CRESTS."
Our indebtedness restricts 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 and the CRESTS, with our remaining assets.
See "Description of Certain Indebtedness."
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
15
<PAGE>
governmental regulations which influence or determine wages, prices or
construction costs, changes in 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
16
<PAGE>
adequate to support our operations as they expand. Any future growth also will
impose significant added 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
17
<PAGE>
- the supply and availability of alternative lodging.
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
18
<PAGE>
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:
- 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
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<PAGE>
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."
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.
ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation and bylaws contain provisions that could
prevent or delay an acquisition of us by means of a tender offer, a proxy
contest or otherwise and may adversely affect prevailing market prices for
common stock. These provisions, among other things, provide:
- for a classified board of directors with each class of directors
consisting of one-third of the total number of our directors and serving
for a term of one to three years;
- that our Board of Directors may designate the terms of any new series of
our preferred stock;
- that any shareholder who wishes to propose any business or to nominate a
person or persons for election as a director at any annual meeting may
only do so if advance notice is given to our secretary;
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<PAGE>
- that no shareholder action may be effected by written consent;
- that a director may be removed only for due cause and upon majority
shareholder vote; and
- that only a majority of the directors or the chief executive officer may
call special meetings of the shareholders.
In addition, we are also subject to Section 203 of the Delaware General
Corporation Law, which generally limits transactions between a publicly held
company and "interested shareholders" (generally, those shareholders who,
together with their affiliates and associates, own 15% or more of Lodgian's
outstanding voting stock). In addition, Section 203 generally prohibits
"interested shareholders" from engaging in certain business combinations
involving us during the three-year period after the date the person became an
"interested shareholder" unless our Board of Directors or a majority of the
shares entitled to vote (excluding interested shares) approves the transaction
or business combination. See "Description of Capital Stock."
RISK FACTORS RELATING TO THE CRESTS
SPECIAL EVENT DISTRIBUTION OR REDEMPTION
Upon the occurrence of a Special Event, including a Tax Event, the Trust
could be dissolved (with our consent), except in the limited circumstance
described below. If the Trust were to be dissoved, after the satisfaction of
liabilities to creditors, the Convertible Debentures would be distributed to the
holders of the Trust Securities in connection with the liquidation of the Trust.
In certain circumstances, we have the right to redeem the Convertible
Debentures, in whole or in part and without premium. In that case, the Trust
would redeem the Trust Securities on a proportional basis to each holder.
Redemption of the Convertible Debentures would be a taxable event to holders of
the CRESTS. See "Description of the CRESTS-- Redemption--Special Event
Distribution or Redemption of Convertible Debentures" and "Certain United States
Federal Income Tax Considerations--Distribution of Convertible Debentures or
Cash Upon Liquidation of the Trust."
We cannot assure you as to the market prices for the CRESTS or the
Convertible Debentures that may be distributed in exchange for CRESTS if the
Trust were to be dissolved or liquidated. Accordingly, the Convertible
Debentures that a holder of CRESTS may receive upon dissolution and liquidation
of the Trust may trade at a discount to the value of the CRESTS. Because holders
of CRESTS may receive Convertible Debentures upon the occurrence of a Special
Event, prospective purchasers of CRESTS are also making an investment decision
with regard to the Convertible Debentures and should carefully review all the
information regarding the Convertible Debentures contained herein. See
"Description of the CRESTS--Redemption--Special Event Distribution or Redemption
of Convertible Debentures" and "Description of the Convertible Debentures."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Under the Indenture, we may at any time and from time to time defer payments
of interest on the Convetible Debentures by extending the interest payment.
However, we may not:
- be in default in payment of interest on the Convertible Debentures;
- extend the interest payment period past 20 consecutive quarters nor past
June 30, 2010 (the maturity date of the Convertible Debentures or "Stated
Maturity").
By extending the interest payments, the Trust would defer distributions (the
"Distributions") on the CRESTS during any extended interest payment period (an
"Extension Period"). Despite deferral, the Distributions would continue to
accumulate at the rate established by the Convertible Debentures, compounded
quarterly. Before the end of any Extension Period, we may further extend the
interest payment period. However, the complete Extension Period (together with
all previous and further
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<PAGE>
extensions) may not exceed 20 consecutive quarters or extend beyond the Stated
Maturity of the Convertible Debentures. When any Extension Period ends and all
amounts then due are paid, we may begin a new Extension Period, subject to the
above requirements. By exercising our right to defer interest payments, we may
not declare or pay any dividend on our capital stock, make any distributions
with respect to its capital stock, or redeem, purchase, acquire, or make a
liquidation payment with respect to any of its capital stock (subject to limited
exceptions). See "Description of the CRESTS--Distributions" and "Description of
the Convertible Debentures--Option to Extend Interest Payment Period."
Because we have the right to defer the payment of stated interest on the
Convertible Debentures, the stated interest on the Convertible Debentures will
be considered to give rise to original issue discount ("OID"). Holders of CRESTS
will be required to include this OID in gross income on a daily economic accrual
basis regardless of their regular method of tax accounting. If we exercise our
right to defer payments of interest by extending the interest payment period,
each holder of CRESTS will continue to accrue income (in the form of OID), based
on the deferred and compounded interest allocable to the CRESTS for U.S. federal
income tax purposes. This OID income will be allocated, but not distributed, to
holders of record of CRESTS. As a result, each holder of CRESTS will recognize
income for U.S. federal income tax purposes before receiving cash from the
Trust. In addition, a holder of CRESTS will not receive the cash from the Trust
related to such income if such holder disposes of its CRESTS before the record
date for the date on which distributions of such amounts are made.
If we decide to exercise such right in the future, the market price of the
CRESTS is likely to be affected. A holder that disposes of its CRESTS during an
Extension Period, therefore, might not receive the same return on its investment
as a holder that continues to hold its CRESTS. In addition, because of our right
to defer interest payments, the market price of the CRESTS (which represent an
undivided beneficial ownership interest in the Convertible Debentures) may be
more volatile than other securities that do not grant the issuer such rights.
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE CONVERTIBLE
DEBENTURES
Our obligations under the our guarantee will be unsecured and will rank
subordinate and junior in right of payment to all other liabilities of Lodgian.
Our obligations under the Guarantee will be the same rank as the most senior
preferred or preference stock now or hereafter issued by Lodgian and any
guarantee previously, now, or hereafter entered into by Lodgian relating to any
preferred or preference stock of any affiliate of Lodgian. Our obligations under
the Convertible Debentures will be subordinate and junior in right of payment to
all of our present and future senior indebtedness. Senior indebtedness includes
the following:
- all of our debts for money borrowed or in connection with the acquisition
of properties or assets (other than trade accounts payable in the ordinary
course of business); and
- any debts of others of the kinds described in the clause above for which
we are liable as guarantor or otherwise.
The Guarantee and the Convertible Debentures will both be structurally
subordinated to all obligations of our subsidiaries. We may not pay the
principal of (redeem), premium (if any), or interest on the Convertible
Debentures (i) if any of our senior indebtedness is not paid when due (a
default) and any applicable grace period with respect to such default has ended
with such default not having been cured or waived or ceasing to exist, or (ii)
if the maturity of any senior indebtedness has been accelerated because of a
default.
As of June 30, 1999, our senior indebtedness aggregated $869.6 million
(including debts of consolidated subsidiaries guaranteed by Lodgian). There are
no terms in the CRESTS, the Convertible Debentures, or the Guarantee that limit
our or our subsidiaries' ability to incur additional debt, including
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<PAGE>
debt that ranks senior to the Convertible Debentures and the Guarantee. See
"Description of the Guarantee" and "Description of the Convertible
Debentures--Subordination."
RIGHTS UNDER THE GUARANTEE
We have guaranteed (the "Guarantee"), to the extent the Trust has available
funds, payments of distributions on the CRESTS and payments upon liquidation of
the Trust or the redemption of the CRESTS. When the CRESTS are registered under
the Securities Act pursuant to this Prospectus, the Guarantee will be qualified
as an indenture under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Property Trustee will act as indenture trustee under the
Guarantee for the purposes of compliance with the provisions of the Trust
Indenture Act (the "Guarantee Trustee"). The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Trust Securities.
Under the Guarantee, we guarantee to pay the holders of the CRESTS:
- any accumulated and unpaid Distributions required to be paid on the
CRESTS, to the extent the Trust has funds available therefor, and
- the redemption price and all accumulated and unpaid Distributions with
respect to CRESTS called for redemption by the Trust, to the extent the
Trust has funds available therefor.
In the case of a voluntary or involuntary dissolution, winding-up or
termination of the Trust (other than in connection with the conversion of all of
the CRESTS into Common Stock or distribution of Convertible Debentures to the
holders of CRESTS or a redemption of all the CRESTS), we guarantee to pay the
holders of the CRESTS the lesser of:
- the total of the liquidation amount and all accumulated and unpaid
Distributions on the CRESTS to the date of the payment to the extent the
Trust has funds available therefor or
- the amount of assets of the Trust remaining available for distribution to
holders of the CRESTS in liquidation of the Trust.
The holders of not less than a majority in liquidation amount of the CRESTS
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee or to exercise any
trust or power conferred upon the Guarantee Trustee under the Guarantee. If the
Guarantee Trustee fails to enforce such Guarantee, any holder of CRESTS may
institute a legal proceeding directly against us to enforce such holder's right
to receive payment under the Guarantee. Any holder of CRESTS may do so without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other person or entity. If we default on our obligation to make payments on
the Convertible Debentures, the Trust would lack available funds for the payment
of distributions or amounts payable on redemption of the CRESTS or otherwise. In
such event, holders of the CRESTS would not be able to rely upon the Guarantee
for payment of such amounts. See "Description of the Guarantee." However, a
holder of the CRESTS could instead rely on the enforcement (i) by the Property
Trustee of its rights as registered holder of the Convertible Debentures against
us pursuant to the terms of the Convertible Debentures or (ii) by such holder of
its right of direct action against us to enforce payments on Convertible
Debentures. See "Description of the Convertible Debentures--Indenture Events of
Default." The Declaration provides that each holder of CRESTS, by acceptance
thereof, agrees to the provisions of the Guarantee, including the subordination
provisions thereof, and the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CRESTS
If (i) the Trust fails to pay Distributions in full on the CRESTS (excepting
periods of deferral of interest during an Extension Period) or (ii) a default
under the Declaration (a "Trust Enforcement Event") occurs and is continuing,
then the holders of CRESTS could expect, and under certain circumstances could
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<PAGE>
cause, the Property Trustee to enforce their rights as holders of the
Convertible Debentures against us. In addition, the holders of a majority in
liquidation amount of the CRESTS will have the following rights:
- to direct the time, method, and place of conducting any proceeding for any
remedy available to the Property Trustee or
- to direct the exercise of any trust or power conferred upon the Property
Trustee under the Declaration, including the right to direct the Property
Trustee to exercise the remedies available to it as a holder of the
Convertible Debentures.
If the Property Trustee fails to enforce its rights under the Convertible
Debentures, a holder of CRESTS may sue us directly to enforce the Property
Trustee's rights under the Convertible Debentures. In that case, a holder of
CRESTS need not first sue the Property Trustee or any other person or entity.
Notwithstanding the foregoing, if a Trust Enforcement Event has occurred and
is continuing which is attributable to our failure to pay interest, principal or
premium on the Convertible Debentures when payable (or in the case of
redemption, on the redemption date), then the registered holder of CRESTS may
sue directly to enforce payment to such holder of the principal of or premium,
if any, or interest on the Convertible Debentures having a principal amount
equal to the aggregate liquidation amount of the CRESTS of such holder (a
"Direct Action") on or after the respective due date specified in the
Convertible Debentures. In connection with such Direct Action, we, as the holder
of the Common Securities, will be subrogated to the rights of such holder of
CRESTS under the Declaration to the extent of any payment made by us to such
holder of CRESTS in such Direct Action. The holders of CRESTS will not be able
to exercise directly any other remedy available to the holders of the
Convertible Debentures. See "Description of the CRESTS--Trust Enforcement
Events" and "Description of the Convertible Debentures--Indenture Events of
Default."
LIMITED VOTING RIGHTS
Holders of CRESTS will have limited voting rights and will not be entitled
to vote to appoint, remove or replace, or to increase or decrease the number of,
the Trustees. These voting rights are vested exclusively in the holders of the
Common Securities. See "Description of the CRESTS--Voting Rights; Amendment of
Declaration."
TRADING PRICE
The CRESTS may trade at a price that does not fully reflect the value of
accrued and unpaid interest with respect to the underlying Convertible
Debentures. A holder who disposes of his CRESTS between record dates for
payments of distributions thereon must nonetheless include any accrued but
unpaid interest on the Convertible Debentures through the date of disposition in
income as ordinary income (i.e., OID). However, the holder adjusts its adjusted
tax basis in such CRESTS by the amount of accrued but unpaid interest. To the
extent the selling price of the CRESTS is less than the holder's adjusted tax
basis in such CRESTS, a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
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USE OF PROCEEDS
The Selling Shareholders will receive all of the proceeds from the sale of
the Offered Securities. Neither we nor the Trust will receive any proceeds from
the sale of the Offered Securities.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange and its trading
symbol is LOD. Prior to June 19, 1997, Servico's common stock was listed on the
American Stock Exchange. The following table sets forth the high and low sales
prices of our common stock on the New York Stock and American Stock Exchanges,
as appropriate, on a quarterly basis for the past two years.
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
---------- ---------- --------- ---------
First Quarter......................................................... $ 20.4375 $ 15.5 $ 20.5 $ 16.0
Second Quarter........................................................ 22.375 14.6875 17.0 13.75
Third Quarter......................................................... 15.875 7.25 18.0 14.25
Fourth Quarter........................................................ 7.0625 3.125 19.0 14.0
</TABLE>
As of March 26, 1999, there were 429 shareholders of record of our common
stock. In addition, there were 2,645 Servico shareholders who have not yet
converted their shares into shares of the Company. When all Servico shareholders
have converted their shares, we will have 3,074 shareholders.
We have not paid any cash dividends since our reorganization and have no
current plans to initiate the payment of dividends. We currently anticipate that
we will retain any future earnings for use in our business. Our Board of
Directors will determine future dividend policies based on our financial
condition, profitability, cash flow, capital requirements and business outlook,
among other factors. Our indebtedness restricts our ability to pay dividends.
See "Description of Certain Indebtedness."
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed charges on a
historical basis for each of the five years in the period ended December 31,
1998 and for the six months ended June 30, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges............................ 1.32 1.34 1.43 1.72 .84
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1999
-----------------
<S> <C>
Ratio of earnings to fixed charges............................ 1.18
</TABLE>
The computation of the ratio of earnings to fixed charges is based on our
earnings and the earnings of our consolidated subsidiaries divided by fixed
charges. Earnings consist of income before income tax and extraordinary items
and minority interests-other. Fixed charges represent interest (whether expensed
or capitalized), rent expense representative of interest, and amortization of
deferred loan costs and dividends on the CRESTS.
ACCOUNTING TREATMENT
The financial statements of the Trust are consolidated with our financial
statements. The CRESTS are shown on our consolidated financial statements as
"Minority interests--Preferred redeemable securities." See "Capitalization."
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CAPITALIZATION
The following table presents our consolidated capitalization as of 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>
(UNAUDITED)
(IN THOUSANDS)
Total long-term debt (including current portion).............................................. $ 869,552
Minority Interests:
Preferred redeemable securities............................................................. 175,000
Other....................................................................................... 15,922
Stockholders' equity:
Common stock................................................................................ 278
Additional paid-in capital.................................................................. 262,436
Retained earnings........................................................................... 29,905
Accumulated other comprehensive loss........................................................ (1,629)
------------------
Total stockholders' equity................................................................ 290,990
------------------
Total capitalization.................................................................... $ 1,351,464
------------------
------------------
</TABLE>
26
<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 Notes and the borrowings under our new credit facility
and the application of the proceeds thereof, as if each such transaction
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 above items would have no effect 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. Therefore, no separate pro forma balance sheet
or statement of operations for this period 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.
27
<PAGE>
LODGIAN, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------
OFFERING OF
THE 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) (1,318)
------------ ------------ ------- ------------ -----------
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) $ (.76)
Loss before extraordinary items per common
share, assuming dilution................. $ (0.16) $ (.76)
Basic weighted average shares.............. 20,245 27,641
Diluted weighted average shares............ 20,245 27,641
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
28
<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.
29
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF LODGIAN
In the table below, we provide you with summary 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. Operating results
for the six months ended June 30, 1999 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.............. 52,205 12,370 18,677 23,023 31,114 14,758 27,500
Other hotel operating
expenses.................. 9,465 59,727 77,183 88,036 129,950 58,952 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>
30
<PAGE>
<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, 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
----------------------------------------------------- JUNE 30,
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.
31
<PAGE>
(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, 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.
32
<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.
33
<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.
34
<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.
35
<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 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. 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 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
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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 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.
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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 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.
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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.
YEAR ENDED DECEMBER 31, 1997 ("1997") COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("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.
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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 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
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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, 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.
In July, we sold $200 million of 12 1/4% Senior Subordinated Notes due in
2009 (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"
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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
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
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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 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 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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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.
44
<PAGE>
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
45
<PAGE>
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
46
<PAGE>
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 Canada at 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
47
<PAGE>
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).
48
<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."
49
<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 an 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>
50
<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>
51
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LAST
RENOVATION OR
HOTEL NAME NO. OF ROOMS LOCATION CONSTRUCTION
- ------------------------------------------------------ ------------- ---------------------------- ---------------
<S> <C> <C> <C>
Radisson Chattanooga(2)............................... 238 Chattanooga, TN 1997
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>
52
<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........................................... 27,375
------
------
</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 72% 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
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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
54
<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 123 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,
55
<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.
56
<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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<PAGE>
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.
58
<PAGE>
(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 $6.125.
(2) Mr. Buddemeyer served as Chairman of the Board, President and Chief
Executive Officer of Servico until his resignation on November 10, 1998.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase Servico's Common Stock as of
December 31, 1998, under Servico's Stock Option Plan held by the executive
officers named in the "Summary Compensation Table."
59
<PAGE>
STOCK OPTION EXERCISES IN FISCAL YEAR
1998 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS HELD AT FISCAL OPTIONS/SARS AT
VALUE YEAR-END (#) FISCAL YEAR-END ($) (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
60
<PAGE>
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
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.
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.
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.
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.
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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 II Lender
will securitize the Nomura II Loan and any Split Nomura II Loan after the
applicable Nomura II Adjustment Date.
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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.
$280 MILLION LOAN FROM SECORE FINANCIAL CORPORATION, AN AFFILIATE OF LEHMAN
BROTHERS HOLDINGS, INC. ("LEHMAN LOAN")
GENERAL
The Lehman Loan is composed of, and evidenced by, among other things, a loan
agreement (the "Lehman Loan Agreement"), among 40 of our operating subsidiaries
(the "Lehman Loan Subsidiaries") and Secore Financial Corporation, an affiliate
of Lehman Brothers Holdings, Inc. ("Lehman"), and a mortgage note for each of
the Lehman Loan Subsidiaries (the "Lehman Mortgage Notes"). The outstanding
principal amount under the Lehman Loan was approximately $274.9 million at June
30, 1999.
INTEREST AND REPAYMENT OF PRINCIPAL
The Lehman Mortgage Notes bear interest at a rate of LIBOR plus 3.25%. The
Lehman Mortgage Notes mature in December 2000, and require monthly amortization
payments of $.5 million monthly for
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the first six months of a given year, $2.1 million per month for the next three
months of a given year, and $3.2 million per month for the last three months of
a given year.
SECURITY AND GUARANTORS
The indebtedness of the Lehman Loan is secured by a limited recourse
mortgage on the hotel properties owned by the Lehman Loan Subsidiaries and an
assignment of the leases and rents from these hotels. The indebtedness is
guaranteed by Lodgian, Inc., Servico Operations Corp., Sharon Motel Enterprises,
Inc., AMIOP Acquisition Corp., and Palm Beach Motel Enterprises.
TERM AND PREPAYMENT
All amounts outstanding under the Lehman Mortgage Notes are due and payable
December 2000. The principal balance of the Lehman Loan may be prepaid upon
notice, payment of accrued interest, payment of all other sums due under the
Lehman Loan documents and payment of a prepayment fee.
CERTAIN COVENANTS
In addition to customary covenants, the Lehman Loan requires, among other
things, that the Lehman Loan Subsidiaries: (a) not transfer or encumber the
mortgaged property; (b) not incur any indebtedness other than the Lehman 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
Lehman, 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 Lehman Notes and certain other guarantee obligations.
EVENTS OF DEFAULT
Events of default, under the Lehman Loan, include without limitation, the
following: (i) any failure by any of the Lehman Loan Subsidiaries to pay
principal, interest or other obligations under the Lehman Loan when due, (ii)
any representation or warranty made by any of the Lehman Loan Subsidiaries in
the Lehman Loan Agreement and related documents proves to have been untrue in
any material respect when made, (iii) any default by Lehman Loan Subsidiaries in
the observance or performance of covenants or other agreements contained in any
of the Lehman Loan Agreement or related agreements, (iv) certain events of
bankruptcy or insolvency of the Lehman Loan Subsidiaries or any guarantor, and
(v) the occurrence of an event of default under any other Lehman Loan document.
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.
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
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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 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;
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- repurchasing shares of capital stock;
- prepaying, redeeming or repurchasing debt;
- capital expenditures;
- granting negative pledges;
- changing the nature of our business;
- 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 covenants 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 CAPITAL STOCK
Under our certificate of incorporation, our authorized capital stock
consists of 75,000,000 shares of common stock and 25,000,000 of preferred stock.
No shares of preferred stock are outstanding; however, 350,000 shares of
preferred stock have been reserved under our rights plan. See "--Rights Plan."
Holders of shares of common stock are entitled to share equally in and
receive all dividends, if dividends are declared, in accordance with the number
of shares of common stock held by each holder, subject to any preferential or
other rights of the holders of outstanding preferred stock.
Shares of preferred stock have preference over shares of common stock with
respect to payment of dividends and the distribution of assets in the event of
liquidation, dissolution or winding up, and other preferences.
The holders of shares of common stock are entitled to one vote for each
share of common stock held. The shares of common stock do not have cumulative
voting rights. No holder of shares of common stock is entitled to preemptive or
subscription rights.
RIGHTS PLAN
On March 26, 1999, our Board of Directors adopted a Shareholder Rights Plan
(the "Plan") and declared a dividend of one right on each outstanding share of
our common stock (each, a "Right"). The dividend was to be paid on April 19,
1999 to shareholders of record on April 14, 1999. The Plan was adopted to deter
abusive takeover tactics that can be used to deprive our shareholders of the
full value of their investment. In particular, the Plan is designed to deter a
"front-end loaded" acquisition of control in which less than a full and fair
price would be offered to all shareholders. The Plan achieves this purpose by
substantially diluting the holdings of a person or group that acquires 15% or
more of our common stock without prior Board approval, unless the Rights are
first redeemed by the Board. The Board may redeem the Rights for $0.005 per
Right.
Initially, the Rights will trade with our common stock and will not be
exercisable. The Rights will separate from the common stock and become
exercisable when any person or group of affiliated persons acquires or makes an
offer to acquire 15% or more of our common stock. At that time, separate Right
certificates will be distributed, and each Right will entitle its holder to
purchase one hundredth of a share of our preferred stock at an exercise price of
$25.00 (the "Exercise Price"). Each one hundredth of a share of preferred stock
has economic and voting terms equivalent to those of one share of common stock.
Upon the actual acquisition by any person or group of 15% or more of our
common stock, then each holder of a Right (other than the acquiring person or
group) may pay the Exercise Price and receive shares of preferred stock having a
value equal to twice the Exercise Price. Also, if we are involved in a Merger or
sale of more than 50% of our assets or earning power, each Right will entitle
its holder (other than the acquiring person or group) to purchase shares of
common stock of the acquiring company having a market value of twice the
Exercise Price. If any person or group acquires at least 15%, but less than 50%,
of our common stock, the Board of Directors may, at its option, exchange one
share of common stock for each Right (other than Rights held by such person or
group).
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LODGIAN CAPITAL TRUST I
The Trust is a statutory business trust formed under the Delaware Business
Trust Act, as amended (the "Trust Act") pursuant to (i) a declaration of trust,
dated as of May 15, 1998, executed by Lodgian, Inc. (the "Company"), as Sponsor,
and the Trustees and (ii) a certificate of trust, dated as of May 15, 1998,
filed with the Secretary of State of the State of Delaware. The Trust's business
and affairs are conducted by the Trustees: Wilmington Trust Company, as Property
Trustee and as Delaware Trustee, and three individual Regular Trustees who are
employees or officers of or affiliated with the Company. The Trust was formed
for the exclusive purpose of (i) issuing and selling the Trust Securities, (ii)
investing the gross proceeds from such sales in the Convertible Debentures and
(iii) engaging in only those other activities necessary or incidental thereto.
Accordingly, the Convertible Debentures are the sole assets of the Trust, and
payments under the Convertible Debentures are the sole revenue of the Trust. All
of the Common Securities are owned by the Company. The Common Securities rank on
a parity, and payments will be made thereon pro rata, with the CRESTS, except
that upon the occurrence and continuance of an event of default under the
Declaration resulting from an event of default under the Indenture (an
"Indenture Event of Default"), the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinate to the rights of the holders of the
CRESTS. See "Description of the CRESTS--Subordination of Common Securities." The
Company acquired Common Securities in an aggregate liquidation amount at least
equal to 3% of the total capital of the Trust.
The Property Trustee holds title to the Convertible Debentures for the
benefit of the holders of the Trust Securities and, as the holder of the
Convertible Debentures, the Property Trustee has the power to exercise all
rights, powers and privileges of a holder of Convertible Debentures under the
Indenture. In addition, the Property Trustee maintains exclusive control of a
segregated non-interest bearing bank account (the "Property Account") to hold
all payments made in respect of the Convertible Debentures for the benefit of
the holders of the Trust Securities. The Guarantee Trustee holds the Guarantee
for the benefit of the holders of the Trust Securities. The Company, as the
holder of all the Common Securities, has the right to appoint, remove or replace
any of the Trustees and to increase or decrease the number of Trustees, provided
that the number of Trustees will be at least three; provided further that at
least one Trustee will be a Delaware Trustee, at least one Trustee will be the
Property Trustee and at least one Trustee will be a Regular Trustee. Under the
Indenture, the Company, as issuer of the Convertible Debentures, agreed to pay
all fees and expenses related to the organization and operations of the Trust
(including any taxes, duties, assessments or governmental charges of whatever
nature (other than United States withholding taxes) imposed by the United States
or any other domestic taxing authority upon the Trust) and the Original Offering
of the CRESTS and be responsible for all debts and obligations of the Trust
(other than with respect to the CRESTS).
For so long as the CRESTS remain outstanding, the Company covenants (i) to
maintain directly or indirectly ownership of all of the Common Securities, (ii)
to cause the Trust to remain a statutory business trust and not to voluntarily
dissolve, wind-up, liquidate or be terminated, except as permitted by the
Declaration, (iii) to use its commercially reasonable efforts to ensure that the
Trust will not be an "investment company" for purposes of the Investment Company
Act of 1940, as amended from time to time, or any successor legislation (the
"1940 Act") and (iv) to take no action that would be reasonably likely to cause
the Trust to be classified as an association or a publicly traded partnership
taxable as a corporation for United States federal income tax purposes.
The rights of the holders of the CRESTS, including economic rights, rights
to information and voting rights, are set forth in the Declaration, the Trust
Act and the Trust Indenture Act. See "Description of the CRESTS." The
Declaration and the Guarantee also incorporate by reference the terms of the
Trust Indenture Act.
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The office of the Delaware Trustee is Rodney Square North, 1100 North Market
Street, Wilmington, Delaware, 19890. The principal executive offices of the
Company and the Trust are located at 3345 Peachtree Road N.E., Suite 700,
Atlanta, Georgia 30326; telephone number (561) 689-9970.
The Trust is not subject to the reporting requirements under the Exchange
Act.
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DESCRIPTION OF THE CRESTS
The following summary of the material terms and provisions of the CRESTS is
subject to, and qualified in its entirety by reference to, the Declaration. The
CRESTS were issued pursuant to the terms of the Declaration. The Declaration
incorporates by reference terms of the Trust Indenture Act. The Declaration will
be qualified under the Trust Indenture Act. The Wilmington Trust Company, as
Trustee, acts as indenture trustee for the Declaration for purposes of
compliance with the Trust Indenture Act. Capitalized terms not otherwise defined
herein have the meanings assigned to them in the Declaration.
DISTRIBUTIONS
Distributions on the CRESTS are fixed at a rate per annum of 7% of the
stated liquidation amount of $50 per CRESTS, subject to increase if certain
events described under "Description of the Convertible Debentures--Interest"
occur, payable quarterly, in arrears, on March 31, June 30, September 30 and
December 31 of each year, commencing September 30, 1998 (each, a "Distribution
Date"), when, as and if available for payment, by the Property Trustee.
Distributions not paid on the scheduled payment date will accumulate and
compound quarterly, to the extent permitted by law, at the applicable
distribution rate ("Compounded Distributions").
The term "Distribution" as used herein includes any ordinary cumulative
Distributions, together with any Compounded Distribution, unless otherwise
stated. The amount of Distributions payable for any period will be computed (i)
for any full 90-day quarterly distribution period, on the basis of a 360-day
year of twelve 30-day months, (ii) for any period shorter than a full 90-day
distribution period for which Distributions are computed, on the basis of a
30-day month and (iii) for periods of less than a month, on the basis of the
actual number of days elapsed. In the event that any date on which Distributions
are payable on the CRESTS is not a Business Day, then payment of the
Distributions payable on such date will be made on the next succeeding day that
is a Business Day (and without any additional Distributions or other payment in
respect of any such delay), except that, if such Business Day is in the next
succeeding calendar year, such payment will be made on the immediately preceding
Business Day, with the same force and effect as if made on the date such payment
was originally payable. A "Business Day" means any day, other than a Saturday or
Sunday, that is not a day on which banking institutions in the Borough of
Manhattan, the City of New York or Wilmington, Delaware are authorized or
required by law, regulation or executive order to close.
Distributions on the CRESTS (other than Distributions on a redemption date)
will be payable to the holders thereof as they appear on the register of the
Trust as of the close of business on the relevant record dates, which, as long
as the CRESTS are represented by one or more global certificated securities
(each, a "Global Certificate"), will be the close of business on the Business
Day prior to the relevant Distribution Dates, unless otherwise provided in the
Declaration or unless a different regular record date is established or provided
for the corresponding interest payment date on the Convertible Debentures. If
the CRESTS are no longer represented by one or more Global Certificates, the
Regular Trustees will have the right to select record dates, which will be at
least one Business Day prior to the relevant Distribution Dates. Distributions
payable on any CRESTS that are not punctually paid on any Distribution Date will
cease to be payable to the person in whose name such CRESTS are registered on
the relevant record date, and such defaulted Distribution will instead be
payable to the person in whose name such CRESTS are registered on the special
record date or other specified date determined in accordance with the
Declaration.
At all times, the Distribution rate, the Distribution Dates and other
payment dates for the CRESTS will correspond to the interest rate, interest
payment dates and other payment dates on the Convertible Debentures, which are
the sole assets of the Trust.
Distributions on the CRESTS will be paid on the dates payable to the extent
that the Trust has funds available for the payment of such Distributions. Such
Distributions are payable only to the extent that payments are made in respect
of the Convertible Debentures held by the Property Trustee and to the
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extent that the Trust has funds available for the payment of such Distributions.
See "Description of the Convertible Debentures." If the Company does not make
interest payments on the Convertible Debentures, the Property Trustee will not
have funds available to pay Distributions on the CRESTS.
The Company has the right under the Indenture to defer payments of interest
on the Convertible Debentures by extending the interest payment period at any
time, and from time to time, on the Convertible Debentures. As a consequence of
such Extension Period, Distributions on the CRESTS would be also deferred (but
despite such deferral would continue to accumulate at the then applicable
distribution rate per annum compounded quarterly) by the Trust during any such
Extension Period. Such right to extend the interest payment period for the
Convertible Debentures is limited to a period not exceeding 20 consecutive
quarterly periods and such Extension Period may not extend beyond the Stated
Maturity of the Convertible Debentures. In the event that the Company exercises
this right to defer payments of interest, then the Company will not, and will
not permit any subsidiary to, (x) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Company's capital stock or (y) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank on a parity with or junior in interest to
the Convertible Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks on a parity with or junior in interest to the
Convertible Debentures (other than (a) dividends or distributions in common
stock of the Company, (b) payments under the Guarantee, (c) any declaration of a
dividend in connection with the implementation of a shareholders' rights plan,
or issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans). Prior to the termination of any such Extension Period,
the Company may further defer payments of interest by extending the interest
payment period, provided that such Extension Period, together with all such
previous and further extensions thereof, may not exceed 20 consecutive quarters
or extend beyond the Stated Maturity of the Convertible Debentures. Upon the
termination of any Extension Period and the payment of all amounts then due, the
Company may commence a new Extension Period, subject to the above requirements.
See "Risk Factors--Risk Factors Relating to the CRESTS--Option to Extend
Interest Payment Period" and "Description of the Convertible Debentures--Option
to Extend Interest Payment Period."
CONVERSION RIGHTS
GENERAL
The CRESTS are convertible, in whole or in part (but only in whole CRESTS),
at any time beginning 90 days following the last date of original issuance of
any CRESTS, at the option of the holders thereof, into shares of Lodgian Common
Stock in the manner described below at an initial conversion price equal to
$21.42 per share of Lodgian Common Stock (equivalent to a conversion ratio of
2.3343 shares of Lodgian Common Stock for each CRESTS), subject to adjustment as
described below (the "Conversion Price").
The right to convert CRESTS terminates prior to the close of business (i) on
June 28, 2010 or (ii) in the case of CRESTS called for redemption, on the second
Business Day prior to the related redemption date, unless the Property Trustee
shall default in making payment of any moneys payable upon such redemption. For
information as to notices of redemption, see "--Redemption Procedures."
The terms of the CRESTS provide that a holder of CRESTS wishing to exercise
its conversion right shall deliver an irrevocable conversion request (and, if
such CRESTS is represented by a definitive certificate, the CRESTS
certificate(s), duly endorsed or assigned to the Trust in blank) to the Property
Trustee, as conversion agent (the "Conversion Agent"), directing the Conversion
Agent, on behalf of such holder, to exchange such CRESTS for a portion of the
Convertible Debentures and immediately convert
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such Convertible Debentures into Lodgian Common Stock at the Conversion Price.
Holders may obtain copies of the required form of the conversion request from
the Conversion Agent. So long as a book-entry system for the CRESTS is in
effect, however, procedures for converting the CRESTS into shares of Lodgian
Common Stock will differ, as described under "Book-Entry Issuance--Depositary
Procedures." Each conversion will be deemed to have been effected immediately
prior to the close of business on the date on which the conversion request is
received by the Trust and the conversion shall be at the Conversion Price in
effect at such time and on such date.
Fractional shares of Lodgian Common Stock or other common stock of the
Company are not to be issued upon conversion, but, in lieu thereof, the Company
will pay a cash adjustment based on the closing sale price thereof on the NYSE
Composite Tape on the trading day prior to the conversion date.
RIGHT TO RECEIVE DISTRIBUTIONS; DIVIDENDS ON LODGIAN COMMON STOCK
Except as provided below, accumulated but unpaid Distributions will not be
paid in cash on the CRESTS that are converted nor will such accumulated
Distributions be converted into additional shares of Lodgian Common Stock.
Holders of CRESTS at the close of business on a Distribution record date will be
entitled to receive the Distribution payable on such CRESTS (except that holders
of CRESTS called for redemption on a redemption date between such record date
and the Distribution Date shall not be entitled to receive such Distribution on
such Distribution Date) on the corresponding Distribution Date notwithstanding
the conversion of such CRESTS following such Distribution record date and prior
to such Distribution Date. However, CRESTS surrendered for exchange for
Convertible Debentures for conversion during the period between the close of
business on any Distribution record date and the opening of business on the
corresponding Distribution Date (except CRESTS called for redemption on a
redemption date during such period) must be accompanied by payment of an amount
equal to the Distribution payable on such CRESTS on such Distribution Date. A
holder of CRESTS on a Distribution record date who (or whose transferee) tenders
any such CRESTS for exchange for Convertible Debentures for conversion into
shares of Lodgian Common Stock on the corresponding Distribution Date will
receive the Distribution payable on such CRESTS on such date, and the converting
holder need not include payment of the amount of such Distribution upon
surrender of CRESTS for exchange for Convertible Debentures for conversion. The
Company will make no payment or allowance for dividends on the shares of Lodgian
Common Stock issued on conversion.
The Company will not redeem any Convertible Debentures (and thus the CRESTS
will not be redeemed) unless all accrued and unpaid interest has been paid on
all outstanding Convertible Debentures for all quarterly interest payment
periods terminating on or prior to the last interest payment date before the
date of redemption. Since the Company is required to pay all accrued and unpaid
interest, other than for the current quarter, prior to redeeming the CRESTS,
holders choosing to convert their CRESTS in order to avoid such redemption will,
at most, forego actual receipt of a cash Distribution payment only for the
current quarter.
CONVERSION PRICE ADJUSTMENTS
The Conversion Price for the Convertible Debentures (and thus the Conversion
Price of the CRESTS) is subject to adjustment upon certain events, including:
(i) dividends and other distributions payable in Lodgian Common Stock on
any class of capital stock of the Company and combinations and subdivisions
of Lodgian Common Stock;
(ii) the issuance of certain rights, options or warrants entitling the
holder thereof to subscribe for or purchase Lodgian Common Stock at less
than the Current Market Price per share of Lodgian Common Stock (calculated
as set forth in the Indenture); provided that if such rights, options or
warrants are only exercisable upon the occurrence of certain triggering
events, then the Conversion
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Price of the Convertible Debentures (and thus the Conversion Price of the
CRESTS) will not be adjusted until such triggering events occur;
(iii) distributions to all holders of Lodgian Common Stock of any shares
of capital stock (other than any common stock of the Company), evidences of
indebtedness or cash or other assets of the Company (including securities,
but excluding, among other things, those dividends, distributions, rights,
options and warrants referred to above and dividends consisting exclusively
of cash and securities received pursuant to a merger or consolidation
described below);
(iv) distributions consisting exclusively of cash (excluding any cash
distributions referred to in (iii) above and any cash distributed in a
merger or consolidation referred to below) to all holders of Lodgian Common
Stock, if the aggregate amount of all such cash distributions, together with
(A) all other all-cash distributions (to which such Conversion Price
adjustment would otherwise apply) made within the preceding 12 months not
triggering a Conversion Price adjustment and (B) all Excess Purchase
Payments (as defined below) in respect of each tender offer or exchange
offer for Lodgian Common Stock concluded by the Company or any of its
subsidiaries within the preceding 12 months not triggering a Conversion
Price adjustment, exceeds an amount equal to 10% of the product of the
Current Market Price per share of Lodgian Common Stock (calculated as set
forth in the Indenture) times the number of shares of Lodgian Common Stock
outstanding on the date fixed for determination of holders of Lodgian Common
Stock entitled to receive such distribution; and
(v) payment of an Excess Purchase Payment, if the aggregate amount of
such Excess Purchase Payment, together with (A) the aggregate amount of any
all-cash distributions (excluding any cash distributions referred to in
(iii) above and any cash distributed in a merger or consolidation referred
to below) made within the preceding 12 months not triggering a Conversion
Price adjustment and (B) all Excess Purchase Payments in respect of each
tender or exchange offer for Lodgian Common Stock concluded by the Company
or any of its subsidiaries within the preceding 12 months not triggering a
Conversion Price adjustment, exceeds an amount equal to 10% of the product
of the Current Market Price per share of Lodgian Common Stock (calculated as
set forth in the Indenture) times the number of shares of Lodgian Common
Stock outstanding on the expiration date of such tender offer or exchange
offer.
For purposes of these Conversion Price adjustments, the term "Excess
Purchase Payment" means the excess, if any, of (A) the aggregate of the cash and
the value of all other consideration paid by the Company or any of its
subsidiaries with respect to the shares of Lodgian Common Stock acquired in a
tender or exchange offer by the Company over (B) the Current Market Price per
share of common stock (calculated as set forth in the Indentures) times the
number of shares of Lodgian Common Stock acquired in the tender or exchange
offer.
A reclassification of Lodgian Common Stock into which Convertible Debentures
are then convertible into securities which include securities other than such
Lodgian Common Stock (other than any reclassification upon a consolidation or
merger to which the second paragraph below applies) shall be deemed to involve
(i) a distribution of such securities other than such Lodgian Common Stock to
all holders of such Lodgian Common Stock and (ii) a subdivision or combination,
as the case may be, of the number of shares of such Lodgian Common Stock
outstanding immediately prior to such reclassification into the number of shares
of such Lodgian Common Stock outstanding immediately thereafter.
The Company from time to time may reduce the Conversion Price of the
Convertible Debentures (and thus the Conversion Price of the CRESTS) by any
amount for any period of at least 20 Business Days (or such other period as may
then be required by applicable law), in which case the Company shall give at
least 15 days' notice of such reduction to each holder of CRESTS and each holder
of Convertible Debentures, if the Company's Board of Directors (the "Board") has
made a determination that such reduction would be in the best interests of the
Company. The Company may, at its option, make such reductions in the Conversion
Price, in addition to those set forth above, as the Board determines to be
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necessary in order that any event treated for federal income tax purposes as a
dividend of stock or stock rights will not be taxable to recipients thereof. The
Company will comply with applicable law, including Rule 13e-4 under the Exchange
Act, in connection with any such adjustment to the conversion price. See
"Certain United States Federal Income Tax Consequences--Conversion Price
Adjustment."
In case the Company shall be a party to any Fundamental Change (as defined
below), each Convertible Debenture (and thus each CRESTS), if outstanding after
the consummation of the transaction, will be convertible thereafter into:
(x) in the case of any such transaction that does not constitute a Common
Stock Fundamental Change (as defined below) and subject to funds being legally
available for such purpose under applicable law at the time of such conversion,
the kind and amount of the securities, cash or other property that would have
been receivable upon such recapitalization, reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares of
Lodgian Common Stock issuable upon conversion of such CRESTS immediately prior
to such recapitalization, reclassification, consolidation, merger, sale,
transfer or share exchange, after giving effect, in the case of any Non-Stock
Fundamental Change (as defined below), to any adjustment in the Conversion Price
in accordance with clause (i) of the following paragraph, and
(y) in the case of any such transaction that constitutes a Common Stock
Fundamental Change, common stock of the kind received by holders of Lodgian
Common Stock as a result of such Common Stock Fundamental Change in an amount
determined in accordance with clause (ii) of the following paragraph.
The Company formed by such consolidation or resulting from such merger or
that acquires assets or that acquires the Company's shares, as the case may be,
shall enter into a supplemental indenture with the Indenture Trustee,
satisfactory in form to the Indenture Trustee and executed and delivered to the
Indenture Trustee, the provisions of which shall establish such right. Such
supplemental indenture shall provide for adjustments that, for events subsequent
to the effective date of such supplemental indenture, shall be as nearly
equivalent as may be practicable to the relevant adjustments provided for in the
preceding paragraphs and in this paragraph.
Notwithstanding any other provision in the preceding paragraphs to the
contrary, if any Fundamental Change occurs, then the Conversion Price in effect
will be adjusted immediately after such Fundamental Change as follows:
(i) in the case of a Non-Stock Fundamental Change, the Conversion Price
immediately following such Non-Stock Fundamental Change shall be the lower
of (A) the Conversion Price in effect immediately prior to such Non-Stock
Fundamental Change, but after giving effect to any other prior adjustments
effected pursuant to the preceding paragraphs, and (B) the product of (1)
the greater of the Applicable Price (as defined below) and the then
applicable Reference Market Price (as defined below) and (2) a fraction, the
numerator of which is $50 and the denominator of which is (x) the amount of
the Redemption Price for one CRESTS if the optional redemption date were the
date of such Non-Stock Fundamental Change (or, for the period commencing
June 17, 1998 and ending June 29, 1999, the twelve month periods commencing
June 30, 1999 and 2000 and the period beginning June 30, 2001 and ending
July 2, 2002, the product of 107%, 106.3%, 105.6% and 104.9%, respectively),
times $50 plus (y) any then accumulated and unpaid Distributions on one
CRESTS; and
(ii) in the case of a Common Stock Fundamental Change, the Conversion
Price immediately following such Common Stock Fundamental Change shall be
the Conversion Price in effect immediately prior to such Common Stock
Fundamental Change, but after giving effect to any other prior adjustments
effected pursuant to the preceding paragraphs, multiplied by a fraction, the
numerator of which is the Purchaser Stock Price (as defined below) and the
denominator of which is the Applicable Price; PROVIDED, that in the event of
a Common Stock Fundamental Change in which
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(A) 100% of the value of the consideration received by a holder of Lodgian
Common Stock is common stock of the successor, acquirer or other third party
(and cash, if any, paid with respect to any fractional interests in such
common stock resulting from such Common Stock Fundamental Change) and (B)
all of the Lodgian Common Stock (other than treasury shares and shares held
by subsidiaries of Servico) shall have been exchanged for, converted into or
acquired for, common stock of the successor acquirer or other third party
(and cash, if any, paid with respect to any fractional interests in such
common stock resulting from such Common Stock Fundamental Change), the
Conversion Price immediately following such Common Stock Fundamental Change
shall be the Conversion Price in effect immediately prior to such Common
Stock Fundamental Change multiplied by a fraction, the numerator of which is
one (1) and the denominator of which is the number of shares of common stock
of the successor, acquirer or other third party received by a holder of one
share of Lodgian Common Stock as a result of such Common Stock Fundamental
Change.
Depending upon whether a Fundamental Change is a Non-Stock Fundamental
Change or a Common Stock Fundamental Change, a holder may receive significantly
different consideration upon conversion. In the event of a Non-Stock Fundamental
Change, the holder has the right to convert CRESTS into the kind and amount of
the shares of stock and other securities or property or assets (including cash),
except as otherwise provided above, that would have been receivable upon such
Non-Stock Fundamental Change by a holder of the number of shares of Lodgian
Common Stock issuable upon conversion of such CRESTS immediately prior to such
Non-Stock Fundamental Change, after giving effect to any adjustment in the
Conversion Price in accordance with clause (i) of the preceding paragraph.
However, in the event of a Common Stock Fundamental Change in which less than
100% of the value of the consideration received by a holder of Lodgian Common
Stock is common stock of the successor, acquirer or other third party, a holder
of a CRESTS who converts such CRESTS following the Common Stock Fundamental
Change will receive consideration in the form of such common stock only, whereas
a holder who converted such CRESTS prior to the Common Stock Fundamental Change
would have received consideration in the form of such common stock as well as
any other securities or assets (which may include cash) issuable upon conversion
of such CRESTS immediately prior to such Common Stock Fundamental Change.
The term "Applicable Price" means (i) in the event of a Non-Stock
Fundamental Change in which the holders of Lodgian Common Stock receive only
cash, the amount of cash received by a holder of one share of Lodgian Common
Stock and (ii) in the event of any other Fundamental Change, the average of the
daily Closing Prices (as defined in the Indenture) of the Lodgian Common Stock
during the 10 Trading Days (as defined in the Indenture) immediately prior to
the record date for the determination of the holders of Lodgian Common Stock
entitled to receive cash, securities, property or other assets in connection
with such Fundamental Change or, if there is no such record date, prior to the
date upon which the holders of Lodgian Common Stock shall have the right to
receive such cash, securities, property or other assets, but the adjustment
shall be based upon the consideration that the holders of Lodgian Common Stock
received in the transaction or event as a result of which more than 50% of the
Lodgian Common Stock shall have been exchanged for, converted into or acquired
for, or shall constitute solely the right to receive such cash, securities,
property or other assets.
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value (as determined in good faith by the Company's
Board of Directors) of the consideration received by holders of Lodgian Common
Stock consists of common stock that, for the 10 Trading Days immediately prior
to such Fundamental Change, has been admitted for listing or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on The Nasdaq National Market System; PROVIDED, that a Fundamental Change
shall not be a Common Stock Fundamental Change unless either (i) the Company
continues to exist after the occurrence of such Fundamental Change and the
outstanding CRESTS continue to exist as outstanding CRESTS or (ii) the
outstanding CRESTS continue to exist as CRESTS and are convertible into shares
of the common stock of the corporation succeeding to the business of the
Company.
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The term "Fundamental Change" means the occurrence of any transaction or
event or series of transactions or events pursuant to which all or substantially
all of the Lodgian Common Stock shall be exchanged for, converted into, acquired
for or shall constitute solely the right to receive cash, securities, property
or other assets (whether by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification, recapitalization or
otherwise); PROVIDED, in the case of any such series of transactions or events,
for purposes of adjustment of the Conversion Price, such Fundamental Change
shall be deemed to have occurred when substantially all of the Lodgian Common
Stock shall have been exchanged for, converted into or acquired for, or shall
constitute solely the right to receive, such cash, securities, property or other
assets.
The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the daily Closing Price for one share of the
common stock received by holders of Lodgian Common Stock in such Common Stock
Fundamental Change during the 10 Trading Days immediately prior to the date
fixed for the determination of the holders of Lodgian Common Stock entitled to
receive such common stock or, if there is no such date, prior to the date upon
which the holders of Lodgian Common Stock shall have the right to receive such
common stock.
The term "Reference Market Price" shall initially mean $11.22 (which is an
amount equal to 66% of the reported last sale price for Lodgian Common Stock on
the New York Stock Exchange on June 8, 1998) and, in the event of any adjustment
to the Conversion Price other than as a result of a Fundamental Change, the
Reference Market Price shall also be adjusted so that the ratio of the Reference
Market Price to the Conversion Price after giving effect to any such adjustment
shall always be the same as the ratio of the initial Reference Market Price to
the initial Conversion Price of $21.42 per share.
No adjustment of the Conversion Price in respect of the Lodgian Common Stock
or any other conversion price in respect of any other common stock of the
Company will be required to be made in any case until cumulative adjustments
amount to 1% or more thereof. Any adjustments not so required to be made will be
carried forward and taken into account in subsequent adjustments.
REDEMPTION
Upon the repayment or redemption, in whole or in part, of the Convertible
Debentures held by the Trust, whether at Stated Maturity or upon earlier
redemption as provided in the Indenture, the proceeds from such repayment or
redemption will be applied by the Property Trustee to redeem a like aggregate
amount of the Trust Securities. If less than all of the Convertible Debentures
held by the Trust are to be repaid or redeemed on a redemption date, then,
except as described under "--Subordination of Common Securities," the proceeds
from such repayment or redemption will be allocated pro rata to the redemption
of the Trust Securities. See "--Redemption Procedures." See "Description of the
Convertible Debentures--Optional Redemption" for a description of the Company's
options to redeem the Convertible Debentures.
SPECIAL EVENT DISTRIBUTION OR REDEMPTION OF CONVERTIBLE DEBENTURES
If, at any time, either a Tax Event or an Investment Company Event (each, a
"Special Event") shall occur, the Regular Trustees may, except in certain
limited circumstances described below, dissolve the Trust and, after
satisfaction of liabilities to creditors, cause Convertible Debentures held by
the Property Trustee, having an aggregate principal amount equal to the
aggregate liquidation amount of the CRESTS, with an interest rate identical to
the interest rate of the CRESTS, and accrued and unpaid interest equal to
accumulated and unpaid Distributions on the CRESTS, and having the same record
date for payment as the CRESTS, to be distributed to the holders of the Trust
Securities in liquidation of such holders' interests in the Trust on a pro rata
basis, within 90 days following the occurrence of such Special Event; provided,
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however, that, in the case of a Tax Event, such dissolution and distribution
shall be conditioned on (i) the Regular Trustees' receipt of an opinion of
independent tax counsel experienced in such matters (which opinion may rely on
published revenue rulings of the Internal Revenue Service ("IRS")) to the effect
that the holders of the CRESTS will not recognize any gain or loss for United
States federal income tax purposes as a result of the dissolution of the Trust
and the distribution of Convertible Debentures (a "No Recognition Opinion"),
(ii) the Company or the Trust being unable to eliminate, which elimination shall
be complete within such 90-day period, such Special Event by taking some
ministerial action (such as filing a form or making an election, or pursuing
some other reasonable measure) that has no adverse effect on the Trust, the
Company or the holders of the CRESTS or does not subject any of them to more
than DE MINIMIS regulatory requirements and (iii) the Company's prior written
consent to such dissolution and distribution.
Furthermore, if a Special Event occurs (i) that is a Tax Event and the
Company has received an opinion of independent tax counsel experienced in such
matters that, as a result of such Tax Event, there is more than an insubstantial
risk that the Company would be precluded from deducting the interest on the
Convertible Debentures for United States federal income tax purposes even after
the Convertible Debentures were distributed to the holders of Trust Securities
in liquidation of such holders' interests in the Trust as described in the
Declaration or (ii) that is a Tax Event or an Investment Company Event and such
Regular Trustees shall have been informed by independent tax counsel experienced
in such matters that it, for substantive reasons, cannot deliver a No
Recognition Opinion to the Trust, the Company shall have the right to redeem the
Convertible Debentures, in whole or in part, for cash at 100% of the principal
amount thereof, plus accrued and unpaid interest thereon to but excluding the
date of redemption (the "Special Redemption Price"), within 90 days following
the occurrence of such Special Event. Following such redemption, Trust
Securities with an aggregate initial liquidation amount equal to the aggregate
principal amount of the Convertible Debentures so redeemed shall be redeemed by
the Trust at a redemption price equal to 100% of the liquidation amount to be
redeemed on a pro rata basis, plus accumulated but unpaid Distributions thereon
to but excluding such redemption date; provided, however, that if at the time
there is available to the Company or the Trust the opportunity to eliminate,
which elimination shall be complete within the 90-day period, such Special Event
by taking some ministerial action, the Trust or the Company will pursue such
ministerial action in lieu of redemption. Under current United States federal
income tax law and interpretations thereof and assuming that, as expected, the
Trust is treated as a grantor trust, a distribution of the Convertible
Debentures will not be a taxable event to the Trust and/or to holders of the
CRESTS. Should there be a change in law, a change in legal interpretation,
certain Tax Events or other circumstances, however, the distribution of
Convertible Debentures could be a taxable event to holders of the CRESTS in
which event the Company could, at its option, redeem the Convertible Debentures
for cash. See "Certain United States Federal Income Tax Consequences--
Distribution of Convertible Debentures or Cash Upon Liquidation of the Trust."
The Trust will issue a press release announcing any such redemption.
If the Company does not elect any of the options described above, the CRESTS
will remain outstanding until the repayment of the Convertible Debentures,
whether at maturity or redemption, and in the event a Tax Event has occurred and
is continuing, under the Indenture, the Company, as borrower, will be obligated
to pay any taxes, duties, assessments and other governmental charges (other than
United States withholding taxes) to which the Trust has become subject as a
result of a Tax Event. See "Description of the Convertible Debentures--Payment
of Expenses of the Trust."
"Investment Company Event" as used herein means the receipt by the Trust of
an opinion of counsel, rendered by a law firm having a recognized national
securities practice, to the effect that, as a result of the occurrence of a
change in law or regulation or a change in interpretation or application of law
or regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in 1940 Act Law"), there is more than an insubstantial risk
that the Trust is or will be considered an "investment
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company" that is required to be registered under the 1940 Act, which Change in
1940 Act Law becomes effective on or after the date on which the CRESTS were
initially issued and sold.
"Tax Event" as used herein means the receipt by the Trust of an opinion of
independent tax counsel experienced in such matters, to the effect that, as a
result of (a) any amendment to, change in or announced proposed change in the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or (b) any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or proposed change,
pronouncement or decision is announced on or after the date on which the CRESTS
were initially issued and sold, there is more than an insubstantial risk that
(i) the Trust is, or will be within 90 days of the date of such opinion, subject
to United States federal income tax with respect to income received or accrued
on the Convertible Debentures, (ii) interest payable by the Company on the
Convertible Debentures is not, or within 90 days of the date of such opinion,
will not be, deductible by the Company, in whole or in part, for United States
federal income tax purposes, or (iii) the Trust is, or will be within 90 days of
the date of such opinion, subject to more than a DE MINIMIS amount of other
taxes, duties or other governmental charges; provided, however, that a Tax Event
shall not be deemed to occur under (ii) above if the Company is merely required
to defer taking a deduction for any interest or OID that accrues with respect to
the Convertible Debentures until such interest payment or OID is paid by the
Company in cash.
Recently, the IRS asserted that the interest payable on a security with
terms that are similar to the terms of the Convertible Debentures (but with a
longer maturity than the Convertible Debentures) was not deductible for United
States federal income tax purposes. The taxpayer in that case has filed a
petition in the United States Tax Court challenging the IRS's position on this
matter. If this matter is in fact litigated and the Tax Court were to sustain
the IRS's position on this matter, such judicial decision could constitute a Tax
Event which could result in an early mandatory redemption of the CRESTS.
REDEMPTION PROCEDURES
CRESTS redeemed on each redemption date will be redeemed at the redemption
price in respect of the Convertible Debentures plus an amount equal to accrued
and unpaid Distributions thereon through the date of redemption (the "Redemption
Price") with the applicable proceeds from the contemporaneous redemption or
payment of the Convertible Debentures. Redemptions of the CRESTS will be made
and the Redemption Price will be payable on each redemption date only to the
extent that the Trust has sufficient funds available for the payment of such
Redemption Price. See "--Subordination of Common Securities."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of CRESTS to be redeemed at
its registered address and be published in a newspaper of general circulation in
New York City made once a week for two successive weeks commencing not less than
30 nor more than 60 days before the redemption date. If the Trust gives a notice
of redemption in respect of the CRESTS, then, by 12:00 noon, New York City time,
on the redemption date, to the extent funds are available, the Property Trustee
will deposit irrevocably with The Depository Trust Company ("DTC") funds
sufficient to pay the applicable Redemption Price for all securities held at DTC
and will give DTC irrevocable instructions and authority to pay the Redemption
Price to the holders of the CRESTS. See "Book-Entry Issuance." If any CRESTS are
not represented by one or more Global Certificates, the Trust, to the extent
funds are available, will irrevocably deposit with the Paying Agent (as defined
herein) for such CRESTS funds sufficient to pay the applicable Redemption Price
and will give the Paying Agent irrevocable instructions and authority to pay the
Redemption Price to the holders thereof upon surrender of their certificates
evidencing the CRESTS. Notwithstanding the foregoing, Distributions payable on
or prior to the redemption date for any CRESTS called for redemption will be
payable to the holders of such CRESTS on the relevant record dates for the
related Distribution Dates. If notice of redemption shall have been given and
funds deposited or paid as required, then immediately prior to the close of
business on the date of such deposit or payment, all rights of the holders of
such CRESTS so
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called for redemption will cease, except the right of the holders of such CRESTS
to receive the Redemption Price, but without interest on such Redemption Price,
and such CRESTS will cease to be outstanding. In the event that any date fixed
for redemption of CRESTS is not a Business Day, then payment of the Redemption
Price payable on such date will be made on the next succeeding day which is a
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on the date such payment was
originally payable.
In the event that payment of the Redemption Price in respect of CRESTS
called for redemption is improperly withheld or refused and not paid either by
the Trust or by the Company pursuant to the Guarantee as described under
"Description of the Guarantee," Distributions on such CRESTS will continue to
accumulate at the applicable rate per annum, from the redemption date originally
established by the Trust for the CRESTS to the date such Redemption Price is
actually paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price. See
"--Distributions."
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding CRESTS by tender, in the open market or
by private agreement.
If fewer than all of the Trust Securities issued by the Trust are to be
redeemed on a redemption date, then the aggregate amount of such Trust
Securities to be redeemed will be allocated pro rata among the CRESTS and the
Common Securities and the CRESTS to be redeemed will be redeemed pro rata from
each holder of CRESTS, it being understood that, in respect of CRESTS registered
in the name of and held of record by DTC or its nominee, the distribution of the
proceeds of such redemption will be made to each member of, or participant in,
DTC (or person on whose behalf such nominee holds such securities) in accordance
with the procedures applied by DTC or its nominee. If CRESTS are represented by
one or more Global Certificates, they will be redeemed as described below under
"Book-Entry Issuance." For all purposes of the Declaration, unless the context
otherwise requires, all provisions relating to the redemption of CRESTS shall
relate, in the case of any CRESTS redeemed or to be redeemed only in part, to
the portion of the aggregate liquidation amount of CRESTS which has been or is
to be redeemed.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the liquidation
amount of such Trust Securities; provided, however, that if on any Distribution
Date or redemption date an Indenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, any of
the Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Common Securities, shall be made unless
payment in full in cash of all accumulated and unpaid Distributions on all of
the outstanding CRESTS for all Distribution periods terminating on or prior
thereto, or in the case of payment of the Redemption Price the full amount of
such Redemption Price on all of the outstanding CRESTS then called for
redemption, shall have been made or provided for, and all funds available to the
Property Trustee shall first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the CRESTS then due and payable.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Declaration, the Trust shall automatically dissolve on the
first to occur of: (i) certain events of bankruptcy, dissolution or liquidation
of the Company; (ii) the distribution of the Convertible Debentures to the
holders of the Trust Securities; (iii) the redemption of all of the CRESTS in
connection
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with the maturity or redemption of all of the Convertible Debentures; (iv) the
entry by a court of competent jurisdiction of an order for the dissolution of
the Trust; and (v) June 30, 2020.
In the event of any voluntary or involuntary liquidation, dissolution, or
winding-up of the Trust (each a "Liquidation"), the holders of the CRESTS on the
date of the Liquidation will be entitled to receive, out of the assets of the
Trust available for distribution to holders of Trust Securities after
satisfaction of the Trusts' liabilities to creditors, if any, distributions in
cash or other immediately available funds in an amount equal to the aggregate of
the stated liquidation amount of $50 per CRESTS plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"), unless, in connection with such Liquidation, Convertible
Debentures in an aggregate stated principal amount equal to the aggregate stated
liquidation amount of, with an interest rate identical to the Distribution rate
of, and accrued and unpaid interest equal to accumulated and unpaid
Distributions on, the Trust Securities shall be distributed on a pro rata basis
to the holders of the Trust Securities in exchange for such Trust Securities. If
such Liquidation Distribution can be paid only in part because the Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Trust on the CRESTS shall
be paid on a pro rata basis. The holders of the Common Securities will be
entitled to receive distributions upon any such liquidation pro rata with the
holders of the CRESTS, except that if an Indenture Event of Default has occurred
and is continuing, the CRESTS shall have a preference over the Common Securities
with regard to such distributions.
After the liquidation date is fixed for any distribution of Convertible
Debentures to holders of the CRESTS (i) the CRESTS will no longer be deemed to
be outstanding, (ii) if the CRESTS are represented by one or more Global
Certificates, DTC or its nominee, as a record holder of CRESTS, will receive a
registered Global Certificate or Certificates representing the Convertible
Debentures to be delivered upon such distribution and (iii) any certificates
representing CRESTS not held by DTC or its nominee will be deemed to represent
Convertible Debentures having a principal amount equal to the liquidation amount
of such CRESTS, and bearing accrued and unpaid interest in an amount equal to
the accrued and unpaid Distributions on such CRESTS until such certificates are
presented for cancellation whereupon the Company will issue to such holder, and
the Indenture Trustee will authenticate, a certificate representing such
Convertible Debentures.
TRUST ENFORCEMENT EVENTS
An Indenture Event of Default constitutes an event of default under the
Declaration with respect to the Trust Securities (a "Trust Enforcement Event").
See "Description of the Convertible Debentures-- Indenture Events of Default."
Upon the occurrence and continuance of a Trust Enforcement Event, the
Property Trustee as the sole holder of the Convertible Debentures will have the
right under the Indenture to declare the principal amount of the Convertible
Debentures due and payable. The Company and the Trust are each required to file
annually with the Property Trustee an officer's certificate as to its compliance
with all conditions and covenants under the Declaration.
If the Property Trustee fails to enforce its rights under the Convertible
Debentures, any holder of CRESTS may institute a legal proceeding against the
Company to enforce the Property Trustee's rights under the Convertible
Debentures without first instituting a legal proceeding against the Property
Trustee or any other person or entity. In addition, if a Trust Enforcement Event
has occurred and is continuing and such event is attributable to the failure of
the Company to pay interest, principal, or premium on the Convertible Debentures
on the date such interest, principal, or premium is otherwise payable (or in the
case of redemption, the redemption date), then the registered holder of CRESTS
may directly institute a proceeding for enforcement of payment to such holder of
the principal of, premium, if any, or interest on the Convertible Debentures
having a principal amount equal to the aggregate liquidation amount of the
CRESTS of such holder on or after the respective due date specified in the
Convertible Debentures. In
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connection with such Direct Action, the rights of the Company, as holder of the
Common Securities, will be subrogated to the rights of such holder of CRESTS
under the Declaration to the extent of any payment requested to be made by the
Company to such holder of CRESTS in such Direct Action.
Pursuant to the Declaration, the holder of the Common Securities will be
deemed to have waived any Trust Enforcement Event with respect to the Common
Securities until all Trust Enforcement Events with respect to the CRESTS have
been cured, waived or otherwise eliminated. Until such Trust Enforcement Events
with respect to the CRESTS have been so cured, waived or otherwise eliminated,
the Property Trustee will be deemed to be acting solely on behalf of the holders
of the CRESTS and only the holders of the CRESTS will have the right to direct
the Property Trustee in accordance with the terms of the CRESTS.
VOTING RIGHTS; AMENDMENT OF DECLARATION
Except as provided below and as otherwise required by law and the
Declaration, the holders of the CRESTS will have no voting rights.
So long as any Convertible Debentures are held by the Property Trustee, the
holders of a majority in liquidation amount of the CRESTS shall have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Property Trustee, or to direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee, as holder of the Convertible Debentures,
to (i) exercise the remedies available to it under the Indenture as a holder of
the Convertible Debentures, (ii) consent to any amendment or modification of the
Indenture or the Convertible Debentures where such consent shall be required or
(iii) waive any past default and its consequences that is waivable under the
Indenture; provided, however, that if an Indenture Event of Default has occurred
and is continuing, then the holders of 25% of the aggregate liquidation amount
of the CRESTS may direct the Property Trustee to declare the principal of and
premium, if any, and interest on the Convertible Debentures due and payable;
provided, further, that where a consent or action under the Indenture would
require the consent or act of the holders of more than a majority of the
aggregate principal amount of Convertible Debentures affected thereby, only the
holders of the percentage of the aggregate stated liquidation amount of the
CRESTS which is at least equal to the percentage required under the Indenture
may direct the Property Trustee to give such consent or to take such action. The
Property Trustee shall notify each holder of the CRESTS of any notice of any
Indenture Event of Default which it receives from the Company with respect to
the Convertible Debentures. Except with respect to directing the time, method,
and place of conducting a proceeding for a remedy, the Property Trustee shall be
under no obligation to take any of the actions described in clauses (i) and (ii)
above unless the Property Trustee has obtained an opinion of independent tax
counsel to the effect that the Trust will not fail to be classified as a grantor
trust for United States federal income tax purposes, as a result of such action,
and each holder will be treated as owning an undivided beneficial ownership
interest in the Convertible Debentures.
The Declaration may be amended from time to time by the Company and a
majority of the Regular Trustees (and in certain circumstances the Property
Trustee and the Delaware Trustee), without the consent of the holders of the
CRESTS, (i) to cure any ambiguity or correct or supplement any provisions in the
Declaration that may be defective or inconsistent with any other provision, or
to make any other provisions with respect to matters or questions arising under
the Declaration that shall not be inconsistent with the other provisions of the
Declaration, (ii) to add to the covenants, restrictions or obligations of the
Company in its capacity as sponsor of the Trust, (iii) to conform to any change
in Rule 3a-5 under the 1940 Act or written change in interpretation or
application of Rule 3a-5 under the 1940 Act by any legislative body, court,
government agency or regulatory authority which amendment does not have a
material adverse effect on the rights, preferences or privileges of the holders
of the Trust Securities or (iv) to modify, eliminate or add to any provisions of
the Declaration to such extent as shall be necessary to ensure that the Trust
will be classified for United States federal income tax purposes as a grantor
trust at all times
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that any Trust Securities are outstanding or to ensure that the Trust will not
be required to register as an "investment company" under the 1940 Act; provided,
however, that such action shall not adversely affect in any material respect the
interests of any holder of Trust Securities, and any amendments of the
Declaration shall become effective when notice thereof is given to the holders
of Trust Securities. The Declaration may be amended by the Company and a
majority of the Regular Trustees with (i) the consent of holders representing
not less than 66 2/3% in liquidation amount of the outstanding CRESTS and (ii)
receipt by the Regular Trustees of an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the Regular Trustees in
accordance with such amendment will not affect the Trust's status for United
States federal income tax purposes as a grantor trust or the Trust's exemption
from status as an "investment company" under the 1940 Act; provided that, if any
amendment or proposal that would adversely affect the powers, preferences or
special rights of the Trust Securities, whether by way of amendment to the
Declaration or otherwise, would adversely affect only the CRESTS or the Common
Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of 66 2/3% in liquidation amount of such class of Trust
Securities affected thereby, provided, further that without the consent of each
holder of Trust Securities affected thereby, the Declaration may not be amended
to (i) change the amount or timing of any Distribution on the Trust Securities
or otherwise adversely affect the amount of any Distribution required to be made
in respect of the Trust Securities as of a specified date or (ii) restrict the
right of a holder of Trust Securities to institute suit for the enforcement of
any such payment on or after such date.
Any required approval or direction of holders of CRESTS may be given at a
meeting of holders of CRESTS convened for such purpose or pursuant to written
consent. The Regular Trustees will cause a notice of any meeting at which
holders of CRESTS are entitled to vote, or of any matter upon which action by
written consent of such holders is to be taken, to be given to each holder of
record of CRESTS in the manner set forth in the Declaration.
No vote or consent of the holders of CRESTS will be required for the Trust
to redeem and cancel the CRESTS in accordance with the Declaration.
Notwithstanding that holders of CRESTS are entitled to vote or consent under
any of the circumstances described above, any of the CRESTS that are owned by
the Company, the Trustees or any affiliate of the Company or any Trustees,
shall, for purposes of such vote or consent, be treated as if they were not
outstanding.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
CRESTS.
Registration of transfers or exchanges of CRESTS will be effected without
charge by or on behalf of the Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange, the Trust may charge a sum sufficient to cover any such payment. If
the CRESTS are to be redeemed in part, the Trust will not be required (i) to
issue, register the transfer of or exchange any CRESTS during a period beginning
at the opening of business 15 days before the day of the mailing of the relevant
notice of redemption and ending at the close of business on the day of such
mailing or (ii) to register the transfer or exchange of any CRESTS so selected
for redemption, except in the case of any CRESTS being redeemed in part, any
portion thereof not to be redeemed.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of a
Trust Enforcement Event, undertakes to perform only such duties as are
specifically set forth in the Declaration and, after such Trust Enforcement
Event (which has not been cured or waived), must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the
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Declaration at the request of any holder of CRESTS unless it is offered
reasonable security and indemnity against the costs, expenses and liabilities
that might be incurred thereby.
PAYMENT AND PAYING AGENCY
Payments in respect of the Global Certificates shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable Distribution payment
dates or, if the CRESTS are not represented by one or more Global Certificates,
such payments shall be made by check mailed to the address of the holder
entitled thereto as such address shall appear on the register in respect of the
registrar. The paying agent (the "Paying Agent") shall initially be the Property
Trustee and any co-paying agent chosen by the Property Trustee and acceptable to
the Regular Trustees and the Company. The Paying Agent shall be permitted to
resign as Paying Agent upon 30 days' written notice to the Property Trustee and
the Company. In the event that the Property Trustee shall no longer be the
Paying Agent, the Regular Trustees shall appoint a successor (which shall be a
bank or trust company acceptable to the Company) to act as Paying Agent.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. The Trust may, at the request of the Company, with the consent
of the Regular Trustees and without the consent of the holders of the CRESTS,
the Delaware Trustee or the Property Trustee merge with or into, consolidate,
amalgamate, be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to a trust organized as such under the laws
of any State; provided that (i) such successor entity (if not the Trust) either
(a) expressly assumes all of the obligations of the Trust with respect to the
CRESTS or (b) substitutes for the CRESTS other securities having substantially
the same terms as the CRESTS (the "Successor Securities") so long as the
Successor Securities rank the same as the CRESTS rank in priority with respect
to distributions and payments upon liquidation, redemption and otherwise, (ii)
if the Trust is not the successor entity, the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee as the holder of the Convertible Debentures, (iii) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
cause the CRESTS (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (iv) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the holders of the CRESTS (including any Successor Securities)
in any material respect, (v) such successor entity has a purpose identical to
that of the Trust, (vi) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer, or lease, the Company has received an opinion
from independent counsel to the Trust experienced in such matters to the effect
that (a) such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the CRESTS (including any Successor Securities) in
any material respect and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, (1) neither the Trust nor such
successor entity will be required to register as an investment company under the
1940 Act and (2) the Trust or the successor entity will continue to be
classified as a grantor trust for United States federal income tax purposes,
(vii) the Company or any permitted successor or assignee owns all of the Common
Securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee and (viii) such successor entity expressly assumes all of the
obligations of the Trust with respect to the Trustees. Notwithstanding the
foregoing, the Trust shall not, except with the consent of holders of 100% in
aggregate liquidation amount of the CRESTS, consolidate, amalgamate, merge with
or into, be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust or the successor entity to be classified as other than a
grantor trust
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for United States federal income tax purposes and each holder of the CRESTS not
to be treated as owning an undivided interest in the Convertible Debentures.
MERGER OR CONSOLIDATION OF TRUSTEES
Any corporation into which the Property Trustee, the Delaware Trustee or any
Regular Trustee that is not a natural person may be merged or converted or with
which such Trustee may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which such Trustee shall be a party, or
any corporation succeeding to all or substantially all the corporate trust
business of such Trustee, shall be the successor of such Trustee under the
Declaration, provided such corporation shall be otherwise qualified and
eligible.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the 1940 Act or
classified as other than a grantor trust for United States federal income tax
purposes and so that the Convertible Debentures will be treated as indebtedness
of the Company for United States federal income tax purposes. The Company and
the Regular Trustees are authorized to take any action, not inconsistent with
applicable law, the Certificate of Trust or the Declaration, that the Company
and the Regular Trustees determine in their discretion to be necessary or
desirable for such purposes, as long as such action does not materially
adversely affect the interests of the holders of the CRESTS.
The Trust may not borrow money, issue debt, reinvest proceeds derived from
investments, mortgage or pledge any of its assets. In addition the Trust may not
undertake any activity that would cause the Trust not to be classified as a
grantor trust for United States federal income tax purposes.
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DESCRIPTION OF THE CONVERTIBLE DEBENTURES
The following description is subject to, and is qualified in its entirety by
reference to, the Indenture. Certain capitalized terms used herein are defined
in the Indenture.
Under certain circumstances involving the dissolution of the Trust,
including following the occurrence of a Special Event, Convertible Debentures
may be distributed to the holders of the Trust Securities in liquidation of the
Trust. See "Description the CRESTS--Redemption--Special Event Distribution or
Redemption of Convertible Debentures."
GENERAL
The Convertible Debentures were issued as an unsecured series of debt under
the Indenture. The Convertible Debentures are limited in aggregate principal
amount to the aggregate liquidation amount of all Trust Securities. Additional
series of debt may be issued under the Indenture.
The Convertible Debentures are not subject to a sinking fund provision. The
entire principal amount of the Convertible Debentures will mature and become due
and payable, together with any accrued and unpaid interest thereon, including
Compounded Interest (as defined herein), if any, on June 30, 2010.
If Convertible Debentures are distributed to holders of CRESTS in
liquidation of such holders' interests in the Trust, such Convertible Debentures
will initially be issued as a Global Security (as defined herein). See
"--Book-Entry Issuance." As described herein, under certain limited
circumstances, Convertible Debentures may be issued in certificated form in
exchange for a Global Security. See "Book-Entry Issuance--Depositary
Procedures." In the event that Convertible Debentures are issued in certificated
form, such Convertible Debentures will be in denominations of $50 and integral
multiples thereof and may be transferred or exchanged at the offices described
below. Payments on Convertible Debentures issued as a Global Security will be
made to DTC, a successor depositary or, in the event that no depositary is used,
to a Paying Agent for the Convertible Debentures. In the event Convertible
Debentures are issued in certificated form, principal, premium, if any, and
interest will be payable, the transfer of the Convertible Debentures will be
registrable and Convertible Debentures will be exchangeable for Convertible
Debentures of other denominations of a like aggregate principal amount at the
corporate trust office of the Debenture Trustee in New York, New York; provided
that payment of interest may be made at the option of the Company by check
mailed to the address of the holder entitled thereto. Notwithstanding the
foregoing, so long as the holder of the Convertible Debentures is the Property
Trustee, the payment of principal of, premium, if any, and interest on the
Convertible Debentures held by the Property Trustee will be made at such place
and to such account as may be designated by the Property Trustee.
SUBORDINATION
The Convertible Debentures are subordinated and junior in right of payment
to all present and future Senior Indebtedness (as defined herein) of the Company
but senior to all capital stock of the Company now outstanding or hereafter
issued by the Company, to the extent set forth in the Indenture.
In the event that (i) the Company shall default in the payment of any
principal, or premium, if any, or interest on any Senior Indebtedness when the
same becomes due and payable, whether at maturity or at a date fixed for
prepayment or declaration or otherwise or (ii) an event of default occurs with
respect to any Senior Indebtedness permitting the holders thereof to accelerate
the maturity thereof and written notice describing such event of default is
given to the Company by the holders of Senior Indebtedness, then unless and
until such default in payment and event of default shall have been cured or
waived or shall have ceased to exist, no direct or indirect payment (in cash,
property, securities, by set-off or otherwise) shall be made or agreed to be
made on account of the Convertible Debentures or any interest thereon or in
respect of any repayment, redemption, retirement, purchase or other acquisition
of the Convertible Debentures.
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In the event of (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relating
to the Company, its creditors or its property, (ii) any proceeding for the
liquidation, dissolution or other winding up of the Company, voluntary or
involuntary, whether or not involving insolvency or bankruptcy proceedings,
(iii) any assignment by the Company for the benefit of its creditors or (iv) any
other marshalling of the assets of the Company, all Senior Indebtedness shall
first be paid in full before any payment or distribution, whether in cash,
securities or other property, shall be made by the Company on account of the
Convertible Debentures. Any payment or distribution, whether in cash, securities
or other property (other than securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment of which
is subordinate, at least to the extent provided in the subordination provisions
of the Indenture with respect to the indebtedness evidenced by the Convertible
Debentures, to the payment of all Senior Indebtedness at the time outstanding
and to any securities issued in respect thereof under any such plan of
reorganization or readjustment), which would otherwise (but for such
subordination provisions) be payable or deliverable in respect of the
Convertible Debentures shall be paid or delivered directly to the holders of
Senior Indebtedness in accordance with the priorities then existing among such
holders until all Senior Indebtedness shall have been paid in full. No present
or future holder of any Senior Indebtedness shall be prejudiced in the right to
enforce subordination of the Convertible Debentures by any act or failure to act
on the part of the Company.
Senior Indebtedness shall not be deemed to have been paid in full unless the
holders thereof shall have received cash, securities or other property equal to
the amount of such Senior Indebtedness then outstanding. Upon the payment in
full of all Senior Indebtedness, the rights of the holders of the Convertible
Debentures shall be subrogated to all the rights of any holders of Senior
Indebtedness to receive any further payments or distributions applicable to the
Senior Indebtedness until the Convertible Debentures shall have been paid in
full, and such payments or distributions received by the holders of the
Convertible Debentures, by reason of such subrogation, of cash, securities or
other property which otherwise would be paid or distributed to the holders of
Senior Indebtedness, shall, as between the Company and its creditors (other than
the holders of Senior Indebtedness), on the one hand, and the holders of the
Convertible Debentures, on the other, be deemed to be a payment by the Company
on account of Senior Indebtedness, and not on account of the Convertible
Debentures.
The term "Senior Indebtedness" means, with respect to the Company, the
principal, premium, if any, and interest on (i) all indebtedness of the Company,
whether outstanding on the date hereof or hereafter created, incurred or
assumed, which is for money borrowed, or evidenced by a note or similar
instrument given in connection with the acquisition of any business, properties
or assets, including securities (other than trade accounts payable in the
ordinary course of business), (ii) any indebtedness of others of the kinds
described in the preceding clause (i) for the payment of which the Company is
responsible or liable (directly or indirectly, contingently or otherwise) as
guarantor or otherwise and (iii) amendments, renewals, extensions and refundings
of any such indebtedness, unless in any instrument or instruments evidencing or
securing such indebtedness or pursuant to which the same is outstanding, or in
any such amendment, renewal, extension or refunding, it is expressly provided
that such indebtedness is not superior in right of payment to the Convertible
Debentures. The Senior Indebtedness shall continue to be Senior Indebtedness and
entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any term of the Senior Indebtedness or
extension or renewal of the Senior Indebtedness. At March 31, 1999, the Senior
Indebtedness of the Company aggregated approximately $854.7 million (including
indebtedness of the consolidated subsidiaries guaranteed by the Company).
The terms of the Convertible Debentures place no limit on the aggregate
amount of Senior Indebtedness that may be issued or incurred by the Company and
do not limit obligations of subsidiaries of the Company which obligations are
structurally senior to the Convertible Debentures.
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CERTAIN COVENANTS OF THE COMPANY
Except as otherwise provided in the Indenture, for so long as the
Convertible Debentures are held by the Property Trustee, the Company will
covenant (i) to maintain directly or indirectly ownership of all of the Common
Securities; provided, however, that any permitted successor of the Company under
the Indenture may succeed to the Company's ownership of the Common Securities,
(ii) to cause the Trust to remain a statutory business trust, except in
connection with a distribution of the Convertible Debentures, the redemption of
all Trust Securities, or certain mergers, consolidations or amalgamations to
holders of Trust Securities, each as permitted by the Declaration, and not to
voluntarily dissolve, wind-up, liquidate or to be terminated, except as
permitted by the Declaration, (iii) to use its commercially reasonable efforts
to ensure that the Trust will not be an "investment company" for purposes of the
1940 Act, as amended and (iv) take no action that would be reasonably likely to
cause the Trust to be classified as an association or a publicly traded
partnership taxable as a corporation for United States federal income tax
purposes.
OPTIONAL REDEMPTION
The Company has the right to redeem the Convertible Debentures for cash on
and after July 3, 2002, in whole at any time or in part from time to time upon
not less than 30 nor more than 60 days' notice, at the following Redemption
Prices (expressed as percentages of the principal amount of the Convertible
Debentures), together with accrued and unpaid interest thereon, including
Compounded Interest, if any, to, but excluding, the redemption date. If the
Convertible Debentures are redeemed during the period beginning July 3, 2002 and
ending on June 27, 2003, the Redemption Price shall be 104.2%, and if redeemed
thereafter during the 12-month period beginning on June 30 of the following
years, the Redemption Prices shall be as set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2003........................................................................ 103.5%
2004........................................................................ 102.8%
2005........................................................................ 102.1%
2006........................................................................ 101.4%
2007........................................................................ 100.7%
2008 and thereafter......................................................... 100.0%
</TABLE>
The Company may exercise its right to redeem the Convertible Debentures for
cash as set forth above provided that the redemption price (other than the
portion thereof consisting of accrued and unpaid interest (including Compounded
Interest, if any)) is payable solely out of the sale proceeds of other equity
securities of the Company, and from no other source. For purposes of the
preceding sentence, "equity securities" means (i) any equity securities,
including common stock and preferred stock, of the Company, (ii) any securities,
which by their terms, are mandatorily convertible or exchangeable for, or
require the purchase of, such common stock or preferred stock and (iii)
preferred securities issued by a business trust, partnership or limited
liability company, all of the common equity of which is owned, directly or
indirectly, by the Company and the sole assets of which are subordinated debt
securities with interest payments deferrable at the Company's option.
The Company shall also have the right to redeem the Convertible Debentures,
in whole or in part, for cash from time to time after July 3, 2002, upon not
less than 30 days' nor more than 60 days' notice to the holders, at a redemption
price equal to 100% of the aggregate principal amount of the Convertible
Debentures to be redeemed, together with accrued and unpaid interest (including
Compounded Interest, if any) thereon to, but excluding, the date of such
redemption. The Company may exercise such right to redeem the Convertible
Debentures by notice given on any date only if (i) for 20 trading days within
any period of 30 consecutive trading days ending on such date, including the
last day of such period, the Closing Price (as defined in the Indenture) of the
shares of Lodgian Common Stock exceeds $25.71 per share (subject to adjustment
upon the occurrence of the events described under "Description of the
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CRESTS--Conversion Rights--Conversion Price Adjustments") with respect to the
Conversion Price and (ii) on or prior to the date of the notice of redemption is
given, the Company shall have entered into an agreement, subject to customary
terms and conditions, with a nationally recognized investment banking firm
pursuant to which such firm shall have agreed to purchase from the Company such
number of whole shares of Lodgian Common Stock as would have been issuable upon
conversion of Convertible Debentures that are not surrendered for conversion
prior to the close of business on the redemption date.
To exercise its right to redeem the Convertible Debentures, the Company
shall issue a press release announcing the redemption prior to the opening of
business on the second trading day after the conditions described in the
preceding sentences have, from time to time, been met. Such press release shall
announce the redemption and set forth the aggregate principal amount of
Convertible Debentures that the Company intends to redeem and, if the Property
Trustee is the holder of the Convertible Debentures, that such redemption will
result in the redemption of an equal liquidation amount of Trust Securities.
Notice of any redemption of the Convertible Debentures shall be given by the
Company by mail to each holder of Convertible Debentures to be redeemed not
fewer than 30 nor more than 60 days before the date fixed for redemption of the
Convertible Debentures. If the Convertible Debentures have been distributed to
Holders in liquidation of the Trust, notice of any redemption shall also be
given by publication made once a week for two successive weeks commencing not
less than 30 nor more than 60 days prior to the redemption date in a newspaper
of general circulation in New York City.
Notwithstanding the foregoing, the Company may not redeem any Convertible
Debentures unless all accrued and unpaid interest (including Compounded
Interest, if any) has been paid on all outstanding Convertible Debentures for
all quarterly interest payment periods terminating on or prior to the last
interest payment date before the date of redemption. If Convertible Debentures
are redeemed on March 31, June 30, September 30, or December 31, accrued and
unpaid interest (including Compounded Interest, if any) shall be payable to
holders of record on the record date for such interest payment.
The Company shall also have the right to redeem the Convertible Debentures
at any time in certain circumstances upon the occurrence of a Special Event as
described under "Description of the CRESTS-- Redemption--Special Event
Distribution or Redemption of Convertible Debentures" for cash at a redemption
price equal to 100% of the principal amount thereof, together with any accrued
and unpaid interest thereon (including Compounded Interest, if any), to, but
excluding, the redemption date.
If the Convertible Debentures are only partially redeemed, the Convertible
Debentures will be redeemed pro rata by the Debenture Trustee.
So long as the CRESTS are outstanding, the proceeds from the redemption of
any of the Convertible Debentures will be used to redeem CRESTS.
INTEREST
Each Convertible Debenture will bear interest at the rate of 7% per annum,
subject to increase as described below, from and including the first date of
original issuance. Interest is payable quarterly in arrears on March 31, June
30, September 30 and December 31, of each year (each, an "Interest Payment
Date"), commencing September 30, 1998, to the person in whose name such
Convertible Debenture is registered, subject to certain exceptions, at the close
of business on the Business Day next preceding such Interest Payment Date. In
the event the CRESTS shall not continue to remain in book-entry only form and
the Convertible Debentures are not in the form of a Global Security, the Company
shall have the right to select record dates, which shall be at least one
Business Day before an Interest Payment Date.
The amount of interest payable for any full quarterly interest period will
be computed on the basis of a 360-day year of twelve 30-day months. The amount
of interest payable for any period shorter than a full quarterly interest period
for which interest is computed, will be computed on the basis of 30-day months
and, for periods of less than a month, on the basis of the actual number of days
elapsed. In the event that
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any date on which interest is payable on the Convertible Debentures is not a
Business Day, then payment of the interest payable on such date will be made on
the next succeeding day that is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, then such payment shall be made on the
immediately preceding business day, in each case with the same force and effect
as if made on such date.
If a Reset Transaction (as defined herein) occurs, the interest rate on the
Convertible Debentures will be adjusted to equal the Adjusted Interest Rate (as
defined herein) from the effective date of such Reset Transaction to but not
including the earlier of (x) the effective date of any succeeding Reset
Transaction or (y) the Stated Maturity. "Reset Transaction" means (i) a merger,
consolidation or statutory share exchange to which the Person that is the issuer
of the common stock into which the Convertible Debentures are then convertible
is a party, (ii) a sale of all or substantially all assets of such Person, (iii)
a recapitalization of such common stock or a distribution described in clause
(iii) of the first paragraph under "Description of the CRESTS--Conversion
Rights--Conversion Price Adjustments," or (iv) the election by the Person that
is the issuer of the common stock into which the Convertible Debentures are then
convertible to be a real estate investment trust (as defined in Section 856 of
the Internal Revenue Code of 1986, as amended), after the effective date of
which transaction, distribution or election described in clauses (i) through
(iv) above, Convertible Debentures are convertible into shares of an entity (x)
the common stock of which had a Dividend Yield for the four fiscal quarters of
such entity immediately preceding the public announcement of such transaction or
distribution which was, or (y) that announces a dividend policy prior to the
effective date of such transaction or distribution which policy, if implemented,
would result in a Dividend Yield on such common stock for the next four fiscal
quarters of such entity which would be more than 250 basis points higher than
the Dividend Yield on the common stock into which the Convertible Debentures are
convertible prior to such transaction, distribution or election for the four
fiscal quarters immediately preceding the public announcement of such
transaction, distribution or election. The Merger is not anticipated to be a
Reset Transaction.
The "Adjusted Interest Rate," with respect to any Reset Transaction, will be
the rate per annum that is the arithmetic average of the rates quoted by two
Reference Dealers selected by the Company or its successor as the rate that the
Convertible Debentures should bear so that the fair market value, expressed in
dollars, of a Convertible Debenture immediately after the later of (i) public
announcement of such Reset Transaction and (ii) public announcement of a change
in dividend policy in connection with such Reset Transaction but without giving
effect to any anti-dilution provisions applicable to such Reset Transaction will
equal the greater of (i) the average Trading Price of CRESTS or, if the
Convertible Debentures have been distributed in liquidation of the Trust, a
Convertible Debenture for the 20 Trading Days immediately preceding the date of
public announcement of such Reset Transaction and (ii) the sum of (A) the fair
market value of a Convertible Debenture immediately after such public
announcement and (B) the amount of the decrease, if any, in the fair market
value of a Convertible Debenture solely attributable to the increase in the
Dividend Yield (excluding the effect of any change in the Trading Price of the
common stock into which the Convertible Debentures are convertible that is
attributable solely to the increase in the Dividend Yield); provided that the
Adjusted Interest Rate shall not be less than 7% per annum.
As used in the two preceding paragraphs, (i) "Dividend Yield," on any
security for any period, means the dividends paid or proposed to be paid
pursuant to an announced dividend policy on such security for such period
divided by, if with respect to dividends paid on such security, the average
Closing Price of such security during such period and, if with respect to
dividends so proposed to be paid on such security, the Closing Price of such
security on the effective date of the related Reset Transaction, (ii) "Reference
Dealer" means a dealer engaged in the trading of convertible securities and
(iii) "Trading Price" of a security on any date of determination means (a) the
closing sale price (or, if no closing price is reported, the last reported sale
price) of a security (regular way) on the NYSE on such date, (b) if such
security is not listed for trading on the NYSE on any such date, as reported in
the composite transactions for the
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principal United States securities exchange on which such security is so listed,
(c) if such security is not so listed on a United States national or regional
securities exchange, as reported by the Nasdaq Stock Market, (iv) if such
security is not so reported, the price quoted by Interactive Data Corporation
("IDC") for such security or, if IDC is not quoting such price, a similar
quotation service selected by the Company, (v) if such security is not so
quoted, the average of the mid-point of the last bid and ask prices for such
security from at least two dealers recognized as market-makers for such security
or (vi) if such security is not so quoted, the average of the last bid and ask
prices for such security from a Reference Dealer.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as the Company is not in default in the payment of interest on the
Convertible Debentures, the Company will have the right, at any time, and from
time to time, during the term of the Convertible Debentures, to defer payments
of interest by extending the interest payment period for a period not exceeding
20 consecutive quarterly periods nor extending beyond the Stated Maturity of the
Convertible Debentures, during which Extension Period no interest will be due
and payable. At the end of the Extension Period, the Company shall pay all
interest then accrued and unpaid, together with interest thereon compounded
quarterly at the then applicable rate for the Convertible Debentures to the
extent permitted by applicable law ("Compounded Interest"). Prior to the
termination of any such Extension Period, the Company may further extend such
Extension Period; provided that such Extension Period, together with all such
previous and further extensions, may not exceed 20 consecutive quarterly periods
or extend beyond the Stated Maturity of the Convertible Debentures. Upon the
termination of any Extension Period and the payment of all amounts then due, the
Company may commence a new Extension Period, subject to the above requirements.
No interest during an Extension Period, except at the end thereof, shall be due
and payable. The Company has no present intention of exercising its right to
defer payments of interest by extending the interest payment period on the
Convertible Debentures.
During any such Extension Period, the Company shall not, and shall not
permit any subsidiary to, (x) declare or pay any dividends or distributions on,
or redeem, purchase, acquire or make a liquidation payment with respect to, any
of the Company's capital stock or (y) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank on a parity with or junior in interest to the Convertible
Debentures or make any guarantee payments with respect to any guarantee by the
Company of the debt securities of any subsidiary of the Company if such
guarantee ranks on a parity with or junior in interest to the Convertible
Debentures (other than (a) dividends or distributions in common stock of the
Company, (b) payments under the Guarantee, (c) any declaration of a dividend in
connection with the implementation of a shareholders' rights plan, or issuance
of stock under any such plan in the future, or the redemption or repurchase of
any such rights pursuant thereto, and (d) purchases of common stock related to
the issuance of common stock or rights under any of the Company's benefit
plans).
If the Property Trustee shall be the only holder of the Convertible
Debentures, the Company shall give the Regular Trustees, the Property Trustee
and the Debenture Trustee notice of its election of such Extension Period one
Business Day prior to the earlier of (i) the next date on which Distributions on
the CRESTS are payable or (ii) the date the Regular Trustees are required to
give notice to any national stock exchange or other organization on which the
CRESTS are listed or quoted, if any, or to holders of the CRESTS as of the
record date or the Distribution Date. If the Trustee shall not be the holder of
the Convertible Debentures, the Company shall give the holders of the
Convertible Debentures notice of its election of such Extension Period at least
ten Business Days prior to the earlier of (i) the Interest Payment Date for the
first quarter of such Extension Period or (ii) the date upon which the Company
is required to give notice of the record or payment date of such related
interest payment to holders of the Convertible Debentures.
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CONVERSION
The Convertible Debentures will be convertible into Lodgian Common Stock at
the option of the holders of the Convertible Debentures at the initial
conversion price of $21.42 per share of Lodgian Common Stock, subject to the
conversion price adjustments described under "Description of the
CRESTS--Conversion Rights--Conversion Price Adjustments." The right to convert
Convertible Debentures will terminate prior to the close of business (i) on June
28, 2010 or (ii) in the case of Convertible Debentures called for redemption, on
the second Business Day prior to the related redemption date, unless the Company
shall default in making payment of any moneys or shares of Lodgian Common Stock
payable upon such redemption.
Except as provided below, accrued but unpaid interest will not be paid in
cash on Convertible Debentures that are converted nor will such accrued interest
be converted into additional shares of Lodgian Common Stock. Holders of
Convertible Debentures at the close of business on an interest record date will
be entitled to receive the interest payable on such Convertible Debentures
(except that holders of Convertible Debentures called for redemption on a
redemption date between such record date and the Interest Payment Date shall not
be entitled to receive such interest on such Interest Payment Date) on the
corresponding Interest Payment Date notwithstanding the conversion of such
Convertible Debentures following such interest record date and prior to such
Interest Payment Date. However, Convertible Debentures surrendered for
conversion during the period between the close of business on any interest
record date and the opening of business on the corresponding Interest Payment
Date (except Convertible Debentures called for redemption on a redemption date
during such period) must be accompanied by payment of an amount equal to the
interest payable on such Convertible Debentures on such Interest Payment Date. A
holder of Convertible Debentures on an interest record date who (or whose
transferee) tenders any such Convertible Debentures for conversion into shares
of Lodgian Common Stock on the corresponding Interest Payment Date will receive
the interest payable by the Company on such Convertible Debentures on such date,
and the converting holder need not include payment of the amount of such
interest upon surrender of Convertible Debentures for conversion. The Company
will make no payment or allowance for dividends on the shares of Lodgian Common
Stock issued upon conversion.
The Convertible Debentures held by the Trust will not be converted except
pursuant to a notice of conversion delivered to the Conversion Agent by a holder
of CRESTS. Upon surrender of CRESTS to the Conversion Agent for conversion, the
Trust will distribute Convertible Debentures to the Conversion Agent on behalf
of the holder of the CRESTS so converted, whereupon the Conversion Agent will
convert such Convertible Debentures to the Lodgian Common Stock on behalf of
such holder. The Company's delivery to the holders of the Convertible Debentures
(through the Conversion Agent) of the fixed number of shares of Lodgian Common
Stock into which the Convertible Debentures are convertible (together with the
cash payment, if any, in lieu of fractional shares) will be deemed to satisfy
the Company's obligation to pay the principal amount of the Convertible
Debentures so converted, and the accrued and unpaid interest thereon
attributable to the period from the last date to which interest has been paid or
duly provided for.
PAYMENT OF EXPENSES OF THE TRUST
Under the terms of the Indenture, the Company, as borrower, has agreed to
pay all fees and expenses related to the organization and operations of the
Trust (including any taxes, duties, assessments or other governmental charges of
whatever nature (other than United States withholding taxes) imposed on the
Trust by the United States or any other domestic taxing authority) and the
offering of the Trust Securities and be responsible for all debts and
obligations of the Trust (other than with respect to the Trust Securities), so
that the net amounts received and retained by the Trust after paying such fees,
expenses, debts and obligations will be equal to the amounts the Trust would
have received had no such fees, expenses, debts and obligations been incurred by
or imposed on the Trust. The foregoing obligations of the Company are for the
benefit of, and shall be enforceable by, any person to whom such fees, expenses,
debts and obligations are owed (each a "Creditor") whether or not such Creditor
has received notice thereof.
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Any such Creditor may enforce such obligations of the Company directly against
the Company, and the Company irrevocably waives any right or remedy to require
that any such Creditor take any action against the Trust or any other person
before proceeding against the Company. The Company shall execute such additional
agreements as may be necessary to give full effect to the foregoing.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Except as otherwise provided in the Indenture, the Company may not merge or
consolidate or sell or convey all or substantially all of its assets unless the
successor corporation (if other than the Company) is a domestic corporation and
assumes the Company's obligations under the Convertible Debentures and the
Indenture.
INDENTURE EVENTS OF DEFAULT
Any one of the following events will constitute an Indenture Event of
Default with respect to the Convertible Debentures:
(a) default in the payment of any interest on the Convertible Debentures
when due and payable, if continued for 30 days after written notice
has been given as provided in the Indenture, whether or not such
payment is prohibited by the subordination provisions of the
Indenture and the Convertible Debentures, provided, however, that a
valid extension of the interest payment period does not constitute a
default in the payment of interest;
(b) default in the payment of Liquidated Damages (under the Registration
Rights Agreement), if any, or of principal of (or premium, if any,
on) the Convertible Debentures when due and payable whether or not
such payment is prohibited by the subordination provisions of the
Indenture and the Convertible Debentures;
(c) failure to perform any other covenant of the Company in the Indenture
or the Convertible Debentures (other than a covenant included in the
Indenture solely for the benefit of any series of debt securities
other than the Convertible Debentures), if continued for 90 days
after written notice has been given as provided in the Indenture;
(d) failure of the Company to deliver the Lodgian Common Stock or shares
of another class of common stock of the Company upon a valid
conversion election by the holder or holders of the Convertible
Debentures to convert such Convertible Debentures into shares of
Lodgian Common Stock or shares of such other class of common stock
(whether or not such conversion is prohibited by the subordination
provisions of the Indenture and the Convertible Debentures);
(e) the occurrence of an event of default under any mortgage, indenture,
loan agreement or other instrument under which the Company has or
shall hereafter have outstanding indebtedness for borrowed money in
excess of $10,000,000 which has become due and payable by its terms
and has not been paid or whose maturity has been accelerated and such
payment default has not been cured or such acceleration has not been
annulled within 30 days after written notice as provided in the
Indenture;
(f) certain events in bankruptcy, insolvency or reorganization involving
the Company; or
(g) the voluntary or involuntary dissolution, winding-up, or termination
of the Trust, except in connection with (i) the distribution of
Convertible Debentures to the holders of Trust Securities in
liquidation of the Trust or of their interest in the Trust, (ii) the
redemption of the CRESTS and (iii) certain mergers, consolidations or
amalgamations, each as permitted by the Declaration.
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If any Indenture Event of Default shall occur and be continuing, the
Property Trustee, as the holder of the Convertible Debentures, will have the
right under the Indenture to declare the principal of the Convertible Debentures
(including any Compounded Interest, if any) and any other amounts payable under
the Indenture to be forthwith due and payable and to enforce its other rights as
a creditor with respect to the Convertible Debentures. An Indenture Event of
Default also constitutes a Trust Enforcement Event. The holders of CRESTS in
certain circumstances have the right to direct the Property Trustee to exercise
its rights as the holder of the Convertible Debentures. In addition, if the
Property Trustee fails to enforce its rights under the Convertible Debentures
any holder of CRESTS may institute a legal proceeding against the Company to
enforce the Property Trustee's rights under the Convertible Debentures. See
"Description of the CRESTS--Trust Enforcement Events" and "--Voting Rights;
Amendment of Declaration." Notwithstanding the foregoing, if an Indenture Event
of Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Convertible
Debentures on the date such interest or principal is otherwise payable (or in
the case of redemption, the redemption date), the Company acknowledges that a
holder of CRESTS may then institute a Direct Action for payment on or after the
respective due date specified in the Convertible Debentures. Notwithstanding any
payments made to such holder of CRESTS by the Company in connection with a
Direct Action, the Company shall remain obligated to pay the principal of or
interest on the Convertible Debentures held by the Trust or the Property Trustee
of the Trust, and the Company shall be subrogated to the rights of the holder of
such CRESTS with respect to payments on the CRESTS to the extent of any payments
made by the Company to such holder in any Direct Action. The holders of CRESTS
will not be able to exercise directly any other remedy available to the holders
of the Convertible Debentures.
If any Indenture Event of Default shall occur and be continuing and the
Convertible Debentures have been distributed to the holders of the Trust
Securities upon a liquidation of the Trust, the holders of not less than 25% in
aggregate principal amount of the Convertible Debentures will have the right to
declare the principal of the Convertible Debentures (including any Compounded
Interest, if any) and any other amounts payable under the Indenture to be
forthwith due and payable and to enforce their other rights as a creditor with
respect to the Convertible Debentures.
DEFEASANCE
The obligations of the Company with respect to the payment of the principal,
Liquidated Damages, if any, premium, if any, and interest on, the Convertible
Debentures will terminate if the Company irrevocably deposits or causes to be
deposited with the Debenture Trustee, under the terms of an escrow trust
agreement satisfactory to the Debenture Trustee, as a trust fund specifically
pledged as security for, and dedicated solely to, the benefit of the holders of
the Convertible Debentures, (i) money, (ii) U.S. government obligations, which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money at such time or times as payments are due
and payable on the Convertible Debentures, or (iii) a combination of (i) and
(ii), sufficient to pay and discharge each installment of principal, premium, if
any, and interest on the Convertible Debentures. The discharge of the
Convertible Debentures is subject to certain other conditions, including,
without limitation, (a) no Indenture Event of Default or event (including such
deposit) which with notice or lapse of time would become an Indenture Event of
Default shall have occurred and be continuing on the date of such deposit, (b)
such deposit and the related intended consequence will not result in any default
or event of default under any material indenture, agreement or other instrument
binding upon the Company or its subsidiaries or any of their properties and (c)
the Company shall have delivered to the Debenture Trustee an opinion of counsel
or a private letter ruling by the IRS satisfactory to the Trustee to the effect
that holders of the Convertible Debentures will not recognize income, gain or
loss for federal income tax purposes if the Company makes such deposit. The
conversion rights under the Indenture will survive until the Convertible
Debentures are no longer outstanding.
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MODIFICATION, WAIVER, MEETINGS AND VOTING
MODIFICATION OF INDENTURE
The Indenture provides that the Company and the Debenture Trustee may,
without the consent of any holders of Convertible Debentures, enter into
supplemental indentures for the purposes, among other things, of adding to the
Company's covenants, adding additional Indenture Events of Default, or curing
ambiguities or inconsistencies in such Indenture, or making other changes to the
Indenture or form or terms of the Convertible Debentures, provided such action
does not have a material adverse effect on the interests of the holders of the
Convertible Debentures. In addition, modifications and amendments of the
Indenture may be made by the Company and the Debenture Trustee with the consent
of the holders of not less than a majority in aggregate principal amount of the
Convertible Debentures and all other series of debt securities issued under the
Indenture then outstanding affected, acting as one class, by such modification
or amendment; provided, however, that no such modification or amendment may,
without the consent of each holder of Convertible Debentures outstanding that is
affected thereby, (a) change the stated maturity of the principal of, or any
installment of principal of or rate of interest on the Convertible Debentures,
(b) reduce the principal, premium, if any, or interest on any Convertible
Debentures, (c) change the place of payment or the currency or currency unit in
which the Convertible Debentures or interest thereon is payable, (d) impair the
right to institute suit for the enforcement of any payment on or with respect to
the Convertible Debentures, (e) reduce the percentage in principal amount of the
Convertible Debentures then outstanding required for modification or amendment
of the Indenture or for any waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults, (f) change any obligation of the
Company to maintain an office or agency in the places and for the purposes
required by the Indenture, (g) make any change that would materially adversely
affect the right to convert the Convertible Debentures or (h) modify any of the
above provisions; provided, further, no such modification or amendment shall be
effective until the holders of not less than 66 2/3% of the aggregate
liquidation amount of the Trust Securities shall have consented to such
modification or amendment; provided, further, that where a consent under the
Indenture would require the consent of the holders of more than 66 2/3% of the
principal amount of the Convertible Debentures, such modification or amendment
shall not be effective until the holders of at least the same proportion in
aggregate stated liquidation amount of the Trust Securities shall have consented
to such modification or amendment.
WAIVER OF DEFAULT
The holders of a majority in aggregate principal amount of the Convertible
Debentures then outstanding may, on behalf of the holders of all Convertible
Debentures, waive any past default under the Indenture with respect to the
Convertible Debentures except a default (a) in the payment of principal,
premium, if any, or any interest on the Convertible Debentures and (b) in
respect of a covenant or provision of the Indenture which cannot be modified or
amended without the consent of each holder of the Convertible Debentures then
outstanding. Such waiver shall not be effective until the holders of a majority
in aggregate liquidation amount of Trust Securities shall have consented to such
waiver; provided, further, that where a consent under the Indenture would
require the consent of the holders of more than a majority in principal amount
of the Convertible Debentures, such waiver shall not be effective until the
holders of at least the same proportion in aggregate stated liquidation amount
of the Trust Securities shall have consented to such waiver.
MEETINGS AND VOTING
A meeting may be called at any time by the Debenture Trustee, and upon
request, by the Company pursuant to a resolution of the Board or the holders of
at least 25% in aggregate principal amount of the Convertible Debentures then
outstanding. Except as described above under "--Modification of Indenture" and
"--Waiver of Default," a resolution presented at a meeting or reconvened meeting
at which a quorum of the holders of Convertible Debentures then outstanding is
present may be adopted by the
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affirmative vote of the lesser of (i) the holders of a majority in principal
amount of the Convertible Debentures then outstanding, and (ii) the holders of
66 2/3% in principal amount of the Convertible Debentures then outstanding
represented and voting at the meeting; provided, however, that if any consent,
waiver or other action which the Indenture expressly provides may be made, given
or taken by the holders of a specified percentage, which is less than a majority
of the principal amount of the Convertible Debentures then outstanding, such
action may be adopted at a meeting or reconvened meeting at which a quorum is
present by the affirmative vote of the lesser of (a) the holders of such
specified percentage in principal amount of the Convertible Debentures then
outstanding and (b) a majority in principal amount of Convertible Debentures
then outstanding of such series represented and voting at the meeting. Any
resolution passed or decision taken at any meeting of holders of Convertible
Debentures duly held in accordance with the Indenture will be binding on all
holders of Convertible Debentures whether or not present or represented at the
meeting.
Except with respect to certain reconvened meetings, the quorum at a meeting
of the holders of Convertible Debentures will be persons holding or representing
a majority in principal amount of the Convertible Debentures then outstanding.
BOOK-ENTRY ISSUANCE
If distributed to holders of CRESTS in connection with the involuntary or
voluntary dissolution, winding-up, or liquidation of the Trust as a result of
the occurrence of a Special Event, the Convertible Debentures will be issued in
the form of one or more global certificates registered in the name of DTC or its
nominee. If the Convertible Debentures are so distributed to holders of CRESTS
in liquidation of such holders' interests in the Trust, DTC will act as
securities depositary for the Convertible Debentures. For further information,
see "Book-Entry Issuance--Depositary Procedures."
None of the Company, the Trust, the Property Trustee, any Paying Agent and
any other agent of the Company or the Debenture Trustee 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 Security
for such Convertible Debentures or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
A Global Security shall be exchangeable for Convertible Debentures
registered in the names of persons other than DTC or its nominee under the
circumstances set forth under "Book-Entry Issuance."
GOVERNING LAW
The Indenture and the Convertible Debentures are governed by and construed
in accordance with the laws of the State of New York.
MISCELLANEOUS
The Indenture provides that the Company, as borrower, will pay all fees and
expenses related to (i) the issuance and exchange of the Trust Securities and
the Convertible Debentures, (ii) the organization, maintenance and dissolution
of the Trust, (iii) the retention of the Trustees and (iv) the enforcement by
the Property Trustee of the rights of the holders of the CRESTS.
The Company has the right at all times to assign any of its respective
rights or obligations under the Indenture to a direct or indirect wholly owned
subsidiary of the Company; provided that, in the event of any such assignment,
the Company will remain liable for all of their respective obligations. Subject
to the foregoing, the Indenture is binding upon and inure to the benefit of the
parties thereto and their respective successors and assigns. The Indenture
provides that it may not otherwise be assigned by the parties thereto.
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DESCRIPTION OF THE GUARANTEE
GENERAL
This summary of certain provisions of the Guarantee does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
form of Guarantee, including the definitions therein of certain terms, and the
Trust Indenture Act. At the time the Registration Statement of which this
Prospectus forms a part becomes effective, the Guarantee will be qualified as an
indenture under the Trust Indenture Act. Wilmington Trust Company will act as
Guarantee Trustee for purposes of compliance with the Trust Indenture Act and
will hold the Guarantee for the benefit of the holders of the CRESTS.
The following payments or distributions with respect to the CRESTS, to the
extent not paid by or on behalf of the Trust (the "Guarantee Payments"), will be
subject to the Guarantee: (i) any accumulated and unpaid Distributions required
to be paid on the CRESTS, to the extent that the Trust has sufficient funds
available therefor at the time, (ii) the Redemption Price and all accumulated
and unpaid Distributions with respect to any CRESTS called for redemption, to
the extent that the Trust has sufficient funds available therefor at such time,
and (iii) upon a voluntary or involuntary dissolution, winding up or liquidation
of the Trust (other than in connection with the exchange of all of the CRESTS
for Convertible Debentures and the conversion thereof into Lodgian Common Stock
or any other class of common stock of the Company or the distribution of the
Convertible Debentures to holders of the CRESTS), the lesser of (a) the
aggregate liquidation amount of the CRESTS and all accumulated and unpaid
Distributions thereon to the date of payment and (b) the amount of assets of the
Trust remaining available for distribution to holders of CRESTS. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of the applicable CRESTS or by
causing the Trust to pay such amounts to such holders.
The holders of not less than a majority in aggregate liquidation amount of
the CRESTS have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Guarantee or to direct the exercise of any trust or power conferred upon the
Guarantee Trustee under the Guarantee. If the Guarantee Trustee fails to enforce
the Guarantee, then any holder of the CRESTS may institute a legal proceeding
directly against the Company to enforce the Guarantee Trustee's rights under
such Guarantee without first instituting a legal proceeding against the Trust,
the Guarantee Trustee or any other person or entity. If the Company were to
default on its obligation to pay amounts payable under the Convertible
Debentures, the Trust would lack sufficient funds for the payment of
Distributions or amounts payable on redemption of the CRESTS or otherwise, and,
in such event, holders of the CRESTS would not be able to rely upon the
Guarantee for payment of such amounts. Instead, if an Indenture Event of Default
shall have occurred and be continuing and such event is attributable to the
failure of the Company to pay interest on or principal of the Convertible
Debentures on the applicable payment date, then a holder of CRESTS may institute
a Direct Action against the Company. Except as described herein, holders of
CRESTS will not be able to exercise directly any other remedy available to the
holders of Convertible Debentures or assert directly any other rights in respect
of the Convertible Debentures. See "Risk Factors--Risk Factors Relating to the
CRESTS-- Enforcement of Certain Rights by Holders of CRESTS."
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company has covenanted that, so long as any CRESTS
remain outstanding if (i) the Company has exercised its option to defer payments
on the Convertible Debentures by extending the interest payment period and such
extension shall be continuing, (ii) the Company shall be in default with respect
to its payment or other obligations under the Guarantee or (iii) there shall
have occurred and be continuing any event that, with the giving of notice, would
constitute an Indenture Event of Default, then the Company will not, and will
not permit any subsidiary to, (x) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the
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Company's capital stock or (y) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank on a parity with or junior in interest to the Convertible
Debentures or make any guarantee payments with respect to any guarantee by the
Company of the debt securities of any subsidiary of the Company if such
guarantee ranks on a parity with or junior in interest to the Convertible
Debentures (other than (a) dividends or distributions in common stock of the
Company, (b) payments under the Guarantee, (c) any declaration of a dividend in
connection with the implementation of a shareholders' rights plan, or issuance
of stock under any such plan in the future, or the redemption or repurchase of
any such rights pursuant thereto, and (d) purchases of common stock related to
the issuance of common stock or rights under any of the Company's benefit
plans).
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of CRESTS (in which case no vote will be required), the
Guarantee may be amended only with the prior approval of the holders of at least
a majority in liquidation amount of all the outstanding CRESTS. The manner of
obtaining any such approval of holders of the CRESTS will be as set forth under
"Description of the CRESTS--Voting Rights; Amendment of Declaration." All
guarantees and agreements contained in the Guarantee shall bind the successors,
assigns, receivers, trustees and representatives of the Company and shall inure
to the benefit of the holders of the CRESTS then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to each holder of CRESTS upon (i) full
payment of the Redemption Price and accumulated and unpaid distributions with
respect to all CRESTS, (ii) upon distribution of the Convertible Debentures held
by the Trust to the holders of the CRESTS, (iii) upon liquidation of the Trust
or (iv) upon the distribution of Lodgian Common Stock to such holder in respect
of the conversion of such holder's CRESTS into Lodgian Common Stock and will
terminate completely upon full payment of the amounts payable in accordance with
the Declaration.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank (i) subordinate and junior in right of payment to all other
liabilities of the Company, (ii) PARI PASSU with the most senior preferred or
preference stock now or hereafter issued by the Company and with any guarantee
previously, now or hereafter entered into by the Company in respect of any
preferred or preference stock of any affiliate of the Company, and (iii) senior
to Lodgian Common Stock. The terms of the CRESTS provide that each holder of
CRESTS issued by the Trust by acceptance thereof agrees to the subordination
provisions and other terms of the Guarantee relating thereto.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the guarantor to enforce its rights under the guarantee without instituting a
legal proceeding against any other person or entity).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee and after the curing of all defaults with respect to the Guarantee
that may have occurred, undertakes to perform only such duties as are
specifically set forth in the Guarantee and, during the occurrence of a default
with respect to the Guarantee, shall exercise the same degree of care as a
prudent person would exercise in the
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conduct of his own affairs. Subject to such provision, the Guarantee Trustee is
under no obligation to exercise any of the powers vested in it by the Guarantee
at the request of any holder of CRESTS unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby.
GOVERNING LAW
The Guarantee will be governed by, and construed in accordance with the laws
of the State of New York.
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RELATIONSHIP AMONG THE CRESTS,
THE CONVERTIBLE DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the CRESTS (to the extent
the Trust has funds available for the payment of such Distributions) are
irrevocably guaranteed by the Company as and to the extent set forth under
"Description of the Guarantee." If and to the extent that the Company does not
make payments under the Convertible Debentures, the Trust will not have
sufficient funds to pay Distributions or other amounts due on the CRESTS. The
Guarantee does not cover payment of Distributions when the Trust does not have
sufficient funds to pay such Distributions. In such event, a holder of CRESTS
may institute a legal proceeding directly against the Company to enforce payment
of such Distributions to such holder after the respective due dates. Taken
together, the Company' obligations under the Declaration, the Convertible
Debentures, the Indenture and the Guarantee constitute a full and unconditional
guarantee of payments of Distributions and other amounts due on the CRESTS. No
single document standing alone or operating in conjunction with fewer than all
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full and unconditional guarantee of the
Trust's obligations under the CRESTS. The obligations of the Company under the
Guarantee are subordinate and junior in right of payment to all liabilities of
the Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest, principal and other payments are made when
due on the Convertible Debentures, such payments will be sufficient to cover
Distributions and other payments due on the CRESTS, because of the following
factors (i) the aggregate principal amount of the Convertible Debentures will be
equal to the sum of the aggregate stated liquidation amount of the Trust
Securities; (ii) the interest rate and interest and other payment dates on the
Convertible Debentures will match the Distribution rate and Distribution and
other payment dates for the CRESTS; (iii) the Company, as borrower, will pay,
and the Trust will not be obligated to pay, all costs, expenses and liabilities
of the Trust except the Trust's obligations under the Trust Securities; and (iv)
the Declaration further provides that the Trust will not engage in any activity
that is not consistent with the limited purposes of the Trust.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a related payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF CRESTS
If a Trust Enforcement Event occurs and is continuing, the holders of CRESTS
would rely on the enforcement by the Property Trustee of its rights as
registered holder of the Convertible Debentures against the Company. In
addition, the holders of a majority in liquidation amount of the CRESTS will
have the right to direct the time, method, and place of conducting any
proceeding for any remedy available to the Property Trustee or to direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, including the right to direct the Property Trustee to exercise the
remedies available to it as the holder of the Convertible Debentures. The
Indenture provides that the Debenture Trustee shall give holders of Convertible
Debentures notice of all defaults or events of default within 30 days after
occurrence.
If the Property Trustee fails to enforce its rights under the Convertible
Debentures in respect of an Indenture Event of Default after a holder of record
of CRESTS has made a written request, such holder of record of CRESTS may, to
the extent permitted by applicable law, institute a legal proceeding against the
Company to enforce the Property Trustee's rights under the Convertible
Debentures. In addition, if the Company fails to pay interest or principal on
the Convertible Debentures on the date such interest or principal is otherwise
payable, and such failure to pay is continuing, a holder of CRESTS may institute
a
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Direct Action after the respective due date specified in the Convertible
Debentures. In connection with such a Direct Action, the Company will have the
right under the Indenture to set off any payment made to such holder by the
Company. The holders of CRESTS will not be able to exercise directly any other
remedy available to the holders of the Convertible Debentures.
LIMITED PURPOSE OF TRUST
The CRESTS evidence a beneficial ownership interest in the Trust, and the
Trust exists for the sole purpose of issuing the Trust Securities and investing
the proceeds thereof in Convertible Debentures. A principal difference between
the rights of a holder of CRESTS and a holder of Convertible Debentures is that
a holder of Convertible Debentures is entitled to receive from the Company the
principal amount of and interest accrued on Convertible Debentures held, while a
holder of CRESTS is entitled to receive Distributions from the Trust (or from
the Company under the Guarantee) if and to the extent the Trust has funds
available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Trust involving the liquidation of the Convertible Debentures, the holders
of the CRESTS will be entitled to receive, out of assets held by the Trust,
subject to the rights of creditors of the Trust, if any, the liquidation
distribution in cash. See "Description of the CRESTS--Liquidation Distribution
Upon Dissolution." Upon any voluntary or involuntary liquidation or bankruptcy
of the Company, the Property Trustee, as holder of the Convertible Debentures,
would be a subordinated creditor of the Company, subordinated in right of
payment to all Senior Indebtedness as set forth in the Indenture, but entitled
to receive payment in full of principal and interest before any stockholders of
the Company receive payments or distributions. Because the Company is the
guarantor under the Guarantee, and pursuant to the Indenture, has agreed to pay
for all costs, expenses and liabilities of the Trust (other than the Trust's
obligations to the holders of the CRESTS), the positions of a holder of CRESTS
and a holder of the Convertible Debentures relative to other creditors and to
stockholders of the Company in the event of liquidation or bankruptcy of the
Company would be substantially the same.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
PROSPECTIVE HOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF ACQUIRING, HOLDING, OR DISPOSING OF THE CRESTS
IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AND THE CONSEQUENCES UNDER FEDERAL,
STATE, LOCAL AND FOREIGN TAX LAWS.
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BOOK-ENTRY ISSUANCE
DTC acts as securities depositary for the CRESTS and, if distributed to
holders of CRESTS in connection with the liquidation of the Trust as a result of
the occurrence of a Special Event, the Convertible Debentures. The CRESTS and
the Convertible Debentures are issued only as fully-registered securities
registered in the name of DTC or its nominee (each, a "Global Security"), in
each case for credit to an account of a direct or indirect participant in DTC as
described below.
DEPOSITARY PROCEDURES
DTC has advised the Trust and the Company that DTC is a limited-purpose
trust company created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interest and transfer of ownership interest of each actual purchaser
of each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
DTC has also advised the Trust and the Company that purchases of CRESTS or
Convertible Debentures within the DTC system must be made by or through
Participants, which will receive a credit for the CRESTS or Convertible
Debentures on DTC's records. The ownership interest of each actual purchaser of
each CRESTS and each Convertible Debenture is in turn to be recorded on the
Participants' and Indirect Participants' records, including Euroclear and CEDEL.
Owners of interest will not receive written confirmation from DTC of their
purchases, but owners of interest are expected to receive written confirmations
providing details of the transactions, as well as periodic statements of their
holdings, from the Participants or Indirect Participants through which the
owners of interest purchased CRESTS or Convertible Debentures. Transfers of
ownership interests in the CRESTS or Convertible Debentures are to be
accomplished by entries made on the books of Participants or Indirect
Participants acting on behalf of owners of interest. Except as described below,
owners of interests do not receive physical delivery of certificates
representing their ownership interests in the CRESTS or Convertible Debentures
and are not be considered the registered owners or holders thereof for any
purpose.
The laws of some states may require that certain persons take physical
delivery in certificated form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Certificate to such persons
are limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in a Global Certificate to
pledge such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests. For certain
other restrictions on the transferability of the CRESTS, see "--Exchange of
Book-Entry CRESTS for Certificated CRESTS."
Payments in respect of the CRESTS and the Convertible Debentures are payable
by the Property Trustee and the Debenture Trustee, respectively, to DTC in its
capacity as the registered holder. The Property Trustee and the Debenture
Trustee will treat the persons in whose names the CRESTS and the Convertible
Debentures, respectively, including the Global Certificates, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Property Trustee nor
any agent thereof has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
Global Certificates, or for
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maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Certificates or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Trust and the Company that its current practice, upon receipt of any
payment in respect of securities such as the CRESTS or the Convertible
Debentures, is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of CRESTS or Convertible Debentures are
governed by standing instructions and customary practices and are the
responsibility of the Participants or the Indirect Participants and are not be
the responsibility of DTC, the Property Trustee, the Debenture Trustee or the
Trust. None of the Trust, the Property Trustee or the Debenture Trustee are
liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the CRESTS or the Convertible Debentures, and the Trust,
the Property Trustee and the Indenture Trustee may conclusively rely on and are
protected in relying on instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear or CEDEL participants, interests
in the Global Certificates will trade in DTC's Same-Day Funds Settlement System
and secondary market trading activity in such interests will therefore settle in
immediately available funds, subject in all cases to the rules and procedures of
DTC and its Participants. Transfers between Participants in DTC are effected in
accordance with DTC's procedures, and are settled in same-day funds. Transfers
between participants in Euroclear or CEDEL are effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or CEDEL participants, on the other hand, are effected through DTC in
accordance with DTC's rules on behalf of Euroclear or CEDEL, as the case may be,
by its respective depositary; however, such cross-market transactions will
require delivery of instructions to Euroclear or CEDEL, as the case may be, by
the counterparty in such system in accordance with the rules and procedures and
within the established deadlines (Brussels time) of such system. Euroclear or
CEDEL, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in
the relevant Global Certificates in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Euroclear participants and CEDEL participants may not deliver instructions
directly to the depositories for Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Certificate from a
Participant in DTC are credited, and any such crediting are reported to the
relevant Euroclear or CEDEL participant, during the securities settlement
processing day (which must be a business day for Euroclear and CEDEL)
immediately following the settlement date of DTC. Cash received in Euroclear or
CEDEL as a result of sales of interests in a Global Certificate by or through a
Euroclear or CEDEL participant to a Participant in DTC are received with value
on the settlement date of DTC but are available in the relevant Euroclear or
CEDEL cash account only as of the business day for Euroclear or CEDEL following
DTC's settlement date.
DTC has advised the Trust and the Company that it will take any action
permitted to be taken by a holder of CRESTS only at the direction of one or more
Participants to whose account with DTC interests in the Global Certificates are
credited. However, if there is an Indenture Event of Default, DTC reserves the
right to exchange the Global Certificates for CRESTS or Convertible Debentures,
as applicable, in certificated form and to distribute such CRESTS or Convertible
Debentures to its Participants.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Trust and the
Company believe to be reliable, but neither the Trust nor the Company takes
responsibility for the accuracy thereof.
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Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the CRESTS or the Convertible Debentures
among participants in DTC, Euroclear and CEDEL, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Trust nor the Property Trustee will have
any responsibility for the performance by DTC, Euroclear or CEDEL or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY CRESTS FOR CERTIFICATED CRESTS
A Global Certificate is exchangeable for CRESTS or Convertible Debentures,
as applicable, in registered certificated form if (i) DTC (x) notifies the Trust
(in the case of CRESTS) or the Company (in the case of Convertible Debentures)
that it is unwilling or unable to continue as depositary for the Global
Certificate and the Trust or the Company, as applicable, thereupon fails to
appoint a successor depositary or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company in its sole discretion
elects to cause the issuance of the CRESTS in certificated form or (iii) there
shall have occurred and be continuing an Indenture Event of Default or, in the
case of CRESTS, any event which after notice or lapse of time or both would be a
Trust Enforcement Event. In all cases, certificated CRESTS or Convertible
Debentures delivered in exchange for any Global Certificate or beneficial
interests therein are registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary in accordance with
its customary procedures.
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ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to ERISA and individual
retirement accounts and Keogh plans subject to Section 4975 of the Code
("Plans"), as well as entities whose assets include "plan assets" by reason of
any Plan's investment in such entities (a "Plan Investor"), may purchase CRESTS,
subject to the investing fiduciary's determination that the investment in CRESTS
satisfies ERISA's fiduciary standards and other requirements applicable to
investments by the Plan Investor.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) (the "DOL Regulation") concerning the definition of what constitutes
the assets of a Plan. The DOL Regulation provides that as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a plan makes an "equity" investment are deemed
for purposes of ERISA to be assets of the investing plan unless certain
exceptions apply. There can be no assurance that any of the exceptions set forth
in the DOL regulation will apply to the purchase of CRESTS offered hereby and,
as a result, the assets of a Plan or other Plan Investor could be considered to
include an undivided interest in the Convertible Debentures held by the Trust.
The Company and/or any of its affiliates may be considered a "party in
interest" (within the meaning of ERISA) or a "disqualified person" (within the
meaning of Section 4975 of the Code) with respect to certain Plans and other
Plan Investors. The acquisition and ownership of CRESTS by a Plan or other Plan
Investor and the conversion of the CRESTS into Lodgian Common Stock may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless such CRESTS are acquired pursuant to and in accordance with an
applicable exemption. As a result, Plans and other Plan Investors with respect
to which the Company or any of its affiliates is a party in interest or a
disqualified person should not acquire CRESTS unless such CRESTS are acquired
pursuant to and in accordance with an applicable prohibited transaction
exemption.
ANY PURCHASER OR HOLDER OF THE CRESTS OR ANY INTEREST THEREIN WILL BE DEEMED
TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (I) THE
PURCHASER AND HOLDER IS NOT A PLAN OR ANY ENTITY WHOSE UNDERLYING ASSETS INCLUDE
"PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND IS NOT
PURCHASING SUCH SECURITIES ON BEHALF OF OR WITH "PLAN ASSETS" OF ANY PLAN OR
(II) BY REASON OF THE APPLICATION OF ONE OR MORE STATUTORY OR ADMINISTRATIVE
EXEMPTIONS FROM THE PROHIBITED TRANSACTION RULES OF SECTION 406 OF ERISA AND
SECTION 4975 OF THE CODE, ITS PURCHASE AND HOLDING OF CRESTS WILL NOT
CONSTITUTE, CAUSE OR RESULT IN THE OCCURRENCE OF A NON-EXEMPT PROHIBITED
TRANSACTION WITHIN THE MEANING OF SECTION 406 OF ERISA OR SECTION 4975 OF THE
CODE. ANY PLANS OR OTHER ENTITIES WHOSE ASSETS INCLUDE PLAN ASSETS SUBJECT TO
ERISA OR SECTION 4975 OF THE CODE PROPOSING TO ACQUIRE CRESTS SHOULD CONSULT
WITH THEIR OWN COUNSEL.
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SELLING SHAREHOLDERS
The CRESTS were originally issued by the Trust and sold by NationsBanc
Montgomery Securities LLC (the "Initial Purchaser"), in a transaction exempt
from the registration requirements of the Securities Act, to persons reasonably
believed by such Initial Purchaser to be "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act). The Selling Shareholders may
from time to time offer and sell pursuant to this Prospectus any or all of the
CRESTS, any Convertible Debentures and Lodgian Common Stock issued upon
conversion of the CRESTS. Because the Selling Shareholders may offer some or all
of their CRESTS which they hold pursuant to the offering contemplated by this
Prospectus, and because this offering is not underwritten, no estimate can be
given as to the number of CRESTS that will be held by the Selling Shareholders
after completion of this offering. The term Selling Shareholder includes,
without duplication, the holders listed below and the beneficial owners of the
CRESTS and their transferees, pledgees, donees or other successors.
The following table sets forth information with respect to the Selling
Shareholders of the CRESTS as of July 6, 1999, and has been provided to the
Trust and the Company by The Depository Trust Company.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF SELLING SHAREHOLDERS CRESTS
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
AFTRA Health Fund.................................................................................. 17,000
Banc of America Securities LLC..................................................................... 265,000
Capital Markets Transactions, Inc.................................................................. 385,000
Deutsche Bank Securities Inc....................................................................... 710,000
Hamilton Partners Limited.......................................................................... 225,000
KA Investments LDC................................................................................. 150,000
Lonestar Partners, L.P............................................................................. 50,000
MainStay Convertible Fund.......................................................................... 173,000
NMS Services, Inc.................................................................................. 300,000
SoundShore Holdings Ltd............................................................................ 45,000
-------------
Total.......................................................................................... 2,170,000
</TABLE>
None of the Selling Shareholders has, or within the past three years has
had, any position, office or other material relationship with the Trust or the
Company or any of their predecessors or affiliates, except that NationsBanc
Montgomery Securities LLC acted as an Initial Purchaser in the Original Offering
and it or its affiliates have provided, and may continue to provide, investment
banking or financial advisory services to the Company. Because the Selling
Shareholders may, pursuant to this Prospectus, offer all or some portion of the
CRESTS, the Convertible Debentures or the Lodgian Common Stock issuable upon
conversion of the CRESTS, no estimate can be given as to the amount of the
CRESTS, the Convertible Debentures or the Lodgian Common Stock issuable upon
conversion of the CRESTS that will be held by the Selling Shareholders upon
termination of any such sales. In addition, the Selling Shareholders identified
above may have sold, transferred or otherwise disposed of all or a portion of
their CRESTS since the date on which they provided the information regarding
their CRESTS pursuant to transactions exempt from the registration requirements
of the Securities Act.
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PLAN OF DISTRIBUTION
The Offered Securities may be sold from time to time to purchasers directly
by the Selling Shareholders. Alternatively, the Selling Shareholders may from
time to time offer the Offered Securities to or through underwriters,
broker-dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling Shareholders
or the purchasers of such securities for whom they may act as agents. The
Selling Shareholders and any underwriters, broker-dealers or agents that
participate in the distribution of Offered Securities may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of such securities and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker/dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Offered Securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of the Offered Securities may be effected in transactions (which may
involve crosses or block transactions) (i) on any national securities exchange
or quotation service on which the Offered Securities may be listed or quoted at
the time of sale, (ii) in the over-the-counter market, (iii) in transactions
otherwise than on such exchanges or services or in the over-the-counter market
or (iv) through the writing of options. In connection with sales of the Offered
Securities or otherwise, the Selling Shareholders may enter into hedging
transactions with broker-dealers, which may in turn engage in short sales of the
Offered Securities in the course of hedging the positions they assume. The
Selling Shareholders may also sell Offered Securities short and deliver Offered
Securities to close out such short positions, or loan or pledge Offered
Securities to broker-dealers that in turn may sell such Securities. At the time
a particular offering of the Offered Securities is made, a Prospectus
Supplement, if required, will be distributed which will set forth the aggregate
amount and type of Offered Securities being offered and the terms of the
offering, including the name or names of any underwriters, broker-dealers or
agents, any discounts, commissions and other terms constituting compensation
from the Selling Shareholders and any discounts, commissions or concessions
allowed or reallowed or paid to broker-dealers.
Pursuant to the Registration Rights Agreement, the Company is required to
use its reasonable best efforts to keep the Registration Statement to which this
Prospectus forms a part continuously effective for a period of two years from
its effective date or such shorter period that will terminate upon the earlier
of the date on which the Offered Securities shall have been sold pursuant to the
Registration Statement or the date on which the Offered Securities are permitted
to be freely sold or distributed to the public pursuant to any exemption from
the registration requirements of the Securities Act (including in reliance on
Rule 144(k) but excluding in reliance on Rule 144A under the Securities Act).
Notwithstanding the foregoing obligations, the Company may, under certain
circumstances, postpone or suspend the filing or the effectiveness of the
Registration Statement (or any amendments or supplements thereto) or the sale of
Offered Securities.
To comply with the securities laws of certain jurisdictions, if applicable,
the Offered Securities will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the Offered Securities may not be offered or sold unless they
have been registered or qualified for sale in such jurisdictions or any
exemption from registration or qualification is available and is complied with.
The Selling Shareholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Offered Securities by the
Selling Shareholders. The foregoing may affect the marketability of such
securities.
Pursuant to the Registration Rights Agreement, all expenses of the
registration of the Offered Securities will be paid by the Company, including,
without limitation, SEC filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling Shareholders
will
117
<PAGE>
pay all underwriting discounts and selling commissions, if any. The Selling
Shareholders will be indemnified by the Company and the Trust, jointly and
severally against certain civil liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection therewith.
The Company and the Trust will be indemnified by the Selling Shareholders
severally against certain civil liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection therewith.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the CRESTS will
be passed upon for the Trust by Richards, Layton & Finger, P.A., Wilmington,
Delaware, special Delaware counsel to the Company and the Trust. The validity of
the Convertible Debentures, the Guarantee and the Common Stock issuable upon
conversion of the Debentures will be passed upon for the Company and the Trust
by Cadwalader, Wickersham & Taft.
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've
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 memorandum, 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.
118
<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,
27,937,057 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............ $ 0.25 $ 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, EXCEPT SHARE DATA)
<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............................................. 2,554 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 15,741 (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 interim
financial information 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.
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--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.
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.
F-8
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-9
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
F-10
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-11
<PAGE>
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. MERGER, ACQUISITIONS AND RELATED ITEMS (CONTINUED)
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>
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 for income taxes for the Company is as follows (in thousands):
<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.................................................... 1,239 (115) 1,354 413 (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 securities:
Minority interest-preferred redeemable securities....... -- 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 years 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
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 (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>
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 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 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 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 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 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 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 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 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 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 EVENT:
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 the event of a successful merger, will owe
investment bankers an additional amount totaling $2,100,000. This amount has not
been accrued in the accompanying financial statements.
F-48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE ISSUER OR ANY OF THEIR
AGENTS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE ISSUER SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary.......................................... 1
Risk Factors..................................... 14
Use of Proceeds.................................. 25
Market for Registrant's Common Equity and Related
Stockholder Matters............................ 25
Ratio of Earnings to Fixed Charges............... 25
Accounting Treatment............................. 25
Capitalization................................... 26
Unaudited Pro Forma Consolidated Financial
Information.................................... 27
Selected Historical Financial Information of
Lodgian........................................ 30
Selected Historical Financial Information of
Impac.......................................... 33
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 34
Business......................................... 44
Management....................................... 57
Security Ownership of Certain Beneficial Owners
and Management................................. 63
Certain Relationships and Related Transactions... 65
Description of Certain Indebtedness.............. 66
Description of Capital Stock..................... 77
Lodgian Capital Trust I.......................... 78
Description of the Crests........................ 80
Description of the Convertible Debentures........ 95
Description of the Guarantee..................... 106
Relationship Among the Crests, the Convertible
Debentures and the Guarantee................... 109
Certain U.S. Federal Income Tax Considerations... 111
Book-Entry Issuance.............................. 112
ERISA Considerations............................. 115
Selling Shareholders............................. 116
Plan of Distribution............................. 117
Legal Matters.................................... 118
Experts.......................................... 118
</TABLE>
3,500,000 SHARES
LODGIAN CAPITAL TRUST I
7% CONVERTIBLE REDEEMABLE
EQUITY STRUCTURED TRUST
SECURITIES(SM) ("CRESTS(SM)")
(LIQUIDATION AMOUNT $50 PER
CRESTS)
GUARANTEED TO THE EXTENT SET FORTH
HEREIN BY AND CONVERTIBLE INTO THE
COMMON STOCK OF
LODGIAN, INC.
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 26,636
Legal Fees and Expenses*.......................................... $ 75,000
Accounting Fees and Expenses*..................................... $ 25,000
Printing Expenses*................................................ $ 70,000
Blue Sky Qualification Fees and Expenses.......................... $ 0
Transfer Agent, Registrar and Trustee Fees and Expenses........... $ 10,000
Miscellaneous Expenses............................................ $ 3,364
---------
Total*........................................................ $ 210,000
---------
---------
</TABLE>
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with the General Corporation Law of the State of Delaware
(being Chapter 1 of Title 8 of the Delaware Code), the Company's Restated
Certificate of Incorporation and Restated Bylaws provide for the indemnification
of, and advancement of expenses to, the directors, officers, employees, and
agents of the Company to the fullest extent permitted by Delaware law from time
to time and the Bylaws provide for various procedures relating thereto. Under
Delaware law, directors, officers, employees and agents of the Company may be
indemnified against amounts paid in judgments, settlements, penalties, fines and
expenses actually and reasonably incurred with respect to proceedings (other
than an action by or in the right of the Corporation, such as a "derivative
action") if they acted good faith and in a manner reasonably believed to be in,
or not opposed to, the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. A similar standard of care is applied in the case of a
derivative action, except that indemnification only extends to expenses
(including attorney's fees) incurred in connection with the defense or
settlement of such an action. However, court approval is required before there
can be any indemnification of expenses where the person seeking indemnification
has been found liable to the Company.
Under Delaware law, expenses incurred by an officer or director in defending
a civil or criminal proceeding shall be paid by the Company upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall be determined that the officer or director is not entitled to
indemnification.
Indemnification and advancement of expenses continues as to a person who has
ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
The Company may purchase and maintain an insurance policy insuring its
directors, officers, employees and agents against any liability for certain acts
and omissions while acting in their official capacity.
Pursuant to the Delaware Business Trust Act, a Delaware business trust has
the power to indemnify and hold harmless any trustee or beneficial owner or
other person from and against any and all claims and demands whatsoever, subject
to such standards and restrictions, if any, as are set forth in the governing
instrument of the business trust. Under the Declaration, the Company agreed to
indemnify each of the Regular Trustees of the Trust, their affiliates, any of
their respective officers, directors, shareholders, members, partners,
employees, representatives or agents and any officer, employee or agent of the
Trust or
II-1
<PAGE>
its affiliates (each an "Indemnified Person") who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Trust) against expenses
(including attorney fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Trust, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Additionally, the Company shall indemnify, to the full
extent permitted by law, any Indemnified Person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Trust to procure a judgment in its favor against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Trust and except that no such indemnification shall be
made in respect of any claim issue or matter as to which such person shall have
been adjudged to be liable to the Trust unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.
Additionally, the Declaration provides that no Indemnified Person shall be
liable, responsible or accountable in damages or otherwise to the Trust or any
officer, director, shareholder, partner, member, representative, employee or
agent of the Trust or the Trust's affiliates or other holder of any CRESTS or
common securities of the Trust (each a "Covered Person") for any loss, damage or
claim incurred by reason of any act or omission performed or omitted by such
Indemnified Person in good faith on behalf of the Trust and in a manner such
Indemnified Person reasonably believed to be within the scope of the authority
conferred on such Indemnified Person by the Declaration or by law, except that
an Indemnified Person shall be liable for any such loss, damage or claim
incurred by reason of such Indemnified Person's negligence or willful misconduct
with respect to such acts or omissions.
Pursuant to the Declaration, the Company agreed to indemnify the (i)
Property Trustee, (ii) the Delaware Trustee, (iii) any affiliate of the Property
Trustee and the Delaware Trustee, and (iv) any officers, directors,
shareholders, members, partners, employees, representatives, custodians,
nominees or agents of the Property Trustee and the Delaware Trustee (each of the
Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified
Person") for, and to hold each Fiduciary Indemnified Person harmless against,
any loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
the Trust thereunder, including the cost and expenses (including reasonable
legal fees and expenses) of defending itself against or investigating any claim
or liability in connection with the exercise or performance of any of its powers
or duties thereunder.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are either filed herewith or incorporated by
reference to documents previously filed as indicated below:
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement, dated June 9, 1998, by Lodgian Capital Trust I and NationsBanc Montgomery
Securities LLC (incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on
Form S-1, filed on July 14, 1999 (Registration Number 333-82859))
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of Lodgian, Inc. (incorporated by reference to Appendix 6 to the
Company's Registration Statement on Form S-4, as amended, filed on July 17, 1998 (Registration Number.
333-59315))
3.2 Restated Bylaws of Lodgian, Inc. (incorporated by reference to Appendix H to the Company's Registration
Statement on Form S-4, as amended, filed on July 17, 1998 (Registration Number 333-59315))
4.1 Indenture, dated as of July 23, 1999, by and among Lodgian Financing Corp., Lodgian, Inc., the
subsidiary guarantors named therein and Bankers Trust Company, as trustee (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration
Number 333-85235))
4.2 Registration Rights Agreement, dated as of July 20, 1999, by and among Lodgian Financing Corp.,
Lodgian, Inc., the subsidiary guarantors named therein and Morgan Stanley & Co. Incorporated, Lehman
Brothers Inc and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
4.4 Indenture, dated as of June 17, 1998, between Servico, Inc., Lodgian, Inc. and Wilmington Trust
Company, as Trustee (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement
on Form S-4, as amended, filed on July 17, 1998 (Registration Number 333-59315))
4.5 First Supplemental Indenture, dated as of June 17, 1998, between Servico, Inc., Lodgian, Inc. and
Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-4, as amended, filed on July 17, 1998 (Registration Number 333-59315))
4.6 Guarantee Agreement, dated as of June 17, 1998, between Servico, Inc., Lodgian, Inc. and Wilmington
Trust Company, as Guarantee Trustee (incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-4, as amended, filed on July 17, 1998 (Registration Number 333-59315))
4.7 Amended and Restated Declaration of Trust of Lodgian Capital Trust I, dated as of June 17, 1998,
between Servico, Inc., as Sponsor, David A. Buddemeyer, Charles M. Diaz and Phillip R. Hale, as Regular
Trustees, and Wilmington Trust Company, as Delaware Trust and Property Trustee (incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4, as amended, filed on
July 17, 1998 (Registration Number 333-59315))
4.8 Specimen Note (included as an exhibit to 4.1)
4.9 Specimen CRESTS (included as an exhibit to Exhibit 4.5)
4.10 Specimen Convertible Debenture (included as an exhibit to Exhibit 4.3)
5.1 Opinion of Richards, Layton & Finger, P.A. regarding the validity of the issuance of the CRESTS being
registered hereby
5.2 Opinion of Cadwalader, Wickersham & Taft regarding the validity of the issuance of the Convertible
Debentures, the Guarantees and the Common Stock being registered hereby
8.1 Tax opinion of Cadwalader, Wickersham & Taft (included in Exhibit 5.2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.1 Credit Agreement, dated as of July 23, 1999, among Lodgian Financing Corp, Lodgian, Inc., Impac Hotel
Group, LLC, Servico, Inc., and the other affiliate guarantors party thereto and the initial lenders and
initial issuing bank named therein and Morgan Stanley Senior Funding, Inc., as Administrative Agent and
Collateral Agent, and Morgan Stanley Senior Funding, Inc., as Co-Lead Arranger, Joint-Book Manager and
Syndication Agent, and Lehman Brothers Inc., as Co-Lead Arranger and Joint-Book Manager (to be filed by
amendment of the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration
Number 333-85235))
10.2 Security Agreement, dated July 23, 1999, from Lodgian Financing Corp., Servico, Inc., Impac Hotel
Group, LLC, and the other grantors referred to therein to Morgan Stanley Senior Funding, Inc., as
Collateral Agent (to be filed by amendment of the Company's Registration Statement on Form S-4, filed
on August 13, 1999 (Registration Number 333-85235))
10.3.1 Loan Agreement, dated December 8, 1998, between Sheraton Concord, Inc. and Banc One Capital Funding
Corporation (incorporated by reference to Exhibit 10.3.1 to the Company's Registration Statement on
Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.3.2 Guaranty and Indemnity Agreement, dated December 8, 1998, by Lodgian AMI, Inc., Penmoco, Inc. and
Island Motel Enterprises, Inc. in favor of Banc One Capital Funding Corporation (incorporated by
reference to Exhibit 10.3.2 to the Company's Registration Statement on Form S-4, filed on August 13,
1999 (Registration Number 333-85235))
10.3.3 Limited Guaranty and Indemnity Agreement dated December 8, 1998, by Lodgian, Inc. in favor of Banc One
Capital Funding Corporation (incorporated by reference to Exhibit 10.3.3 to the Company's Registration
Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.4.1 Loan Agreement, dated December 8, 1998, between Island Motel Enterprises, Inc., Penmoco, Inc. and Banc
One Capital Funding Corporation (incorporated by reference to Exhibit 10.4.1 to the Company's
Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.4.2 Guaranty and Indemnity Agreement, dated December 8, 1998, by Servico Concord, Inc. and Lodgian AMI,
Inc. in favor of Banc One Capital Funding Corporation (incorporated by reference to Exhibit 10.4.2 to
the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number
333-85235))
10.4.3 Limited Guaranty and Indemnity Agreement dated December 8, 1998, by Lodgian, Inc. in favor of Banc One
Capital Funding Corporation (incorporated by reference to Exhibit 10.4.3 to the Company's Registration
Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.5.1 Loan Agreement, dated December 8, 1998, between Lodgian AMI, Inc. and Banc One Capital Funding
Corporation (relating to Holiday Inn--Lancaster East) (incorporated by reference to Exhibit 10.5.1 to
the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number
333-85235))
10.5.2 Guaranty and Indemnity Agreement, dated December 8, 1998, by Servico Concord, Inc., Penmoco, Inc. and
Island Motel Enterprises, Inc. in favor of Banc One Capital Funding Corporation (incorporated by
reference to Exhibit 10.5.2 to the Company's Registration Statement on Form S-4, filed on August 13,
1999 (Registration Number 333-85235))
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.5.3 Limited Guaranty and Indemnity Agreement dated December 8, 1998, by Lodgian, Inc. in favor of Banc One
Capital Funding Corporation (incorporated by reference to Exhibit 10.5.3 to the Company's Registration
Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.6.1 Loan Agreement, dated December 8, 1998, between Lodgian AMI, Inc. and Banc One Capital Funding
Corporation (relating to Holdiay Inn--International Airport) (incorporated by reference to Exhibit
10.6.1 to the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration
Number 333-85235))
10.6.2 Guaranty and Indemnity Agreement, dated December 8, 1998, by Servico Concord, Inc., Penmoco, Inc. and
Island Motel Enterprises, Inc. in favor of Banc One Capital Funding Corporation (incorporated by
reference to Exhibit 10.6.2 to the Company's Registration Statement on Form S-4, filed on August 13,
1999 (Registration Number 333-85235))
10.6.3 Limited Guaranty and Indemnity Agreement dated December 8, 1998, by Lodgian, Inc. in favor of Banc One
Capital Funding Corporation (incorporated by reference to Exhibit 10.6.3 to the Company's Registration
Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.7.1 Loan Agreement dated as of July 18, 1996, among GMAC Commercial Mortgage Corporation and Servico
Council Bluffs, Inc., Servico West Des Moines, Inc., Servico Omaha, Inc., Servico Omaha Central, Inc.,
and Servico Wichita, Inc. (incorporated by reference to Exhibit 10.7.1 to the Company's Registration
Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.7.2 Mortgage Note in the amount of $16.84 million, dated as of July 18, 1996, by Servico Council Bluffs,
Inc., Servico West Des Moines, Inc., Servico Omaha, Inc., Servico Omaha Central, Inc., and Servico
Wichita, Inc., in favor of GMAC Commercial Mortgage Corporation (incorporated by reference to Exhibit
10.7.2 to the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration
Number 333-85235))
10.8.1 Loan Agreement dated as of May 7, 1996, between GMAC Commercial Mortgage Corporation and Servico
Lansing, Inc. (incorporated by reference to Exhibit 10.8.1 to the Company's Registration Statement on
Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.8.2 Mortgage Note in the original amount of $5.687 million, dated as of May 7, 1996, by Servico Lansing,
Inc. in favor of GMAC Commercial Mortgage Corporation (incorporated by reference to Exhibit 10.8.2 to
the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number
333-85235))
10.9.1 Loan Agreement dated as of January 17, 1996, among GMAC Commercial Mortgage Corporation and Brecksville
Hospitality, L.P., Sioux City Hospitality, L.P. and 1075 Hospitality, L.P. (incorporated by reference
to Exhibit 10.9.1 to the Company's Registration Statement on Form S-4, filed on August 13, 1999
(Registration Number 333-85235))
10.9.2 Mortgage Note in the original amount of $12.91 million by Brecksville Hospitality, L.P., Sioux City
Hospitality, L.P. and 1075 Hospitality, L.P. in favor of GMAC Commercial Mortgage Corporation
(incorporated by reference to Exhibit 10.9.2 to the Company's Registration Statement on Form S-4, filed
on August 13, 1999 (Registration Number 333-85235))
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.10.1 Loan Agreement dated as of January 31, 1995, by and among Column Financial, Inc., and Servico Fort
Wayne, Inc., Washington Motel Enterprises, Inc., Servico Hotels I, Inc., Servico Hotels II, Inc.,
Servico Hotels III, Inc., Servico Hotels IV, Inc., New Orleans Airport Motel Associates, Ltd., Wilpen,
Inc., Hilton Head Motel Enterprises, Inc., and Moon Airport Hotel, Inc. (incorporated by reference to
Exhibit 10.10.1 to the Company's Registration Statement on Form S-4, filed on August 13, 1999
(Registration Number 333-85235))
10.10.2 Promissory Note in the original amount of $60.5 million, dated as of January 31, 1995, by Servico Fort
Wayne, Inc., Washington Motel Enterprises, Inc., Servico Hotels I, Inc., Servico Hotels II, Inc.,
Servico Hotels III, Inc., Servico Hotels IV, Inc., New Orleans Airport Motel Associates, Ltd., Wilpen,
Inc., Hilton Head Motel Enterprises, Inc., and Moon Airport Hotel, Inc. in favor of Column Financial,
Inc. (incorporated by reference to Exhibit 10.10.2 to the Company's Registration Statement on Form S-4,
filed on August 13, 1999 (Registration Number 333-85235))
10.11.1 Loan Agreement dated as of June 29, 1995, between Column Financial, Inc., and East Washington
Hospitality Limited Partnership (incorporated by reference to Exhibit 10.11.1 to the Company's
Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.11.2 Promissory Note in the original amount of $11.0 million, dated as of June 29, 1995, by East Washington
Hospitality Limited Partnership in favor of Column Financial, Inc. (incorporated by reference to
Exhibit 10.11.2 to the Company's Registration Statement on Form S-4, filed on August 13, 1999
(Registration Number 333-85235))
10.12.1 Loan Agreement, dated as of January 31, 1995 and amended as of June 29, 1995, between Column Financial,
Inc., and McKnight Motel, Inc. (incorporated by reference to Exhibit 10.12.1 to the Company's
Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.12.2 Promissory Note in the original amount of $3.9 million, dated as of January 31, 1995 and amended as of
June 29, 1995, by McKnight Motel, Inc. in favor of Column Financial, Inc. (incorporated by reference to
Exhibit 10.12.2 to the Company's Registration Statement on Form S-4, filed on August 13, 1999
(Registration Number 333-85235))
10.13.1 Loan Agreement, dated December 8, 1998, between Lodgian AMI, Inc. and Banc One Capital Funding
Corporation (relating to Holdiay Inn--Glen Burnie) (incorporated by reference to Exhibit 10.13.1 to the
Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.13.2 Guaranty and Indemnity Agreement, dated December 8, 1998, by Servico Concord, Inc., Penmoco, Inc. and
Island Motel Enterprises, Inc. in favor of Banc One Capital Funding Corporation (incorporated by
reference to Exhibit 10.13.2 to the Company's Registration Statement on Form S-4, filed on August 13,
1999 (Registration Number 333-85235))
10.13.3 Limited Guaranty and Indemnity Agreement dated December 8, 1998, by Lodgian, Inc. in favor of Banc One
Capital Funding Corporation (incorporated by reference to Exhibit 10.13.3 to the Company's Registration
Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
10.14.1 Loan Agreement, dated December 8, 1998, between Lodgian AMI, Inc. and Banc One Capital Funding
Corporation (relating to Holdiay Inn--Inner Harbor) (incorporated by reference to Exhibit 10.14.1 to
the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration Number
333-85235))
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.14.2 Guaranty and Indemnity Agreement, dated December 8, 1998, by Servico Concord, Inc., Penmoco, Inc. and
Island Motel Enterprises, Inc. in favor of Banc One Capital Funding Corporation (incorporated by
reference to Exhibit 10.14.2 to the Company's Registration Statement on Form S-4, filed on August 13,
1999 (Registration Number 333-85235))
10.14.3 Limited Guaranty and Indemnity Agreement dated December 8, 1998, by Lodgian, Inc. in favor of Banc One
Capital Funding Corporation (incorporated by reference to Exhibit 10.14.3 to the Company's Registration
Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
12.1 Statement Regarding Computation of Earnings to Fixed Charges (incorporated by reference to the
Company's Registration Statement on Form S-1, as amended, filed on July 14, 1999 (Registration Number
333-82859))
21.1 Subsidiaries of Lodgian, Inc. (incorporated by reference to the Company's Registration Statement on
Form S-1, as amended, filed on July 14, 1999 (Registration Number 333-82859))
23.1 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.1)
23.2 Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.2)
23.3 Consent of Ernst & Young L.L.P.
23.4 Consent of PricewaterhouseCoopers L.L.P.
24.1 Power of Attorney (incorporated by reference to the signature page of the Company's Registration
Statement on Form S-4, filed on August 13, 1999 (Registration Number 333-85235))
25.1 Form T-1: Statement of Eligibility of Bankers Trust Company (incorporated by reference to Exhibit
10.25.1 to the Company's Registration Statement on Form S-4, filed on August 13, 1999 (Registration
Number 333-85235))
25.2 Form T-1: Statement of Eligibility of Wilmington Trust Company to act as trustee under the CRESTS
Guarantee (incorporated by reference to the Company's Registration Statement on Form S-1, as amended,
filed on July 14, 1999 (Registration Number 333-82859))
25.3 Form T-1: Statement of Eligibility of Wilmington Trust Company to act as trustee under the CRESTS
Indenture (incorporated by reference to the Company's Registration Statement on Form S-1, as amended,
filed on July 14, 1999 (Registration Number 333-82859))
25.4 Form T-1: Statement of Eligibility of Wilmington Trust Company to act as trustee under the CRESTS
Amended and Restated Declaration of Trust (incorporated by reference to the Company's Registration
Statement on Form S-1, as amended, filed on July 14, 1999 (Registration Number 333-82859))
27.1 Financial Data Schedule (incorporated by reference to Exhibit 27.1 to the Company's Registration
Statement on Form S-1, filed on July 14, 1999 (Registration Number 333-82859))
</TABLE>
II-7
<PAGE>
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Lodgian, Inc.
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on the 27th day of August,
1999.
LODGIAN, INC.
*By: /s/ ROBERT S. COLE
-----------------------------------------
Robert S. Cole
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, Lodgian Capital
Trust I certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on the 27th day of August,
1999.
LODGIAN CAPITAL TRUST I
By: /s/ KENNETH R. POSNER
-----------------------------------------
Regular Trustee
By: /s/ MARK K. RAFUSE
-----------------------------------------
Regular Trustee
II-9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
PRINCIPAL EXECUTIVE OFFICER:
/s/ ROBERT S. COLE Director and Chief
- ------------------------------ Executive Officer August 30, 1999
Robert S. Cole
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ KENNETH R. POSNER Executive Vice President
- ------------------------------ and Chief Financial August 30, 1999
Kenneth R. Posner Officer
* Director
- ------------------------------ August 30, 1999
Joseph C. Calabro
* Director
- ------------------------------ August 30, 1999
John Lang
* Director
- ------------------------------ August 30, 1999
Michael A. Leven
* Director
- ------------------------------ August 30, 1999
Peter R. Tyson
* Director
- ------------------------------ August 30, 1999
Richard H. Weiner
*By: /s/ KENNETH R. POSNER
-------------------------
Kenneth R. Posner
Attorney-in-Fact
II-10
<PAGE>
Exhibit 5.1
[Letterhead of Richards, Layton & Finger]
August 26, 1999
Lodgian, Inc.
3445 Peachtree Road, N.E.
Suite 700
Atlanta, Georgia 30326
Re: Lodgian Capital Trust I
-----------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel for Lodgian, Inc., a Delaware
corporation (the "Company") and Lodgian Capital Trust I, a Delaware business
trust (the "Trust"), in connection with the matters set forth herein. At your
request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust, as filed with the office of
the Secretary of State of the State of Delaware (the "Secretary of State") on
May 15, 1998;
(b) The Declaration of Trust of the Trust, dated as of May 15, 1998,
among the Company and the trustees named therein;
(c) Amendment No. 1 to the Registration Statement (the "Registration
Statement") on Form S-1, including a preliminary prospectus with respect to
the Trust (the "Prospectus"), relating to the 7% Convertible Redeemable
Equity Structured Trust Securities-SM- of the Trust representing preferred
undivided beneficial interests in the assets of the Trust (each, a "Preferred
Security" and collectively, the "Preferred Securities"), to be filed by the
Company and the Trust with the Securities and Exchange Commission on or about
August 26, 1999;
(d) The Amended and Restated Declaration of Trust of the Trust, dated
as of June 17, 1998 (including Exhibits A and B thereto) (the "Declaration"),
among the Company, the
<PAGE>
Lodgian, Inc.
August 26, 1999
Page 2
trustees of the Trust named therein, and the holders, from time to time, of
the undivided beneficial interests in the assets of the Trust; and
(e) A Certificate of Good Standing for the Trust, dated August 26,
1999, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the Declaration.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed in paragraphs (a) through (e) above. In particular,
we have not reviewed any document (other than the documents listed in
paragraphs (a) through (e) above) that is referred to in or incorporated by
reference into the documents reviewed by us. We have assumed that there
exists no provision in any document that we have not reviewed that is
inconsistent with the opinions stated herein. We have conducted no
independent factual investigation of our own but rather have relied solely
upon the foregoing documents, the statements and information set forth
therein and the additional matters recited or assumed herein, all of which we
have assumed to be true, complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii)
the conformity with the originals of all documents submitted to us as copies
or forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Declaration
constitutes the entire agreement among the parties thereto with respect to
the subject matter thereof, including with respect to the creation, operation
and termination of the Trust, and that the Declaration and the Certificate of
Trust are in full force and effect and have not be amended, (ii) except to
the extent provided in paragraph 1 below, the due organization or due
formation, as the case may be, and valid existence in good standing of
each party to the documents examined by us under the laws of the jurisdiction
governing its organization or formation, (iii) the legal capacity of natural
persons who are parties to the documents examined by us, (iv) that each of the
parties to the documents examined by us has the power and authority to
execute and deliver, and to perform its obligations under, such documents, (v)
the due authorization, execution and delivery by all parties thereto of all
documents examined by us, (vi) the receipt by each Person to whom a Preferred
Security was issued by the Trust (collectively, the "Preferred Security
Holders") of a Preferred Security Certificate for such Preferred Security and
the payment for such Preferred Security, in accordance with the Declaration
and (vii) that the Preferred Securities have been issued and sold to the
Preferred Security Holders in accordance with the Declaration. We have not
participated in the preparation of the Registration Statement or the
Prospectus and assume no responsibility for their contents.
<PAGE>
Lodgian, Inc.
August 26, 1999
Page 3
This opinion is limited to the laws of the State of Delaware (excluding
the securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal
laws and rules and regulations relating thereto. Our opinions are rendered
only with respect to Delaware laws and rules, regulations and orders
thereunder which are currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good
standing as a business trust under the Business Trust Act.
2. The Preferred Securities of the Trust represent valid and, subject
to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable beneficial interests in the assets of the Trust.
3. The Preferred Security Holders, as beneficial owners of the Trust,
are entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware. We note that the Preferred Security
Holders may be obligated to make payments as set forth the Declaration.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. We hereby
consent to the use of our name under the heading "Legal Matters" in the
Prospectus. In giving the foregoing consents, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Richards, Layton & Finger
-----------------------------------
<PAGE>
Exhibit 5.2
[Letterhead of Cadwalader, Wickersham & Taft]
August , 1999
Lodgian Capital Trust I
Lodgian, Inc.
3445 Peachtree N.E.
Suite 700
Atlanta, Georgia 30326
Re: LODGIAN CAPITAL TRUST I
Ladies and Gentlemen:
We have acted as counsel to Lodgian, Inc., a Delaware corporation (the
"Company"), and Lodgian Capital Trust I, a Delaware statutory business trust
(the "Trust"), in connection with the preparation of a Registration Statement on
Form S-1 (the "Registration Statement") to be filed by the Company and the Trust
with the Securities and Exchange Commission (the "SEC") for the purpose of
registering under the Securities Act of 1933, as amended, the Convertible
Redeemable Equity Structured Trust Securities (the "CRESTS") of the Trust, the
7% Convertible Junior Subordinated Debentures (the "Debentures") of the Company,
the guarantee of the Company with respect to the CRESTS (the "Guarantee") and
the shares of the common stock, par value $.01 per share, of the Company (the
"Common Stock") issuable upon the conversion of the CRESTS and the Debentures.
In connection with this opinion, we have examined originals or copies, certified
or otherwise identified to our satisfaction, of (i) the Articles of
Incorporation and By-laws of the Company (ii) the Certificate of Trust (the
"Certificate of Trust") filed by the Trust with the Secretary of State of the
State of Delaware on May 15, 1998 (iii) the Amended and Restated Declaration of
Trust, dated as of June 17, 1998, with respect to the Trust (the "Declaration");
(iv) the form of the CRESTS; (v) the form of the Guarantee among the Company,
Servico, Inc., a Florida corporation ("Servico"), and Wilmington Trust Company,
as trustee (the "Trustee"), (vi) the form of the Debentures; (vii) the
Indenture, dated as of June 17, 1998, among the Company, Servico, and the
Trustee, as supplemented by the First Supplemental Indenture, dated as of June
17, 1998 among the company, Lodgian and the Trustee with respect to the
Debentures (the "Indenture") and (viii) the Registration Statement. We have also
examined originals or copies, certified, or otherwise identified to our
satisfaction, of
<PAGE>
Lodgian, Inc.
Lodgian Capital Trust I -2- August 24, 1999
such other documents, certificates, and records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural persons,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as copies and the authenticity of the originals of such copies.
We have also assumed the absence of any undisclosed amendments of supplements
to, or modifications or terminations of, any such documents and the absence of
any undisclosed waiver of any right or remedy contained in any such documents.
In examining documents executed by parties other than the Company or the Trust,
we have assumed that such parties had the power, corporate or otherwise, to
enter into and perform all obligations thereunder and have also assumed the due
authorization by all requisite action, corporate or otherwise, and execution and
delivery by such parties of such documents and that, except as set forth in
paragraphs (1) and (2) below, such documents constitute valid and binding
obligations of such parties. As to any facts material to the opinions expressed
herein which were not independently established or verified, we have relied upon
oral or written statements and representations of officers, trustees, and other
representatives of the Company, the Trust and others.
In rendering the opinions below, we do not express any opinion concerning the
laws of any jurisdiction other than the substantive laws of the State of New
York and, where expressly referred to below, the General Corporation Law of the
State of Delaware and the substantive federal laws of the United States of
America (in each case without regard to conflicts of law principles), and we
express no opinion as to whether a court outside the State of New York would
honor the choice of New York law in any agreement or instrument referred to
herein. Our opinions are limited to the laws and regulations within the scope of
this opinion in effect on the date of this opinion, and we offer no opinion as
to the possible application of the laws of other jurisdictions, unless they are
specifically referred to herein, and have no responsibility to advise you of
changes in such laws or regulations which may hereafter come to our attention.
Based upon and subject to the foregoing and other qualifications and limitations
set forth herein, we are of the opinion that:
1. The Debentures, when duly executed, delivered, authenticated and issued in
accordance with the Indenture and delivered and paid for as contemplated by the
Registration Statement, will be valid and binding obligations of the Company,
entitled to the benefits of the Indenture and enforceable against the Company in
accordance with their terms, except (i) as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar law now or
thereafter in effect relating to creditors' rights and remedies generally, (ii)
as to general principles of equity regardless of whether enforceability is
considered in a proceeding at law or in equity, (iii) to the extent that a
waiver of rights under any usury laws may be
<PAGE>
Lodgian, Inc.
Lodgian Capital Trust I -3- August 24, 1999
unenforceable and (iv) as rights to indemnity may be limited by federal or state
securities laws or the public policy underlying such laws.
2. The Guarantee is a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except (i) as such enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights and
remedies generally, (ii) as to general principles of equity regardless of
whether enforceability is considered in a proceeding at law or in equity, (iii)
to the extent that a waiver of rights under any usury laws may be unenforceable
and (iv) as rights to indemnity may be limited by federal or state securities
laws or the public policy underlying such laws.
3. The Common Stock, when issued and delivered by the Company upon conversion of
the CRESTS or the Debentures in accordance with their respective terms, will be
validly issued, fully paid and non-assessable.
4. The statements made in the Prospectus constituting a part of the Registration
Statement under the caption "Certain U.S. Federal Income Tax Considerations,"
insofar as such statements purport to summarize certain federal income tax laws
of the United States of America, constitute a fair summary of the principal
federal income tax consequences of an investment in the Exchange Notes.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the reference to this Firm in the Prospectus
constituting a part of the Registration Statement under the caption "Legal
Matters," without admitting that we are "experts" within the meaning of the
Securities Act or the rules and regulations of the Commission issued thereunder
with respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Cadwalader, Wickersham & Taft
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and in
the Selected Historical Financial Information of Lodgian, Inc. and to the use of
our report dated March 31, 1999, except for Note 15, as to which the date is
June 24, 1999 in Amendment No. 1 to the Registration Statement (Form S-1
Registration No. 333-82859) and related Prospectus of Lodgian, Inc. for the
registration of 3,500,000 shares of Lodgian Capital Trust I, 7% Convertible
Redeemable Equity Structured Trust Securities (the "CRESTS") and 8,170,050
shares of common stock issuable upon conversion of the CRESTS.
/s/ Ernst & Young LLP
Atlanta, Georgia
August 26, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Amendment No.
1 to Form S-1 of our reports dated April 10, 1998, except for Note 9 as to which
the date is December 11, 1998 related to the financial statements of Impac Hotel
Group, L.L.C., which appear in such Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
August 26, 1999
