<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NO. 1-11342
LODGIAN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-2093696
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3445 PEACHTREE ROAD, N.E., SUITE 700, 30326
ATLANTA, GA (Zip Code)
(Address of principal executive offices)
(Registrant's telephone number, including area code): (404) 364-9400
(Former name, former address and former fiscal year, if changed since last report): NOT APPLICABLE
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF DECEMBER 4, 2000
----- ----------------------------------
<S> <C>
Common 28,126,591
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
LODGIAN, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999....................................... 1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999........... 2
Condensed Consolidated Statements of Stockholders' Equity
for the Six Months Ended June 30, 2000 and for the Year
Ended December 31, 1999..................................... 3
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999......................... 4
Notes to Condensed Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 29
Item 2. Changes in Securities....................................... 29
Item 6. Exhibits and Reports on Form 8-K............................ 29
SIGNATURES............................................................ 31
</TABLE>
i
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 29,887 $ 14,644
Restricted cash........................................... 3,527 2,692
Accounts receivable, net of allowances.................... 26,702 26,520
Inventories............................................... 8,882 9,190
Prepaid expenses and other current assets................. 11,318 9,984
---------- ----------
Total current assets.............................. 80,316 63,030
Property and equipment, net................................. 1,233,933 1,314,141
Deposits for capital expenditures........................... 18,607 12,357
Other assets, net........................................... 30,390 32,468
---------- ----------
$1,363,246 $1,421,996
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 29,334 $ 34,332
Accrued interest.......................................... 20,052 13,390
Other accrued liabilities................................. 46,905 42,783
Advance deposits.......................................... 3,101 2,384
Current portion of long-term obligations.................. 76,162 35,404
---------- ----------
Total current liabilities......................... 175,554 128,293
Long-term obligations, less current portion................. 833,207 856,675
Deferred income taxes....................................... 3,702 33,082
Commitments and contingencies............................... -- --
Minority interests:
Preferred redeemable securities (including related accrued
interest).............................................. 178,063 175,000
Other..................................................... 4,762 4,404
---------- ----------
Total liabilities................................. 1,195,288 1,197,454
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares
authorized; 28,247,869 and 28,130,325 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively........................................... 282 281
Additional paid-in capital................................ 263,205 262,760
Accumulated deficit....................................... (94,617) (37,587)
Accumulated other comprehensive loss...................... (912) (912)
---------- ----------
Total stockholders' equity........................ 167,958 224,542
---------- ----------
$1,363,246 $1,421,996
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Rooms....................................... $117,101 $114,879 $217,218 $211,663
Food and beverage........................... 36,445 37,056 67,949 69,126
Other....................................... 7,577 7,928 14,391 14,878
-------- -------- -------- --------
Total revenue....................... 161,123 159,863 299,558 295,667
-------- -------- -------- --------
Operating expenses:
Direct:
Rooms....................................... 31,898 30,858 60,499 57,122
Food and beverage........................... 25,465 26,433 48,683 50,541
Other....................................... 4,607 4,093 8,917 8,216
General, administrative and other............. 56,644 47,564 111,789 96,510
Depreciation and amortization................. 16,408 13,750 32,440 27,500
Impairment of long-lived assets............... 56,549 -- 66,162 --
Severance and restructuring expenses.......... 1,502 -- 1,502 --
-------- -------- -------- --------
Total operating expenses............ 193,073 122,698 329,992 239,889
-------- -------- -------- --------
(31,950) 37,165 (30,434) 55,778
Other income (expenses):
Interest income and other................... 300 469 527 817
Interest expense............................ (25,843) (18,209) (49,830) (37,139)
Loss on asset dispositions, net............. (98) -- (3) --
Minority interests:
Preferred redeemable securities............. (3,064) (3,457) (6,127) (6,814)
Other....................................... (236) (566) (543) (1,310)
-------- -------- -------- --------
(Loss) income before income taxes............. (60,891) 15,402 (86,410) 11,332
(Benefit) provision for income taxes.......... (20,703) 6,161 (29,380) 4,533
-------- -------- -------- --------
Net (loss) income............................. $(40,188) $ 9,241 $(57,030) $ 6,799
======== ======== ======== ========
(Loss) earnings per common share -- basic..... $ (1.43) $ 0.34 $ (2.04) $ 0.25
======== ======== ======== ========
(Loss) earnings per common share -- diluted... $ (1.43) $ 0.32 $ (2.04) $ 0.25
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER TOTAL
------------------- PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) LOSS EQUITY
---------- ------ ---------- ------------ ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998....................... 27,937,057 $278 $261,976 $ 23,106 $(1,593) $283,767
401(k) Plan contribution..... 143,160 2 547 -- -- 549
Exercise of stock options.... 30,000 1 119 -- -- 120
Tax benefit from exercise of
stock options.............. -- -- 20 -- -- 20
Director compensation........ 20,108 -- 98 -- -- 98
Net loss..................... -- -- -- (60,693) -- (60,693)
Currency translation
adjustments................ -- -- -- -- 681 681
--------
Comprehensive loss........... -- -- -- -- -- (60,012)
---------- ---- -------- -------- ------- --------
Balance at December 31,
1999....................... 28,130,325 281 262,760 (37,587) (912) 224,542
401(k) Plan contribution..... 111,388 1 418 -- -- 419
Director compensation........ 6,156 -- 27 -- -- 27
Net loss..................... -- -- -- (57,030) -- (57,030)
Currency translation
adjustments................ -- -- -- -- -- --
--------
Comprehensive loss........... -- -- -- -- -- (57,030)
---------- ---- -------- -------- ------- --------
Balance at June 30, 2000..... 28,247,869 $282 $263,205 $(94,617) $ (912) $167,958
========== ==== ======== ======== ======= ========
</TABLE>
The comprehensive loss for the three months ended June 30, 2000 was $40,188 and
the comprehensive income for the three and six months ended June 30, 1999 was
$9,179 and $6,737, respectively.
The data for the six months ended June 30, 2000 is unaudited.
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income......................................... $(57,030) $ 6,799
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 32,440 27,500
Loss on sale of assets, net............................ 3 --
Deferred income tax (benefits) provision............... (29,380) 4,533
Minority interests..................................... 3,607 --
Impairment of long-lived assets........................ 66,162 --
Other.................................................. 839 5,343
Changes in operating assets and liabilities:
Accounts receivable.................................. (182) (11,095)
Inventories.......................................... 308 128
Other current assets................................. (2,169) (5,479)
Accounts payable..................................... (4,998) (9,497)
Accrued liabilities.................................. 11,501 2,054
-------- --------
Net cash provided by (used in) operating activities......... 21,101 20,286
-------- --------
INVESTING ACTIVITIES:
Capital expenditures, net................................. (51,437) (44,259)
Acquisitions of property and equipment.................... -- (1,929)
Proceeds from sale of assets.............................. 34,725 11,100
Net withdrawals (deposits) for capital expenditures....... (6,250) 588
-------- --------
Net cash provided by (used in) investing activities......... (22,962) (34,500)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... -- 60
Proceeds from issuance of long-term obligations........... 32,085 29,640
Principal payments on long-term obligations............... (14,795) (12,866)
Payments of deferred loan costs........................... -- (1,360)
Distributions to minority interests....................... (186) (123)
-------- --------
Net cash provided by (used in) financing activities......... 17,104 15,351
-------- --------
Net increase in cash and cash equivalents................... 15,243 1,137
Cash and cash equivalents at beginning of period............ 14,644 19,185
-------- --------
Cash and cash equivalents at end of period.................. $ 29,887 $ 20,322
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized.................... $ 41,282 $ 35,623
======== ========
Income taxes........................................... $ 427 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements include the accounts of
Lodgian, Inc. ("Lodgian" or the "Company"), its wholly-owned subsidiaries and
five partnerships in which Lodgian exercises control. Lodgian believes it has
control of partnerships when the Company manages and has control of the
partnerships' assets and operations, has the ability and authority to enter into
financing arrangements on behalf of the entity or to sell the assets of the
entity within reasonable business guidelines. One unconsolidated entity is
accounted for on the equity method. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accounting policies followed for quarterly financial reporting are the
same as those disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting primarily
of normal recurring adjustments, necessary to present fairly the financial
position of the Company as of June 30, 2000, and the results of its operations
for the three and six month periods ended June 30, 2000 and its cash flows for
the six months ended June 30, 2000. The results for interim periods are not
necessarily indicative of results for the entire year. While management believes
that the disclosures presented are adequate to make the information not
misleading, these financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
As previously reported in the Company's Form 10-K for the year ended
December 31, 1999, during the fourth quarter of 1999, the Company initiated an
internal review of its accounting records. The Company experienced significant
difficulty in the integration and conversion of information and accounting
systems subsequent to the merger of Servico, Inc. and Impac Hotel Group, LLC on
December 11, 1998 (the "Merger"). In addition, the Company determined that a
significant number of reconciliations involving cash, accounts receivable, fixed
assets, accounts payable and other accounts had not been completed during 1999.
As a result of these systems and reconciliation issues, the Company experienced
a significant delay in preparing its 1999 annual financial statements. Certain
charges were recorded in the fourth quarter of 1999 after the account
reconciliation process was completed in 2000.
Also, as previously reported in the Company's Form 10-K for the year ended
December 31, 1999, the Company concluded, after consultation with its prior
independent auditors that its internal controls for the preparation of interim
financial information did not provide an adequate basis for its prior
independent auditors to complete reviews of the 1999 quarterly financial
information in accordance with standards established by the American Institute
of Certified Public Accountants. The Company believes that certain charges that
were recorded in the fourth quarter of 1999 may relate to individual prior
quarters; however the Company does not have sufficient information to identify
all specific changes attributable to prior 1999 quarters.
The internal control weaknesses described above existed during the first
and second quarters of 2000 and also caused a significant delay in preparing the
Company's June 30, 2000 Form 10-Q. The Company has committed substantial
resources to mitigate the previously identified control weaknesses including
contracting with outside consulting accountants to ensure the Company has the
corporate financial resources needed to provide reasonable assurances that it
can comply with the record keeping and internal control requirements applicable
to SEC registrants. Management believes these efforts have enabled the Company
to produce reliable interim financial statements as of June 30, 2000 and for the
three and six months then ended. The Company is in the process of implementing a
plan which, if successful, will enable the Company to timely comply with the
financial statement reporting requirements applicable to SEC registrants by the
time it is
5
<PAGE> 8
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required to file its 2000 annual financial statements and will have
substantially developed and implemented an adequate control environment by this
date.
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.
Certain reclassifications have been made to prior year amounts In the
financial statements in order to conform to the current year presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator:
Net (loss) income............................. $(40,188) $ 9,241 $(57,030) $ 6,799
Effect of dilutive securities:
Minority interest-preferred redeemable
securities................................. -- 2,074 -- --
-------- ------- -------- -------
Numerator for diluted earnings per share...... $(40,188) $11,315 $(57,030) $ 6,799
======== ======= ======== =======
Denominator:
Denominator for basic earnings per
share-weighted-average shares.............. 28,192 27,080 27,956 26,909
Effect of dilutive securities:
Employee stock options........................ -- 176 -- --
Convertible preferred securities.............. -- 8,170 -- --
-------- ------- -------- -------
Denominator for dilutive earnings per
share-adjusted weighted-average shares..... 28,192 35,426 27,956 26,909
======== ======= ======== =======
Basic earnings per share:
Net (loss) income............................. $ (1.43) $ 0.34 $ (2.04) $ 0.25
======== ======= ======== =======
Diluted earnings per share:
Net (loss) income............................. $ (1.43)(1) $ 0.32 $ (2.04)(1) $ 0.25(1)
======== ======= ======== =======
</TABLE>
(1) The computation of diluted earnings per share did not include shares
associated with the assumed conversion of the Convertible Redeemable Equity
Structure Trust Securities (CRESTS), employee stock options and contingent
shares in connection with the Merger because their inclusion would have been
antidilutive.
3. ASSETS HELD FOR SALE
As discussed in footnote 7. and Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company has
adopted strategic plans to reduce the size of the Company's non-core hotel
portfolio and reduce the level of overall debt of the Company. In this regard,
the Company has identified and will continue to identify throughout 2000 and
2001 properties which will be classified as held for sale to meet these
objectives. In second quarter of 2000 the Company has recorded an impairment
charge of
6
<PAGE> 9
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$56.6 million related to properties identified as held for sale at June 30,
2000. Impairment charges for the six month period ended June 30, 2000 were $66.2
million. The Company's first quarter charge of $9.6 million related to revised
estimates of fair value for properties held for sale at December 31, 1999 and
the second quarter charge of $56.6 million related to the ten hotels sold to
Sunstone Investors, LLC on August 31, 2000. During the third quarter 2000 the
Company recaptured $10.7 million of impairment charges recorded in 1999 and 2000
as seven hotels previously considered held for sale as of December 31, 1999 are
no longer being actively marketed for sale. The Company may incur additional
impairment charges in the fourth quarter 2000 and in 2001 as it continues to
identify properties to be considered held for sale to meet the objectives
described.
Summary results of operations included in the Statement of Operations with
respect to the properties identified as held for sale at June 30, 2000 are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 2000
------------ ------------
<S> <C> <C>
Revenues.................................................. $ 33,614 $ 58,304
======== ========
Loss before income taxes.................................. $(46,178)(1) $(55,604)(1)
======== ========
</TABLE>
(1) Includes impairment charge of $56.6 million and $66.2 million,
respectively.
Included in property and equipment, net at June 30, 2000 is $243.3 million
related to properties identified as held for sale at June 30, 2000.
4. COMMITMENTS AND CONTINGENCIES
In July 1999, a contractor hired by Servico to perform work on hotels in
New York, Illinois and Texas filed a complaint against the Company in the
Supreme Court of the State of New York, claiming breach of contract and quantum
meruit, among other claims. The contractor seeks damages totaling $80 million,
including $60 million punitive damages. The Company answered the complaint
asserting counterclaims aggregating $20 million and successfully filed a motion
to dismiss the claims related to two properties located in Illinois and Texas.
In October 1999, a subcontractor filed a lawsuit in Texas against the above
contractor and the Company. The Company has filed an answer and cross-claim
against the contractor in the amount of $2.8 million. In February 2000, the
contractor filed a lawsuit in Texas claiming over $3 million in actual damages
and an undisclosed amount of punitive damages. The Company answered the
complaint and asserted a counterclaim. The Company has also filed a lawsuit
against the contractor in Federal District Court in Illinois, seeking $2
million. The contractor has filed an answer and counterclaim aggregating $2.8
million in actual damages and $10 million in punitive damages. The Company
believes that it has valid defenses and counterclaims in these matters and that
the outcome will not have a material adverse effect on its financial position or
results of operations.
On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an
arbitration claim against the Company claiming breach of contract relating to a
January 4, 1992 contract. WH claims entitlement to profit participation relating
to the sale of certain hotel properties by an affiliate and predecessor of the
Company. Although the Demand for Arbitration does not make a specific damages
demand, it is believed that WH is claiming approximately $1,100,000 from the
Company. Lodgian believes it has meritorious defenses to this matter and is
defending it vigorously.
The Company is a party to other legal proceedings arising in the ordinary
course of business, the impact of which would not, either individually or in the
aggregate, in management's opinion, have a material adverse effect on financial
condition or results of operations.
7
<PAGE> 10
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and derivatives used for
hedging purposes. SFAS No. 133 requires that entities recognize all derivative
financial instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133, as
amended by SFAS No. 137 and 138, is effective for the Company in its first
fiscal quarter 2001. The Company doesn't presently believe that the adoption of
SFAS No. 133 will have a significant effect on its financial position or its
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which addresses revenue recognition issues. SAB 101 is required to
be adopted for the quarter ending December 31, 2000. The Company is currently
assessing the types of transactions that may be impacted by this pronouncement.
The impact of SAB 101 on the financial statements of the Company is not expected
to be material.
6. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the Company's sale of $200 million of 12 1/4% Senior
Subordinated Notes (the "Notes") in July 1999, certain of the Company's
subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's
obligations to pay principal and interest with respect to the Notes. Each
Subsidiary Guarantor is wholly-owned and management has determined that separate
financial statements for the Subsidiary Guarantors are not material to
investors. The subsidiaries of the Company that are not Subsidiary Guarantors
are referred to in the note as the "Non-Guarantor Subsidiaries".
The following supplemental condensed consolidating financial statements
present balance sheets as of June 30, 2000 and December 31, 1999 and statements
of operations for the three and six months ended June 30, 2000 and 1999 and the
statements of cash flows for the six months ended June 30, 2000 and 1999. In the
condensed consolidating financial statements, Lodgian, Inc. (the "Parent")
accounts for its investments in wholly owned subsidiaries using the equity
method.
8
<PAGE> 11
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......... $ 59 $ 22,326 $ 7,502 $ -- $ 29,887
Restricted cash.................... -- -- 3,527 -- 3,527
Accounts receivable, net of
allowances...................... -- 11,422 15,280 -- 26,702
Inventories........................ -- 3,712 5,170 -- 8,882
Prepaid expenses and other current
assets.......................... 2,254 492 8,572 -- 11,318
--------- --------- --------- -------- ----------
Total current assets....... 2,313 37,952 40,051 -- 80,316
Property and equipment, net.......... 587,582 646,351 -- 1,233,933
Deposits for capital expenditure..... -- -- 18,607 -- 18,607
Investment in consolidated
entities........................... (264,706) -- -- 264,706 --
Due from (to) affiliates............. 438,905 (218,663) (220,242) -- --
Other assets, net.................... 36 17,592 12,762 -- 30,390
--------- --------- --------- -------- ----------
$ 176,548 $ 424,463 $ 497,529 $264,706 $1,363,246
========= ========= ========= ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................... $ -- $ 12,957 $ 16,377 $ -- $ 29,334
Accrued interest................... -- 18,059 1,993 -- 20,052
Other accrued liabilities.......... -- 13,040 33,865 -- 46,905
Advance deposits................... -- 1,447 1,654 -- 3,101
Current portion of long-term
obligations..................... -- 62,400 13,762 -- 76,162
--------- --------- --------- -------- ----------
Total current
liabilities.............. -- 107,903 67,651 -- 175,554
Long-term obligations, less current
portion............................ 3,976 394,762 434,469 -- 833,207
Deferred income taxes................ 3,702 -- -- -- 3,702
Commitments and contingencies........ -- -- -- -- --
Minority interests:
Preferred redeemable securities
(including related accrued
interest)....................... -- -- 178,063 -- 178,063
Other.............................. -- -- 4,762 -- 4,762
--------- --------- --------- -------- ----------
Total liabilities.......... 7,678 502,665 684,945 -- 1,195,288
--------- --------- --------- -------- ----------
Stockholders' equity:
Common stock....................... 282 33 440 (473) 282
Additional paid-in capital......... 263,205 22,619 (41,447) 18,828 263,205
Accumulated deficit................ (94,617) (99,942) (146,409) 246,351 (94,617)
Accumulated other comprehensive
loss............................ -- (912) -- -- (912)
--------- --------- --------- -------- ----------
Total stockholders'
equity................... 168,870 (78,202) (187,416) 264,706 167,958
--------- --------- --------- -------- ----------
$ 176,548 $ 424,463 $ 497,529 $264,706 $1,363,246
========= ========= ========= ======== ==========
</TABLE>
9
<PAGE> 12
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 59 $ 9,910 $ 4,675 $ -- $ 14,644
Restricted cash.................... -- -- 2,692 -- 2,692
Accounts receivable, net........... -- 8,257 18,263 -- 26,520
Inventories........................ -- 4,116 5,074 -- 9,190
Prepaid expenses and other current
assets.......................... 2,342 64 7,578 -- 9,984
--------- --------- --------- -------- ----------
Total current assets....... 2,401 22,347 38,282 -- 63,030
Property and equipment, net.......... -- 610,854 703,287 -- 1,314,141
Deposit for capital expenditures..... -- -- 12,357 -- 12,357
Investment in consolidated
entities........................... (208,123) -- -- 208,123 --
Due from (to) affiliates............. 467,811 (246,793) (221,018) -- --
Other assets, net.................... 136 18,762 13,570 -- 32,468
--------- --------- --------- -------- ----------
$ 262,225 $ 405,170 $ 546,478 $208,123 $1,421,996
========= ========= ========= ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ -- $ 13,471 $ 20,861 $ -- $ 34,332
Accrued interest................... -- 12,310 1,080 -- 13,390
Other accrued liabilities.......... -- 7,318 35,465 -- 42,783
Advance deposits................... -- 1,088 1,296 -- 2,384
Current portion long-term
obligations..................... -- 27,400 8,004 -- 35,404
--------- --------- --------- -------- ----------
Total current
liabilities.............. 61,587 66,706 -- 128,293
Long-term obligations, less current
portion............................ 3,689 411,761 441,225 -- 856,675
Deferred income taxes................ 33,082 -- -- -- 33,082
Minority interests:
Preferred redeemable securities.... -- -- 175,000 -- 175,000
Other.............................. -- -- 4,404 -- 4,404
Stockholder's equity:
Common stock....................... 281 33 440 (473) 281
Additional paid-in capital......... 262,760 22,619 (41,893) 19,274 262,760
Accumulated deficit................ (37,587) (89,918) (99,404) 189,322 (37,587)
Accumulated other comprehensive
loss............................ -- (912) -- -- (912)
--------- --------- --------- -------- ----------
Total stockholders' equity
(net).................... 225,454 (68,178) (140,857) 208,123 224,542
--------- --------- --------- -------- ----------
$ 262,225 $ 405,170 $ 546,478 $208,123 $1,421,996
========= ========= ========= ======== ==========
</TABLE>
10
<PAGE> 13
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms................................ $ -- $ 51,233 $ 65,868 $ -- $117,101
Food and beverage.................... -- 15,265 21,180 -- 36,445
Other................................ -- 3,063 4,514 -- 7,577
-------- -------- -------- ------- --------
Total revenue................ -- 69,561 91,562 -- 161,123
-------- -------- -------- ------- --------
Operating expenses:
Direct:
Rooms................................ -- 14,195 17,703 -- 31,898
Food and beverage.................... -- 10,628 14,837 -- 25,465
Other................................ -- 2,045 2,562 -- 4,607
General, administrative and other...... -- 23,416 33,228 -- 56,644
Depreciation and amortization.......... -- 6,328 10,080 -- 16,408
Impairment of long-lived assets........ -- -- 56,549 -- 56,549
Severance and restructuring charges.... -- -- 1,502 -- 1,502
-------- -------- -------- ------- --------
Total operating expenses..... -- 56,612 136,461 -- 193,073
-------- -------- -------- ------- --------
-- 12,949 (44,899) -- (31,950)
Other income (expenses):
Interest income and other............ -- -- 300 -- 300
Interest expense..................... -- (14,144) (11,699) -- (25,843)
Loss on asset dispositions, net...... -- (98) -- -- (98)
Equity in loss of consolidated
subsidiaries...................... (60,890) -- -- 60,890 --
Minority interests:
Preferred redeemable securities...... -- -- (3,064) -- (3,064)
Other................................ -- -- (236) -- (236)
-------- -------- -------- ------- --------
Loss before income taxes............... (60,890) (1,293) (59,598) 60,890 (60,891)
Benefit for income taxes............... (20,703) (440) (20,263) 20,703 (20,703)
-------- -------- -------- ------- --------
Net loss............................... $(40,187) $ (853) $(39,335) $40,187 $(40,188)
======== ======== ======== ======= ========
</TABLE>
11
<PAGE> 14
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms................................. $ -- $53,100 $ 61,779 $ -- $114,879
Food and beverage..................... -- 16,128 20,928 -- 37,056
Other................................. -- 3,366 4,562 -- 7,928
------- ------- -------- -------- --------
Total revenue................. -- 72,594 87,269 -- 159,863
------- ------- -------- -------- --------
Operating expenses:
Direct:
Rooms................................. -- 13,556 17,302 -- 30,858
Food and beverage..................... -- 11,772 14,661 -- 26,433
Other................................. -- 2,128 1,965 -- 4,093
General, administrative and other....... -- 23,342 24,222 -- 47,564
Depreciation and amortization........... -- 4,401 9,349 -- 13,750
------- ------- -------- -------- --------
Total operating expenses...... -- 55,199 67,499 -- 122,698
------- ------- -------- -------- --------
-- 17,395 19,770 -- 37,165
Other income (expenses):
Interest income and other............. -- -- 469 -- 469
Interest expense...................... -- (7,573) (10,636) -- (18,209)
Equity in income of consolidated
subsidiaries....................... 15,402 -- -- (15,402) --
Minority interests:
Preferred redeemable securities....... -- -- (3,457) -- (3,457)
Other................................. -- (3) (563) -- (566)
------- ------- -------- -------- --------
Income before income taxes.............. 15,402 9,819 5,583 (15,402) 15,402
Provision for income taxes.............. 6,161 2,963 3,198 (6,161) 6,161
------- ------- -------- -------- --------
Net income.............................. $ 9,241 $ 6,856 $ 2,385 $ (9,241) $ 9,241
======= ======= ======== ======== ========
</TABLE>
12
<PAGE> 15
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms................................ $ -- $ 96,534 $120,684 $ -- $217,218
Food and beverage.................... -- 29,186 38,763 -- 67,949
Other................................ -- 5,851 8,540 -- 14,391
-------- -------- -------- ------- --------
Total revenue................ -- 131,571 167,987 -- 299,558
-------- -------- -------- ------- --------
Operating expenses:
Direct:
Rooms................................ -- 27,187 33,312 -- 60,499
Food and beverage.................... -- 20,739 27,944 -- 48,683
Other................................ -- 3,987 4,930 -- 8,917
General, administrative and other...... -- 46,207 65,582 -- 111,789
Depreciation and amortization.......... -- 12,263 20,177 -- 32,440
Impairment of long-lived assets........ -- 8,800 57,362 -- 66,162
Severance and restructuring charges.... -- -- 1,502 -- 1,502
-------- -------- -------- ------- --------
Total operating expenses..... -- 119,183 210,809 -- 329,992
-------- -------- -------- ------- --------
-- 12,388 (42,822) -- (30,434)
Other income (expenses):
Interest income and other............ -- -- 527 -- 527
Interest expense..................... -- (27,573) (22,257) -- (49,830)
Loss on asset dispositions, net...... -- (3) -- -- (3)
Equity in loss of consolidated
subsidiaries...................... (86,410) -- -- 86,410 --
Minority interests:
Preferred redeemable securities...... -- -- (6,127) -- (6,127)
Other................................ -- -- (543) -- (543)
-------- -------- -------- ------- --------
Loss before income taxes............... (86,410) (15,188) (71,222) 86,410 (86,410)
Benefit for income taxes............... (29,380) (5,164) (24,216) 29,380 (29,380)
-------- -------- -------- ------- --------
Net loss............................... $(57,030) $(10,024) $(47,006) $57,030 $(57,030)
======== ======== ======== ======= ========
</TABLE>
13
<PAGE> 16
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms................................. $ -- $ 98,981 $112,682 $ -- $211,663
Food and beverage..................... -- 30,801 38,325 -- 69,126
Other................................. -- 6,529 8,349 -- 14,878
------- -------- -------- -------- --------
Total revenue................. -- 136,311 159,356 -- 295,667
------- -------- -------- -------- --------
Operating expenses:
Direct:
Rooms................................. -- 25,092 32,030 -- 57,122
Food and beverage..................... -- 22,160 28,381 -- 50,541
Other................................. -- 3,991 4,225 -- 8,216
General, administrative and other....... -- 45,110 51,400 -- 96,510
Depreciation and amortization........... -- 8,802 18,698 -- 27,500
------- -------- -------- -------- --------
Total operating expenses...... -- 105,155 134,734 -- 239,889
------- -------- -------- -------- --------
-- 31,156 24,622 -- 55,778
Other income (expenses):
Interest income and other............. -- -- 817 -- 817
Interest expense...................... -- (15,098) (22,041) -- (37,139)
Equity in income of consolidated
subsidiaries....................... 11,332 -- -- (11,332) --
Minority interests:
Preferred redeemable securities....... -- -- (6,814) -- (6,814)
Other................................. -- -- (1,310) -- (1,310)
------- -------- -------- -------- --------
Income (loss) before income taxes....... 11,332 16,058 (4,726) (11,332) 11,332
Provision (benefit) for income taxes.... 4,533 5,459 (926) (4,533) 4,533
------- -------- -------- -------- --------
Net income (loss)....................... $ 6,799 $ 10,599 $ (3,800) $ (6,799) $ 6,799
======= ======== ======== ======== ========
</TABLE>
14
<PAGE> 17
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................ $ -- $(10,024) $(47,006) $(57,030)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................. -- 12,263 20,177 32,440
Loss on sale of assets, net................... -- 3 -- 3
Deferred income tax benefit................... (29,380) -- -- (29,380)
Minority interests............................ -- -- 3,607 3,607
Impairment losses............................. -- 8,800 57,362 66,162
Other......................................... 475 (121) 485 839
Changes in operating assets and liabilities:
Accounts receivable........................... -- (3,165) 2,983 (182)
Inventories................................... -- 404 (96) 308
Other current assets.......................... -- (429) (1,740) (2,169)
Accounts payable.............................. -- (514) (4,484) (4,998)
Accrued liabilities........................... -- 11,830 (329) 11,501
-------- -------- -------- --------
Net cash (used in) provided by operating
activities................................. (28,905) 19,047 30,959 21,101
-------- -------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures, net..................... -- (31,055) (20,382) (51,437)
Proceeds from sale of assets.................. -- 34,725 -- 34,725
Net deposits for capital expenditures......... -- -- (6,250) (6,250)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities................................. -- 3,670 (26,632) (22,962)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
obligations................................ -- 30,000 2,085 32,085
Proceeds received from (paid to) related
parties.................................... 28,905 (28,130) (775) --
Principal payments on long-term obligations... -- (12,171) (2,624) (14,795)
Distributions to minority interests........... -- -- (186) (186)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities................................. 28,905 (10,301) (1,500) 17,104
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... -- 12,416 2,827 15,243
Cash and cash equivalents at beginning of
period........................................ 59 9,910 4,675 14,644
-------- -------- -------- --------
Cash and cash equivalents at end of period...... $ 59 $ 22,326 $ 7,502 $ 29,887
======== ======== ======== ========
</TABLE>
15
<PAGE> 18
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PARENT AND SUBSIDIARY NON-GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................... $ -- $ 10,598 $ (3,799) $ 6,799
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. -- 8,802 18,698 27,500
Deferred income tax provision................. 4,533 -- -- 4,533
Other......................................... -- 12,041 (6,698) 5,343
Changes in operating assets and liabilities:
Accounts receivable........................... -- (11,205) 110 (11,095)
Inventories................................... -- 132 (4) 128
Other current assets.......................... 389 2,457 (8,325) (5,479)
Accounts payable.............................. (132) (3,748) (5,617) (9,497)
Accrued liabilities........................... -- 8,426 (6,372) 2,054
------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................... 4,790 27,503 (12,007) 20,286
------- -------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures, net..................... -- (3,544) (42,644) (46,188)
Proceeds from sale of assets.................. -- -- 11,100 11,100
Net (deposits) withdrawals for capital
expenditures............................... -- 1,393 (805) 588
------- -------- -------- --------
Net cash provided by (used in) investing
activities................................. -- (2,151) (32,349) (34,500)
------- -------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
obligations................................ -- -- 29,640 29,640
Proceeds received from (paid to) related
parties.................................... (841) (33,387) 34,228 --
Net proceeds from issuance of common stock.... -- -- 60 60
Principal payments on long-term obligations... (5,085) (3,972) (3,809) (12,866)
Payments of deferred loan costs............... -- -- (1,360) (1,360)
Distributions to minority interests........... -- -- (123) (123)
------- -------- -------- --------
Net cash provided by (used in) financing
activities................................. (5,926) (37,359) 58,636 15,351
------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... (1,136) (12,007) 14,280 1,137
Cash and cash equivalents at beginning of
period........................................ 1,648 7,140 10,397 19,185
------- -------- -------- --------
Cash and cash equivalents at end of period...... $ 512 $ (4,867) $ 24,677 $ 20,322
======= ======== ======== ========
</TABLE>
16
<PAGE> 19
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FACTORS AFFECTING BUSINESS
During the past twelve months, the Company's Board of Directors has adopted
strategic plans that are intended to enhance value for its shareholders. At the
end of 1999 the Company adopted a strategic plan to reduce the size of the
Company's non-core hotel portfolio. In 2000, the Company adopted a strategic
plan to reduce the level of overall debt of the Company and retained an
investment banker to review its strategic alternatives. As part of that review
the Company is pursuing a sale of the Company. With regard to this strategic
alternative the Company has received offers from Whitehall Street Real Estate
Partnership and Edgecliff Holdings, LLC to acquire the Company. Presently both
parties are continuing to actively and simultaneously conduct due diligence. The
Company will reimburse Whitehall Street Real Estate Partnership the expense it
incurs in connection with evaluating and pursuing the transaction, up to a
maximum of $3,500,000, if a definitive agreement for the sale is not consummated
with Whitehall Street Real Estate Partnership. The Company is unable to predict
whether the due diligence being performed by the parties will ultimately result
in an actual sale of the Company.
In July 1999, the Company sold $200 million of Notes. In addition, the
Company 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 Notes was used to repay the loan from Lehman Brothers Holding, Inc.,
("Lehman") and, in September, a $132.5 million loan (one of three facilities)
from Nomura Asset Capital Corporation. These financings contain various
financial covenants, coverage ratios and payment restrictions with which the
Company was in compliance at June 30, 2000. Payment restrictions contained in
the Company's Notes required the Company to defer dividend payments with respect
to the CRESTS beginning June 30, 2000. Pursuant to the terms of the agreement
the Company has the right to defer the dividend payment for up to 20 quarters.
The Company does not anticipate resumption of the quarterly dividend payment on
the CRESTS in the near future.
The Company was unable to deliver its 1999 annual audited and quarterly
2000 unaudited financial statements to its Senior Secured loan facility lenders
on a timely basis. The Company has received a waiver for the late delivery of
these financial statements and the time period for delivery of quarterly 2000
financial statements has been extended. In addition, on July 31, 2000, the
Company entered into an amendment to its Senior Secured loan credit facility
which provides for a 0.50% increase in the interest rate, termination of the
tranche A facility which reduces the maximum credit facility by $25 million and
provides for additional amortization payment requirements for tranche B term
loans of (i) $25 million on or prior to December 31, 2000, (ii) an additional
$35 million on or prior to June 30, 2001 and (iii) an additional $40 million on
or prior to December 31, 2001. Prior to the amendment, amortization payment
requirements were effectively 1% per year of the outstanding tranche B term
loans during that period. The amendment modifies various covenants and coverage
ratios, with which the Company believes it is in compliance or which have been
waived by the lenders. The amendment provides for immediate access to the $25
million unused portion of the revolving credit facility and provides increased
flexibility for the sale of hotel assets. The Company paid an amendment fee of
approximately $1.4 million. As of December 13, 2000 the Company has paid fully
the $25 million required amortization payment due December 31, 2000 and has paid
approximately $2.5 million of the $35 million required amortization payment due
June 30, 2001.
The Company has adopted strategic plans to reduce the size of the Company's
non-core hotel portfolio and reduce the overall level of debt. With regard to
these strategic plans the Company has sold nineteen hotel properties and two
other assets from January 1, to December 13, 2000. Gross sales price of these
twenty one properties was $191.2 million while the reduction of debt was $147.3
million. The balance was used primarily to support capital expenditures related
to major renovation projects and the construction of one new hotel.
17
<PAGE> 20
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company will continue to explore potential property sale transactions
in addition to those discussed above. Certain of these transactions include
hotels other than those identified for sale currently. The discussions with
potential purchasers are in various stages, including the execution of
preliminary agreements in a few situations. Those transactions where preliminary
agreements have been reached are subject to, among other things, buyer due
diligence and financing and the cooperation of the Company's existing lenders.
Accordingly, the Company is unable to predict whether any of the transactions
being considered will result in an actual sale. The majority of the net proceeds
from any completed sales will be used to reduce debt.
In June 2000, the Company in an effort to reduce corporate overhead
expenses instituted a plan to close four of the six regional offices, close the
Company's reservation center located in Baton Rouge, Louisiana and eliminate
certain positions in the corporate office. Approximately 65 employees were
terminated in this restructuring. The Company recognized a charge of
approximately $1.5 million at June 30, 2000 to implement this plan. Of the $1.5
million charge approximately $1.3 million was related to salary and benefits of
the terminated employees and $.2 million related to the costs of closing the
physical regional offices and the reservation center. During the third and
fourth quarters of 2000 $1.3 million and $.2 million was charged against this
accrual, respectively.
On August 31, 2000, in conjunction with the sale of ten hotels, principally
located in the Western United States, the Company and the lenders amended the
terms of the credit facilities totaling $213 million at December 31, 1999. Under
this amendment two former credit facilities were amended into one new facility
and the Company paid down approximately $106 million of the debt with proceeds
from the sale, extended the maturity date to November 30, 2002 from November 30,
2000 and converted the remaining balance owed, approximately $107 million, to a
floating rate facility. In addition, the Company paid approximately $4.3 million
to "break" the interest rate lock agreement on $54 million related to this debt.
Under the original terms of the loan agreement when the loan matured in November
2000 and converted to a term loan, the interest rate would be based on a
benchmark treasury rate of 7.235%.
Considering the amendments to the existing loan agreements and the debt
repayments discussed above, the Company's total outstanding debt as of December
13, 2000 (excluding CRESTS) is approximately $757.0 million. Of this amount $.6
million is due December 31, 2000 and $87.7 million is due in 2001. As of
December 13, 2000, the Company's held for sale properties have an estimated fair
value of approximately $89.6 million, which are encumbered by indebtedness of
approximately $7.9 million due subsequent to 2001.
In 2001, the Company will need to sell assets and therefore will continue
to identify properties to be classified as held for sale to meet its $87.7
million amortization payment requirements in 2001 and its capital improvement
program, as discussed in Item 2. Liquidity and Capital Resources section
following. Although the Company anticipates being able to sell sufficient assets
to meet its obligations in 2001, there can be no assurances that the sales will
occur or generate sufficient net proceeds to meet these obligations.
18
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion below and elsewhere in this Form 10-Q includes statements
that are "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act. These include
statements that describe anticipated revenues, capital expenditures and other
financial items, statements that describe the Company's business plans and
objectives, and statements that describe the expected impact of competition,
government regulation, litigation and other factors on the Company's future
financial condition and results of operations. The words "may," "should,"
"expect," "believe,' "anticipate,' "project,' "estimate," and similar
expressions are intended to identify forward-looking statements. Such risks and
uncertainties, any one of which may cause actual results to differ materially
from those described in the forward-looking statements, include or relate to,
among other things:
- The impact of pending or threatened litigation and/or governmental
inquiries and investigation involving the Company.
- The Company's ability to significantly improve and stabilize its
accounting systems and procedures and maintain stability.
- The uncertainties relating to the Company's proposed strategic
initiative, including the willingness of prospective purchasers to
purchase the hotels the Company has identified as divestiture candidates
on terms the Company finds acceptable, the timing and terms on which such
hotels may be sold, and other factors affecting the ability of
prospective purchasers to consummate such transactions, including the
availability of financing.
- The effect of competition on the Company's ability to maintain margins on
existing operations, including uncertainties relating to competition.
- The impact on operations due to renovation work being performed at
certain hotels.
- The Company's ability to generate sufficient cash flows from operations
to cover its cash needs, the Company's ability to obtain additional
capital if needed and the possible default under credit facilities if
cash flows are lower than expected or capital expenditures are greater
than expected.
- The effectiveness of changes in management and the ability of the Company
to retain qualified individuals to serve in senior management positions.
- The potential for additional impairment charges against earnings related
to long-lived assets which may result from the Company's strategic
initiatives to reduce the size of the hotel portfolio and reduce debt.
- The impact of termination of letters of intent from prospective buyers of
the Company as a whole.
Strategic Plans
During the past twelve months, the Company's Board of Directors have
adopted strategic plans that are intended to enhance value for its shareholders.
At the end of 1999 the Company adopted a strategic plan to reduce the size of
the Company's non-core hotel portfolio. In 2000, the Company adopted a strategic
plan to reduce the level of overall debt of the Company and retained an
investment banker to review its strategic alternatives. As part of that review
the Company is pursuing a sale of the Company. With regard to this strategic
alternative the Company has received offers from Whitehall Street Real Estate
Partnership and Edgecliff Holdings, LLC to acquire the Company. Both parties are
continuing to actively and simultaneously conduct due diligence on the Company.
The Company is unable to predict whether any of the transactions being
considered will result in an actual sale of the Company. See further discussion
in Liquidity and Capital Resources following.
With regard to the strategic plans to reduce the size of the Company's
non-core hotel portfolio and reduce the level of overall debt of the Company,
the Company has sold nineteen hotel properties and two other assets from January
1, to December 13, 2000. Gross sale price of these twenty one properties was
$191.2 million while the reduction of debt was $147.3 million. The balance was
used primarily to support capital expenditures related to major renovation
projects and the construction of one new hotel. In addition, the Company has
19
<PAGE> 22
several additional assets under contract and scheduled for closing during
December 2000. See further discussion in Liquidity and Capital Resources
following.
Overview
Management believes that results of operations in the hotel industry are
best explained by four key performance measures: occupancy levels, average daily
rate ("ADR"), revenue per available room ("RevPAR") and Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") margins. These
measures are influenced by a variety of factors including national, regional and
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 included the acquisition of underperforming hotels
and the implementation of our operational initiatives and repositioning and
renovation programs to achieve revenue and margin improvements. Such initiatives
typically require a 12 to 18 month period before newly acquired, underperforming
hotels are repositioned and stabilized. During this period, the revenues and
earnings of these hotels may be adversely affected and may have a negative
impact on RevPAR, average daily rate and occupancy rate performance, as well as
operating margins for the Company overall. In addition, our strategy also
included 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's impact on the
Company's results of operations, we classify our hotels as either "Stabilized
Hotels," "Stabilizing Hotels" or "Being Repositioned Hotels," as described
below:
Stabilized Hotels are properties 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 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 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 repositioning once
the renovation is completed. After the reposition work is completed these
properties will be reclassified as Stabilizing Hotels.
Management classifies each hotel into one of the three categories at the
beginning of each fiscal year. Management will determine the category most
appropriate for each hotel based on its evaluation of objective and subjective
factors, including the time of completion of renovation and whether the full
benefit of renovations have been realized.
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<PAGE> 23
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1999
Historical Results of Operations
The following table presents, for the periods indicated, the period to
period change in dollars (in thousands) and percentages for the various
consolidated statements of operations line items.
<TABLE>
<CAPTION>
PERIOD TO PERIOD PERIOD TO PERIOD
CHANGE FOR THE THREE CHANGE FOR THE SIX
MONTHS ENDED JUNE MONTHS ENDED JUNE
30, 2000 AND 1999 30, 2000 AND 1999
--------------------- ------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Rooms................................................ $ 2,222 1.9% $ 5,555 2.6%
Food and beverage.................................... (611) 1.6 (1,177) 1.7
Other................................................ (351) 4.4 (487) 3.3
-------- ------ -------- -----
Total revenue................................ 1,260 0.8 3,891 1.3
-------- ------ -------- -----
Operating expenses:
Direct:
Rooms................................................ 1,040 3.4 3,377 5.9
Food and beverage.................................... (968) 3.7 (1,858) 3.7
Other................................................ 514 12.6 701 8.5
General, administrative and other...................... 9,080 19.1 15,279 15.8
Depreciation and amortization.......................... 2,658 19.3 4,940 18.0
Impairment of long-lived assets........................ 56,549 100.0 66,162 100.0
Severance and restructuring expenses................... 1,502 100.0 1,502 100.0
-------- ------ -------- -----
Total operating expenses..................... 70,375 57.4 90,103 37.6
-------- ------ -------- -----
(69,115) 186.0 (86,212) 155.0
Other income/expenses:
Interest income and other............................ (169) 36.0 (290) 35.5
Interest expense..................................... (7,634) 41.9 (12,691) 34.2
Loss on asset dispositions, net........................ (98) 100.0 (3) 100.0
Minority interests:
Preferred redeemable securities...................... 393 11.4 687 10.1
Other................................................ 330 58.3 767 58.5
-------- ------ -------- -----
Loss before income taxes............................... (76,293) 495.3 (97,742) 862.5
Benefit for income taxes............................... (26,864) 436.0 (33,913) 748.1
-------- ------ -------- -----
Net loss............................................... $(49,429) 534.9% $(63,829) 938.8%
======== ====== ======== =====
</TABLE>
21
<PAGE> 24
The following table presents for the periods indicated, the percentage
relationship that the various statements of operations line items bear to
operating revenues:
LODGIAN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Rooms....................................... 72.7% 71.9% 72.5% 71.6%
Food and beverage........................... 22.6 23.2 22.7 23.4
Other....................................... 4.7 4.9 4.8 5.0
------ ------ ------ ------
Total revenue....................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Direct:
Rooms....................................... 19.8 19.3 20.2 19.3
Food and beverage........................... 15.8 16.5 16.3 17.1
Other....................................... 2.9 2.6 3.0 2.8
General, administrative and other............. 35.2 29.8 37.3 32.6
Depreciation and amortization................. 10.2 8.6 10.8 9.3
Impairment of long-lived assets............... 35.1 0.0 22.1 0.0
Severance and restructuring expenses.......... 0.9 0.0 0.5 0.0
------ ------ ------ ------
Total operating expenses............ 119.9 76.8 110.2 81.1
------ ------ ------ ------
(19.9) 23.2 (10.2) 18.9
Other income/expenses:
Interest income and other................... 0.2 0.3 0.2 0.3
Interest expense............................ (16.0) (11.4) (16.6) (12.6)
Loss on asset dispositions, net............. (0.1) 0.0 0.0 0.0
Minority interests:
Preferred redeemable securities............. (1.9) (2.2) (2.0) (2.3)
Other....................................... (0.1) (0.3) (0.2) (0.5)
------ ------ ------ ------
(Loss) income before income taxes............. (37.8) 9.6 (28.8) 3.8
(Benefit) provision for income taxes.......... (12.8) 3.8 (9.8) 1.5
------ ------ ------ ------
Net (loss) income............................. (25.0)% 5.8% (19.0)% 2.3%
====== ====== ====== ======
</TABLE>
As previously reported in the Company's Form 10-K for the year ended
December 31, 1999, during the fourth quarter of 1999, the Company initiated an
internal review of its accounting records. The Company experienced significant
difficulty in the integration and conversion of information and accounting
systems subsequent to the Merger. In addition, the Company determined that a
significant number of reconciliations involving cash, accounts receivable, fixed
assets, accounts payable and other accounts had not been completed during 1999.
As a result of these systems and reconciliation issues, the Company experienced
a significant delay in preparing its 1999 annual financial statements. Certain
charges were recorded in the fourth quarter of 1999 after the account
reconciliation process was completed in 2000.
Also, as previously reported in the Company's Form 10-K for the year ended
December 31, 1999, the Company concluded, after consultation with its prior
independent auditors that its internal controls for the preparation of interim
financial information did not provide an adequate basis for its prior
independent auditors to complete reviews of the 1999 quarterly financial
information in accordance with standards established by the American Institute
of Certified Public Accountants. The Company believes that certain charges that
were recorded in the fourth quarter of 1999 and were principally recognized in
general, administrative and other in the consolidated statements of operations
may relate to individual prior quarters;
22
<PAGE> 25
however the Company does not have sufficient information to identify all
specific changes attributable to prior 1999 quarters.
The internal control weaknesses described above existed during the first
and second quarters of 2000 and also caused a significant delay in preparing the
Company's June 30, 2000 Form 10-Q. The Company has committed substantial
resources to mitigate the previously identified control weaknesses including
contracting with outside consulting accountants to ensure the Company has the
corporate financial resources needed to provide reasonable assurances that it
can comply with the record keeping and internal control requirements applicable
to SEC registrants. Management believes these efforts have enabled the Company
to produce reliable interim financial statements as of June 30, 2000 and for the
three and six months then ended. The Company is in the process of implementing a
plan which, if successful, will enable the Company to timely comply with the
financial statement reporting requirements applicable to SEC registrants by the
time it is required to file its 2000 annual financial statements and will have
substantially developed and implemented an adequate control environment by this
date.
THREE MONTHS ENDED JUNE 30, 2000 ("SECOND QUARTER 2000") COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 1999 ("SECOND QUARTER 1999")
Revenues
Revenues are composed of room, food and beverage and other revenues. Room
revenues are derived from guest room rentals, whereas food and beverage revenues
primarily include sales from 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 the
Company for services rendered in conjunction with managed properties.
Total revenue for the second quarter 2000 was $161.1 million, an increase
of 0.8% and RevPAR was $53.43, an increase of 4.6%, compared to 1999, despite a
decrease of ten hotels in the owned portfolio and a significant revenue
displacement as a result of renovations.
The following table summarizes certain operating data for the Company's
hotels for the three months ended June 30, 2000 and 1999. The Stabilized,
Stabilizing and Being Repositioned Hotels refers to classifications in these
respective categories as of January 1 of the year indicated.
<TABLE>
<CAPTION>
HOTELS(1) ADR OCCUPANCY REVPAR
----------- --------------- ------------- ---------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ------ ------ ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stabilized.......................... 97 77 $73.96 $75.14 70.62% 70.2% $52.23 $52.75
Stabilizing......................... 10 35 87.30 75.61 69.41 64.1 60.60 48.50
Being repositioned.................. 19 24 88.02 81.89 62.44 60.3 54.96 49.35
--- --- ------ ------ ----- ----- ------ ------
Total..................... 126 136 $77.37 $76.38 69.06% 66.9% $53.43 $51.08
=== === ====== ====== ===== ===== ====== ======
</TABLE>
---------------
(1) Excludes the hotel managed for a third party and the partially owned
non-consolidated hotel in 2000 and excludes the two hotels managed for third
parties and the partially owned non-consolidated hotel in 1999.
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 are primarily
variable with available rooms and occupancy rates, but also have a small fixed
component which can be leveraged with increases in revenues. General and
administrative expenses represent corporate salaries and other corporate
operating expenses and are generally fixed. The Company has incurred significant
professional fees in 2000 to correct internal control weaknesses identified in
late 1999. Other expenses include primarily property level expenses related to
general operations such as marketing, utilities, repairs and maintenance and
other property administrative costs. These expenses are primarily fixed.
23
<PAGE> 26
Direct operating expenses for the Company were $62.0 million (38.5% of
direct revenues) for the second quarter 2000 and $61.4 million (38.4% of direct
revenues) for the second quarter of 1999. This $0.6 million increase was
primarily attributable to an increase in rooms and other direct expenses of $1.0
million and $0.6 million, respectively (which related to an increase in the
number of room nights sold) net of a reduction in food and beverage costs of
$1.0 million (arising from discounts and rebates that the Company was able to
garner in the second quarter of 2000).
General, administrative and other expenses were $56.6 million in second
quarter 2000 and $47.6 million in the second quarter 1999. Included in the $9.0
million increase is $1.3 million of professional fees that the Company expended
in its effort to reconcile accounts and to improve its accounting systems and
procedures.
Depreciation and amortization were $16.4 million in second quarter 2000 and
$13.8 million in the second quarter 1999. The $2.6 million increase is primarily
as a result of the completion of a significant number of renovation projects and
the opening of 3 hotels in the latter part of 1999 as well as in the first
quarter of 2000, offset by a decrease in depreciation related to hotels sold.
Impairment of long-lived assets was $56.6 million in the second quarter
1999. This relates to impairment charges on the ten hotels sold to Sunstone
Investors, LLC on August 31, 2000.
Interest expense was $25.8 million in second quarter 2000 and $18.2 million
in second quarter 1999. This increase is primarily attributable to an increase
in the level of debt as well as an increase in the cost of debt.
Minority interest expense was $3.3 million in second quarter 2000 and $4.0
million in second quarter 1999. The $0.7 million decrease is primarily
attributable to lower net income levels for those hotels which the Company
co-owns with its third-party-minority equity partners.
Net Income (Loss)
After a tax benefit of $20.7 million in second quarter 2000 and a provision
of $6.1 million in second quarter 1999, the Company had a net loss of $40.2
million ($1.43 per share) in second quarter 2000 compared with a net income of
$9.2 million ($.34 per share) in second quarter 1999, for the reasons discussed
above.
SIX MONTHS ENDED JUNE 30, 2000 (THE "2000 PERIOD") COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1999 (THE "1999 PERIOD")
Revenues
Revenues for the Company were $299.6 million for the 2000 period, a 1.3%
increase over revenues of $295.7 million for the 1999 period and RevPAR was
$49.02, an increase of 4.4%, despite a decrease of ten hotels in the owned
portfolio and significant revenue displacement as a result of renovations.
The following table summarizes certain operating data for the Company's
hotels for the Six Months ended June 30, 2000 and 1999. The Stabilized,
Stabilizing and Being Repositioned Hotels refers to classifications in these
respective categories as of January 1 of the year indicated.
<TABLE>
<CAPTION>
HOTELS(1) ADR OCCUPANCY REVPAR
----------- --------------- ------------- ---------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ------ ------ ----- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stabilized......................... 97 77 $73.29 $74.57 66.7% 66.3% $48.89 $49.45
Stabilizing........................ 10 35 $85.18 $75.56 61.0% 61.2% 51.96 $46.26
Being Repositioned................. 19 24 $84.60 $78.50 56.83% 51.3% 48.08 $40.29
--- --- ------ ------ ----- ---- ------ ------
Total.................... 126 136 $76.03 $75.42 64.48% 62.3% $49.02 $46.95
=== === ====== ====== ===== ==== ====== ======
</TABLE>
---------------
(1) Excludes the hotel managed for a third party and the one partially owned
non-consolidated hotel in 2000 and excludes the two hotels managed for third
parties and the partially owned non-consolidated hotel in 1999.
24
<PAGE> 27
Operating Expenses
Direct operating expenses for the Company were $118.1 million (39.4% of
direct revenues) for the 2000 period and $115.8 million (39.2% of direct
revenue) for the 1999 period. This $2.3 million increase was primarily
attributable to an increase in rooms and other direct expenses of $3.4 million
and $.7 million, respectively (which related to an increase in the number of
room nights sold) net of a reduction in food and beverage costs of $1.8 million
(arising from discounts and rebates that the Company was able to garner in the
second quarter of 2000.
General administrative and other expenses were $111.8 million in the 2000
period and $96.5 million in the 1999 period. Included in the $15.3 million
increase is $3.8 million of professional fees that the Company expended in its
effort to reconcile accounts and to improve its accounting systems and
procedures.
Depreciation and amortization expense was $32.4 million in the 2000 period
and $27.5 million in the 1999 period. The $4.9 million increase is primarily a
result of the completion of a significant number of renovation projects and the
opening of 3 hotels in the latter part of 1999 as well as in the first quarter
of 2000, offset by a decrease in depreciation related to hotels sold.
Impairment of long-lived assets was $66.2 million in the 2000 period,
consisting of $9.6 million and $56.6 million in the first and second quarters,
respectively. The first quarter charge related to revised estimates of fair
value for properties held for sale at December 31, 1999 and the second quarter
charge related to the ten hotels sold to Sunstone Investors, LLC on August 31,
2000.
Interest expense was $49.8 million in the 2000 period and $37.1 million in
the 1999 period. This increase is primarily attributable to an increase in the
level of debt as well as an increase in the cost of debt.
Minority interest expense was $6.7 million in the 2000 period and $8.1
million in the 1999 period. This $1.4 million decrease is primarily attributable
to lower net income levels for those hotels which the Company co-owns with its
third-party-minority equity partners.
Net Income
After a benefit for income taxes of $29.4 million in the 2000 period and a
provision for income taxes of $4.5 million in the 1999 period, the Company had a
net loss of $57.0 million ($2.04 per share) in the 2000 period compared with a
net income of $6.8 million ($.25 per share) in the 1999 period, for the reasons
discussed above.
Income Taxes
As of December 31, 1999, Lodgian had net operating loss carryforwards of
approximately $90.3 million for federal income tax purposes, which expire in
2005 through 2018. The Company's ability to use these net operating loss
carryforwards to offset 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
Lodgian's principal sources of liquidity consist of existing cash balances,
cash flow from operations and financing. Additionally, the Company expects to
generate cash from the disposition of hotels it has targeted for sale and that
will be targeted for sale in the future. The majority of net proceeds from the
sale of hotels is expected to be used to reduce long-term debt.
The Company had earnings from operations before interest, taxes,
depreciation and amortization ("EBITDA"), as adjusted in 2000 of $75.7 million,
a 10.2% decrease from the $84.3 million for the 1999 Period. The Company has
computed EBITDA without regard to the unusual items and one-time charges. During
2000 these items consisted of unusual costs, principally professional fees and
restructuring costs, of $7.6 million and impairment charges of $66.2 million.
There were no such items in 1999. EBITDA is a widely regarded industry measure
of lodging performance used in the assessment of hotel property values, although
25
<PAGE> 28
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.
Cash flows used in investing activities were $23.0 million and $34.5
million in 2000 and 1999, respectively. The 2000 amount includes capital
expenditures of $51.4 million, net proceeds from the sale of assets of $34.7
million and deposits for capital expenditure escrows of $6.3 million. The 1999
amount includes capital expenditures of $46.2 million, net proceeds from the
sale of assets of $11.1 million and withdrawals from capital expenditure escrows
of $.6 million.
Cash flows provided by financing activities were $17.1 million and $15.4
million in 2000 and 1999, respectively. The 2000 and 1999 amounts consist
primarily of the net proceeds from the issuance and repayment of long-term
obligations.
At June 30, 2000, the Company had a working capital deficit of $95.2
million as compared with a working capital deficit of $65.2 million at December
31, 1999.
At June 30, 2000, long-term obligations were $833.2 million. Long-term
obligations were $856.7 million at December 31, 1999. Both periods exclude $175
million of CRESTS.
The Company has a capital improvement program to address the capital
improvements required at the hotels related to product improvement plans
specified by license agreements with franchisors, re-branding of several hotels
and general renovation projects intended to ultimately improve the operations of
the hotels. As of December 13, 2000, the Company's capital budget for 2001 is
approximately $51.8 million and the Company has approximately $13.9 million
escrowed for such improvements.
In connection with the Merger on December 11, 1998, the Company obtained
$265 million of mortgage notes from Lehman. The net proceeds were used to repay
existing debt and related obligations.
In July 1999, the Company sold $200 million of Notes. In addition, the
Company 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 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. These
financings contain various financial covenants, coverage ratios and payment
restrictions with which the Company was in compliance at June 30, 2000. Payment
restrictions contained in the Company's Notes required the Company to defer
dividend payments with respect to the CRESTS beginning June 30, 2000. Pursuant
to the terms of the agreement the Company has the right to defer the dividend
payment for up to 20 quarters. The Company does not anticipate resumption of the
quarterly dividend payment on the CRESTS in the near future.
The Company was unable to deliver its 1999 annual audited and quarterly
2000 unaudited financial statements to its Senior Secured loan facility lenders
on a timely basis. The Company has received a waiver for the late delivery of
these financial statements and the time period for delivery of quarterly 2000
financial statements has been extended. In addition, on July 31, 2000, the
Company entered into an amendment to its Senior Secured loan credit facility
which provides for a 0.50% increase in the interest rate, termination of the
tranche A facility which reduces the maximum credit facility by $25 million and
provides for additional amortization payment requirements for tranche B term
loans of (i) $25 million on or prior to December 31, 2000, (ii) an additional
$35 million on or prior to June 30, 2001 and (iii) an additional $40 million on
or prior to December 31, 2001. Prior to the amendment, amortization payment
requirements were effectively 1% per year of the outstanding tranche B term
loans during that period. The amendment modifies various covenants and coverage
ratios, with which the Company believes it is in compliance or which have been
waived by the lenders. The amendment provides for immediate access to the $25
million unused portion of the revolving credit facility and provides increased
flexibility for the sale of hotel assets. The Company paid an amendment fee of
approximately $1.4 million. As of December 13, 2000 the Company has paid fully
the $25 million required amortization payment due December 31, 2000 and has paid
approximately $2.5 million of the $35 million required amortization payment due
June 30, 2001.
26
<PAGE> 29
As discussed previously in Item 2, the Company has adopted strategic plans
to reduce the size of the Company's non-core hotel portfolio and reduce the
overall level of debt. With regard to these strategic plans the Company has sold
nineteen hotel properties and two other assets from January 1, to December 13,
2000. Gross sales price of these twenty one properties was $191.2 million while
the reduction of debt was $147.3 million. The balance was used primarily to
support capital expenditures related to major renovation projects and the
construction of one new hotel.
The Company will continue to explore potential property sale transactions
in addition to those discussed above. Certain of these transactions include
hotels other than those identified for sale currently. The discussions with
potential purchasers are in various stages, including the execution of
preliminary agreements in a few situations. Those transactions where preliminary
agreements have been reached are subject to, among other things, buyer due
diligence and financing and the cooperation of the Company's existing lenders.
Accordingly, the Company is unable to predict whether any of the transactions
being considered will result in an actual sale. The majority of the net proceeds
from any completed sales will be used to reduce debt.
In June 2000, the Company in an effort to reduce corporate overhead
expenses instituted a plan to close four of the six regional offices, close the
Company's reservation center located in Baton Rouge, Louisiana and eliminate
certain positions in the corporate office. Approximately 65 employees were
terminated in this restructuring. The Company recognized a charge of
approximately $1.5 million at June 30, 2000 to implement this plan. Of the $1.5
million charge approximately $1.3 million was related to salary and benefits of
the terminated employees and $.2 million related to the costs of closing the
physical regional offices and the reservation center. During the third and
fourth quarters of 2000 $1.3 million and $.2 million was charged against this
accrual, respectively. In the future the Company anticipates approximately $5
million in annual savings from instituting this plan.
On August 31, 2000, in conjunction with the sale of ten hotels, principally
located in the Western United States, the Company and the lenders amended the
terms of the credit facilities totaling $213 million at December 31, 1999. Under
this amendment two former credit facilities were amended into one new facility
and the Company paid down approximately $106 million of the debt with proceeds
from the sale, extended the maturity date to November 30, 2002 from November 30,
2000 and converted the remaining balance owed, approximately $107 million, to a
floating rate facility. In addition, the Company paid approximately $4.3 million
to "break" the interest rate lock agreement on $54 million related to this debt.
Under the original terms of the loan agreement when the loan matured in November
2000 and converted to a term loan, the interest rate would be based on a
benchmark treasury rate of 7.235%.
Also as discussed previously in Item 2, the Board of Directors is actively
pursuing the sale of the Company as a whole. During the fourth quarter of 2000
Whitehall Street Real Estate Partnership and Edgecliff Holdings, LLC each made a
proposal to acquire all of the outstanding shares of the Company. Presently both
parties are continuing to actively and simultaneously conduct due diligence. The
Company will reimburse Whitehall Street Real Estate Partnership the expense it
incurs in connection with evaluating and pursuing the transaction, up to a
maximum of $3,500,000, if a definitive agreement for the sale is not consummated
with Whitehall Street Real Estate Partnership. The Company is unable to predict
whether the due diligence being performed by the parties will ultimately result
in an actual sale of the Company.
Considering the amendments to the existing loan agreements and the debt
repayments discussed above, the Company's total outstanding debt as of December
13, 2000 (excluding CRESTS) is approximately $757.0 million. Of this amount $.6
million is due December 31, 2000 and $87.7 million is due in 2001. As discussed
previously, the Company's estimated capital expenditures for 2001 is
approximately $37.9 million (net of escrowed funds of $13.9 million). As of
December 13, 2000, the Company's held for sale properties have an estimated fair
value of approximately $89.6 million, and which are encumbered by indebtedness
of approximately $7.9 million due subsequent to 2001.
In 2001, the Company will need to sell assets and therefore will continue
to identify properties to be classified as held for sale to meet its $87.7
million amortization payment requirements in 2001 and its capital improvement
program. Although the Company anticipates being able to sell sufficient assets
to meet its
27
<PAGE> 30
obligations in 2001, there can be no assurances that the sales will occur or
generate sufficient net proceeds to meet these obligations.
One of the assets under contract for sale in December 2000 is the hotel
under construction in Richmond, Virginia. If the closing occurs, the Company
will retain $10 million of the cash proceeds for liquidity purposes. If the sale
of the Richmond hotel does not occur, the Company will be required to fund
additional capital expenditures of approximately $14.0 million in 2001. In
addition, the Company currently has $23.8 million of availability on its
revolving credit facility. The Company anticipates borrowing the majority
available under its revolving credit facility in January 2001 to cover certain
interest and operating obligations. The Company believes that the combination of
its current cash position, cash flow from operations, availability on the
revolving credit facility and net proceeds from property (both properties
identified and to be identified) sales will provide sufficient liquidity to fund
the Company's operating, capital expenditure and debt service obligations
through December 31, 2000.
Inflation
The rate of inflation has not had a material effect on the Company's
revenues or costs and expenses in recent years and it is not anticipated that
inflation will have a material effect on the Company in the near term.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1999, a contractor hired by Servico to perform work on hotels in
New York, Illinois and Texas filed a complaint against the Company in the
Supreme Court of the State of New York, claiming breach of contract and quantum
meruit, among other claims. The contractor seeks damages totaling $80 million,
including $60 million punitive damages. The Company answered the complaint
asserting counterclaims aggregating $20 million and successfully filed a motion
to dismiss the claims related to two properties located in Illinois and Texas.
In October 1999, a subcontractor filed a lawsuit in Texas against the above
contractor and the Company. The Company has filed an answer and cross-claim
against the contractor in the amount of $2.8 million. In February 2000, the
contractor filed a lawsuit in Texas claiming over $3 million in actual damages
and an undisclosed amount of punitive damages. The Company answered the
complaint and asserted a counterclaim. The Company has also filed a lawsuit
against the contractor in Federal District Court in Illinois, seeking $2
million. The contractor has filed an answer and counterclaim aggregating $2.8
million in actual damages and $10 million in punitive damages. The Company
believes that it has valid defenses and counterclaims in these matters and that
the outcome will not have a material adverse effect on its financial position or
results of operations.
On October 13, 2000, Winegardner & Hammons, Inc. ("WH") filed an
arbitration claim against the Company claiming breach of contract relating to a
January 4, 1992 contract. WH claims entitlement to profit participation relating
to the sale of certain hotel properties by an affiliate and predecessor of the
Company. Although the Demand for Arbitration does not make a specific damages
demand, it is believed that WH is claiming approximately $1,100,000 from the
Company. Lodgian believes it has meritorious defenses to this matter and is
defending it vigorously.
The Company is a party to other legal proceedings arising in the ordinary
course of business, the impact of which would not, either individually or in the
aggregate, in management's opinion, have a material adverse effect on financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
The Company has not paid any cash dividends since the Merger and has no
current plans to initiate the payment of dividends. The Company currently
anticipates that it will retain any future earnings for use in its business. The
Board of Directors of the Company will determine future dividend policies based
on the Company's financial condition, profitability, cash flow, capital
requirements and business outlook, among other factors. The Company's ability to
pay dividends is restricted by the Indenture governing the Company's 12 1/4%
Senior Subordinated Notes Due 2009 (the "Notes"), the Company's credit agreement
dated as of July 23, 1999 among the Company, Lodgian Financing Corp., certain
other of the Company's subsidiaries and the banks named therein, and the
Indenture governing the Company's Convertible Redeemable Equity Structures Trust
Securities ("CRESTS"). On June 30, 2000, the Company exercised its rights to
begin the deferral of dividend payments on the CRESTS, effective with the
interest payment due June 30, 2000. Pursuant to the terms of the instrument, the
Company has the right to defer payment for up to twenty quarters (the "Extension
Period"), during which Extension Period no interest shall be due and payable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of the exhibits required to be filed as part of this Report on Form
10-Q is set forth in the "Exhibit Index" which immediately precedes such
exhibits, and is incorporated herein by reference.
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(b) Reports on Form 8-K
A report on Form 8-K was filed on May 1, 2000 relating to expectations
regarding the completion of its year-end audit and the preliminary unaudited
financial results for 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
LODGIAN, INC.
Registrant
DATE: December 15, 2000 /s/ ROBERT S. COLE
-----------------------------------------------------
Robert S. Cole
President and Chief Executive Officer
DATE: December 15, 2000 /s/ THOMAS R. EPPICH
-----------------------------------------------------
Thomas R. Eppich
Chief Financial Officer
</TABLE>
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<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
27 -- Financial Data Schedule (For SEC use only)
</TABLE>
32
