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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NO. 1-14537
LODGIAN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2093696
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3445 PEACHTREE ROAD, N.E., SUITE 700, ATLANTA, GA 30326
- ------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 364-9400
(Former name, former address and former fiscal year, if changed since last
report): NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
CLASS OUTSTANDING AS OF AUGUST 5, 2002
- -------------------- -----------------------------------
Common 28,479,837
The unaudited condensed consolidated financial statements for the
previous quarter have since been reviewed by Lodgian's independent public
accountants in accordance with professional standards for conducting such
reviews. There were no material changes as a result of the review.
LODGIAN, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 (unaudited)..................................................... 1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and 2001
(unaudited)........................................................................... 2
Condensed Consolidated Statements of Stockholders' Equity
for the Six Months Ended June 30, 2002 and for the
Year Ended December 31, 2001 (unaudited).............................................. 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (unaudited)................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)...................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 33
Item 2. Changes in Securities................................................................. 34
Item 6. Exhibits and Reports on Form 8-K...................................................... 34
Signatures ..................................................................................... 35
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
(unaudited)
--------------------------------
(In thousands,
except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 24,650 $ 14,007
Cash, restricted 7,305 3,218
Accounts receivable, net of allowances 16,673 12,489
Inventories 7,304 7,223
Prepaid expenses and other current assets 8,223 6,284
--------- ---------
Total current assets 64,155 43,221
Property and equipment, net 897,474 913,968
Deposits for capital expenditures 17,147 15,813
Other assets 2,844 2,360
--------- ---------
$ 981,620 $ 975,362
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities Not Subject to Compromise
Current liabilities:
Accounts payable $ 13,499 $ 2,706
Accrued interest 135 1,192
Other accrued liabilities 39,655 29,785
Advance deposits 2,338 1,771
Current portion of long-term debt and capital lease obligations 266 7,717
--------- ---------
Total current liabilities 55,893 43,171
Other long-term debt and capital lease obligations 7,312 7,652
Liabilities Subject to Compromise 928,832 925,894
Minority interests 6,652 5,326
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par value, 75,000,000 shares authorized; 28,479,837
issued and outstanding at June 30, 2002 and December 31, 2001 284 284
Additional paid-in capital 263,320 263,320
Accumulated deficit (279,273) (268,306)
Accumulated other comprehensive loss (1,400) (1,979)
--------- ---------
Total stockholders' deficit (17,069) (6,681)
--------- ---------
$ 981,620 $ 975,362
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months ended Six Months ended
JUNE 30, JUNE 30,
----------------------- -------------------------
2002 2001 2002 2001
----------------------- -------------------------
(In thousands, except per share data)
(unaudited)
Revenues:
Rooms $ 83,949 $ 91,937 $ 153,734 $ 175,955
Food and beverage 25,340 27,799 45,871 53,001
Other 4,415 6,161 8,461 11,714
--------- --------- --------- ---------
113,704 125,897 208,066 240,670
--------- --------- --------- ---------
Operating expenses:
Direct:
Rooms 22,845 24,269 42,645 48,377
Food and beverage 17,653 19,492 33,027 38,155
Other 3,028 3,145 5,696 6,349
--------- --------- --------- ---------
43,526 46,906 81,368 92,881
--------- --------- --------- ---------
Gross contribution 70,178 78,991 126,698 147,789
General, administrative and other 44,160 49,682 85,975 101,162
Depreciation and amortization 14,721 14,491 28,984 30,148
Impairment of long-lived assets -- 4,000 -- 4,565
Severance and restructuring expenses 17 717 139 1,467
--------- --------- --------- ---------
Other operating expenses 58,898 68,890 115,098 137,342
--------- --------- --------- ---------
11,280 10,101 11,600 10,447
Other income (expenses):
Interest income and other 274 214 455 480
Interest expense (contractual interest: $8.2 million and $16.1
million for the three and six months ended June 30, 2002,
respectively) (7,707) (18,604) (16,263) (39,369)
(Loss) gain on asset dispositions -- (260) -- 24,109
Minority interests:
Preferred redeemable securities (contractual interest: $3.5 million
and $7.0 million for the three and six months ended June 30,
2002, respectively) -- (3,283) -- (6,509)
Other (858) 30 (1,331) (116)
--------- --------- --------- ---------
Income (loss) before income taxes, reorganization items and
extraordinary items 2,989 (11,802) (5,539) (10,958)
Reorganization items (3,869) -- (9,696) --
--------- --------- --------- ---------
Loss before income taxes and extraordinary items (880) (11,802) (15,235) (10,958)
Provision for income taxes (76) -- (151) (2,700)
--------- --------- --------- ---------
Loss before extraordinary items (956) (11,802) (15,386) (13,658)
Extraordinary item:
Gain on extinguishment of debt (income taxes estimated at nil) 4,419 -- 4,419 --
--------- --------- --------- ---------
Net income (loss) $ 3,463 $ (11,802) $ (10,967) $ (13,658)
========= ========= ========= =========
Earnings (loss) per common share - basic and diluted:
Loss before extraordinary items $ (0.03) $ (0.42) $ (0.54) $ (0.48)
Extraordinary item 0.15 -- 0.15 --
--------- --------- --------- ---------
Net income (loss) $ 0.12 $ (0.42) $ (0.39) $ (0.48)
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
OTHER ACCUMULATED
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
--------------------------- PAID-IN ACCUMULATED LOSS STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT (net of tax) EQUITY (DEFICIT)
-------------- ----------- -------------- ----------------- --------------- ---------------
(Unaudited in thousands, except share data)
Balance at December 31, 1999 28,130,325 $ 281 $ 262,760 $ (37,587) $ (912) $ 224,542
401(k) Plan contribution 144,131 1 504 - - 505
Director compensation 15,968 56 - - 56
Net loss - - - (87,955) - (87,955)
Currency translation
adjustments, net of tax - - - - (268) (268)
----------
Comprehensive loss - - - - - (88,223)
-------------- ----------- --------------- ----------------- ------------ ----------
Balance at December 31, 2000 28,290,424 282 263,320 (125,542) (1,180) 136,880
401(k) Plan contribution 189,413 2 2
Net loss - - - (142,764) - (142,764)
Currency translation
adjustments, net of tax - - - - (799) (799)
----------
Comprehensive loss (143,563)
-------------- ----------- --------------- ----------------- ------------ ----------
Balance at December 31, 2001 28,479,837 284 263,320 (268,306) (1,979) (6,681)
Net loss - (10,967) (10,967)
Currency translation
adjustments, net of tax - 579 579
----------
Comprehensive loss (10,388)
-------------- ----------- --------------- ----------------- ------------ ----------
Balance at June 30, 2002 28,479,837 $ 284 $ 263,320 $ (279,273) $ (1,400) $ (17,069)
============== =========== =============== ================= ============ ==========
The comprehensive income for the three months ended June 30, 2002 was $4.4
million and the comprehensive loss for the three and six months ended June 30,
2001 was $11.3 million and $13.8 million, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
--------------------------------------------------
2002 2001
-------------------- ----------------------
(In thousands, except share data)
(unaudited)
Operating activities:
Net loss $ (10,967) $ (13,658)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 28,984 30,148
Impairment of long-lived assets - 4,565
Gain on extinguishment of debt (4,419) -
Deferred income tax provision - 2,700
Minority interests 1,331 6,625
Gain on sale of assets - (24,109)
Amortization of deferred loan fees - 2,802
Other (582) (480)
Changes in operating assets and liabilities:
Accounts receivable, net of allowances (4,184) (68)
Inventories (81) 234
Prepaid expenses, other assets and restricted cash (6,026) (917)
Accounts payable 9,013 (4,995)
Accrued liabilities 8,796 (4,504)
Advance deposits 567 271
-------------------- ----------------------
Net cash provided by (used in) operating activities 22,432 (1,386)
-------------------- ----------------------
Investing activities:
Capital improvements (9,341) (15,944)
Proceeds from sale of assets, net of related selling costs - 64,590
(Deposits) withdrawals for capital expenditures (1,334) 1,524
-------------------- ----------------------
Net cash (used in) provided by investing activities (10,675) 50,170
-------------------- ----------------------
Financing activities:
Proceeds from borrowings on working capital revolver - 16,000
Principal payments on long-term obligations (1,114) (66,268)
-------------------- ----------------------
Net cash used in financing activities (1,114) (50,268)
-------------------- ----------------------
Net increase (decrease) in cash and cash equivalents 10,643 (1,484)
Cash and cash equivalents at beginning of period 14,007 21,002
-------------------- ----------------------
Cash and cash equivalents at end of period $ 24,650 $ 19,518
==================== ======================
Supplemental cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized $ 17,320 $ 37,799
==================== ======================
Income taxes, net of refunds $ 12 $ -
==================== ======================
Operating cash receipts and payments
resulting from Chapter 11 proceedings:
Interest received $ 100 $ -
Professional fees paid 5,223 -
Other reorganization payments 594 -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements include the accounts of
Lodgian, Inc., its wholly-owned subsidiaries and four joint ventures in which
Lodgian exercises control (collectively "Lodgian" or the "Company"). Lodgian
believes it has control of the joint ventures when the Company manages and has
control of the joint ventures' assets and operations, has the ability and
authority to enter into financing arrangements on behalf of the entity or to
sell the assets of the entity within reasonable business guidelines. One
unconsolidated entity (owning 1 hotel) is accounted for on the equity method.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The accounting policies followed for quarterly financial reporting are
the same as those disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in the Company's Form 10-K for the year ended December 31,
2001.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting primarily
of normal recurring adjustments, necessary to present fairly the financial
position of the Company as of June 30, 2002, the results of its operations for
the three and six months ended June 30, 2002 and 2001 and its cash flows for the
six months ended June 30, 2002 and 2001. The results for interim periods are not
necessarily indicative of the results for the entire year. These financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Form 10-K for the year
ended December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. BANKRUPTCY FILING AND GOING CONCERN MATTERS
On December 20, 2001, the Company and eighty-one of its subsidiaries
(the "Debtors") filed for voluntary reorganization with the United States
Bankruptcy Court for the Southern District of New York under Chapter 11 of the
Bankruptcy Code (the "Chapter 11 Cases"). The Chapter 11 Cases have been
consolidated for purposes of administration under case number 01-16345. The
filing was precipitated by the weaker US economy, the decline in travel since
the events of September 11 and the Company's heavy debt load. The Debtors are
currently operating their businesses as debtors-in-possession and are subject to
the jurisdiction of the Bankruptcy Court while a reorganization plan is being
formulated.
Also, on April 17, 2002, one additional operating subsidiary, New
Orleans Airport Motel Associates, LP filed for voluntary reorganization with the
United States Bankruptcy Court for the Southern District of New York under
Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has
also been consolidated with the previously filed Chapter 11 Cases, for purposes
of administration, under case number 01-16345.
5
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
As of June 30, 2002, all operating subsidiaries of the Company were
included in the Chapter 11 Cases except for one subsidiary owning one hotel. The
Chapter 11 Cases also exclude 65 non-operating subsidiaries of the Company. At
June 30, 2002 and December 31, 2001, the assets and liabilities of the operating
and non-operating subsidiaries excluded from the Chapter 11 Cases are as follows
(amounts in thousands):
June 30, 2002 December 31, 2001
Assets $ 13,210(1) $ 13,357
Liabilities $ (25,867)(1) $ (28,107)
As a result of the Chapter 11 filing, the Company is prohibited from
paying pre-petition claims (unless these are approved by the Bankruptcy Court)
and creditors are prohibited from attempting to collect loans or debts arising
prior to December 20, 2001. The Company, at its option, may assume or reject
contracts entered into prior to the date of filing. Claims related to rejected
contracts entered into prior to the date of the petitions would be treated as
unsecured claims.
The Company has received approval from the Bankruptcy Court to pay
pre-petition employee wages, salaries, benefits and other employee obligations.
The Bankruptcy Court also approved orders granting the Debtors authority to pay,
among other things, certain pre-petition claims of its critical service vendors.
The Company has been paying and intends to continue to pay its post-petition
obligations arising in the ordinary course of business.
The Debtors have received debtor-in-possession financing (the "DIP
Facility") of $25 million from a group of lenders led by Morgan Stanley Funding
Inc. and Lehman Brothers Inc. The DIP Facility, along with the rights of the
Debtors to use the cash collateral of these lenders expires one year from the
date of filing or on the effective date of the reorganization plan, whichever is
earlier.
As of August 14, 2002, the Debtors had not yet filed a plan of
reorganization (the "Plan") with the Bankruptcy Court but management believes
that the Plan will result in most unsecured claims being settled for less than
100% of their face value and that the interests of the common stock holders will
be significantly diluted.
Going Concern
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis of accounting and do not reflect adjustments
that might result if the Company is unable to continue as a going concern. The
Company's recent losses and the Chapter 11 Cases raise substantial doubt about
the Company's ability to continue as a going concern. The ability of the Company
to continue as a going concern and the appropriateness of using the going
concern basis is dependent upon, among other things: (i) the Company's ability
to comply with the debtor-in-possession financing (DIP Facility) agreements,
(ii) the Company's ability to obtain financing upon expiration of the DIP
Facility, (iii) confirmation of the Plan under the Bankruptcy Code, (iv) the
Company's ability to achieve profitable operations after such confirmation, and
(v) the Company's ability to generate sufficient cash from operations to meet
its obligations. In addition, the Company's debtor-in-possession financing
agreements expire in December 2002; there can be no assurance that the Company
will be successful in obtaining confirmation of the Plan by December 2002 and,
if not, there can be no assurance that the existing debtor-in-possession lenders
will agree to continue to provide debtor-in-possession financing.
The consolidated financial statements do not include any adjustments
relating to recoverability and classification of recorded asset amounts or the
amount and classification of liabilities that might be necessary should the
Company not be able to continue as a going concern.
- --------
(1) Figures exclude New Orleans Airport Motel Associates LP which petitioned
under Chapter 11 on April 17, 2002.
6
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
The Plan could materially change the amounts currently recorded in the
consolidated financial statements. The consolidated financial statements do not
give effect to any adjustments to the carrying value of assets or amounts and
classifications of liabilities that might be necessary as a result of the
Chapter 11 Cases.
3. ACCOUNTING DURING REORGANIZATION PROCEEDINGS
The Company continues to apply generally accepted accounting principles
in the preparation of its consolidated financial statements while in Chapter 11.
However, in accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7 - "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" (SOP 90-7): 1) the consolidated
financial statements distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations of the business;
2) the Company's consolidated balance sheets segregate liabilities subject to
compromise from liabilities not subject to compromise; and 3) where the
estimated value of the underlying collateral in respect of certain debt is
considered to be less than the debt obligation, the Company ceased accruing
interest on those debts.
Management believes that 29 of its hotels are significantly
overleveraged in that the estimated fair value of these hotels does not exceed
the outstanding debt on these hotels. Therefore, with the approval of the
Bankruptcy Court, the Company ceased paying interest to the secured lenders of
these properties from the date of the bankruptcy petitions. With respect to the
remaining 76 hotels that are currently in Chapter 11, management presently
believes the value of these hotels exceeds the outstanding debt on these
properties. Accordingly, with the approval of the Bankruptcy Court, the Company
agreed to pay interest on these debts. However, while the Company is in Chapter
11, the value of these properties may be adversely affected by changes in the
economy, changes in the hospitality industry, actions taken or that may be taken
by the franchisors, and the Company's ability to obtain exit financing and
achieve a consensual plan of reorganization. Furthermore, management believes
the significant terms of these debts could also be compromised as a result of
the Chapter 11 Cases. Accordingly, management classifies all of its secured debt
as liabilities subject to compromise in the accompanying balance sheets at June
30, 2002 and December 31, 2001.
Liabilities Subject to Compromise
Liabilities subject to compromise refers to known liabilities incurred
prior to the commencement of the Chapter 11 Cases including those considered by
the Bankruptcy Court to be pre-petition claims. These liabilities consist
primarily of amounts outstanding under long-term debt and also include accounts
payable, accrued interest, and other accrued expenses. These amounts represent
the Company's estimate of known or potential claims to be resolved in the
Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments
may result from (1) negotiations; (2) actions of the Bankruptcy Court; (3)
further development with respect to disputed claims; (4) proofs of claim; or (5)
other events. Payment terms for these amounts will be established under the
Plan.
7
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
The principal categories of claims classified as liabilities subject to
compromise in the Chapter 11 Cases as of June 30, 2002 and December 31, 2001,
are identified below: (amounts in thousands)
June 30, December 31,
2002 2001
---- ----
Long-term debt and capital lease obligations $ 488,653 $ 485,774
Senior Subordinated Notes (including related accrued interest) 210,549 210,549
Minority interest - preferred redeemable securities (including related accrued 197,218 197,218
interest) - CRESTS
Accounts payable 23,319 22,698
Accrued liabilities (including accrued interest of $1,027 at June 30, 2002 and 9,093 9,655
--------- ---------
December 31, 2001)
$ 928,832 $ 925,894
========= =========
Summary of Reorganization Items
The results for the three and six month period ended June 30, 2002
include charges which relate to the reorganization process and the Chapter 11
Cases. The table below summarizes these reorganization charges (amounts in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
Legal and professional fees $2,988 $8,652
Other 881 1,044
------ ---------
$3,869 $9,696
====== ==========
4. CASH, RESTRICTED
Restricted cash as of June 30, 2002 comprises utility deposits of $1.0
million, a restricted payroll deposit of $0.5 million, property tax escrows of
$2.2 million and cash generated from certain highly leveraged properties of $3.6
million (restricted to expenditures on properties in the same lender pool).
5. PROPERTY AND EQUIPMENT, NET
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS 144 and records impairment losses for assets held for use,
where the estimated future undiscounted cash flows are insufficient to recover
the carrying value of those assets. However, as a result of the filing of the
Chapter 11 Cases, the Company may ultimately sell or otherwise dispose of its
hotel assets for amounts less than the carrying value of these assets and future
actions by the Company, its creditors or the Bankruptcy Court could adversely
impact the Company's ability to hold its assets for periods sufficient for it to
recover the carrying value of its assets on an undiscounted cash flow basis. As
a result, the Company could recognize impairment losses in future periods.
Also, as previously reported in the Company's Form 10-K for the year
ended December 31, 2001, in connection with its bankruptcy petitions on December
20, 2001, the Company determined that 29 of its hotels were significantly
overleveraged in that the estimated fair value of these hotels did not exceed
the outstanding debt on these hotels. Therefore, with the approval of the
Bankruptcy Court, the Company ceased paying interest to the secured lenders of
these properties from the date of the bankruptcy petitions. The Company also
concluded that it no longer had the ability to hold these hotels for a period
sufficient for their estimated future undiscounted cash flows to cover their
carrying values. Therefore in accordance with
8
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
the provisions of SFAS 144, the Company determined that an impairment charge of
$69 million was necessary to reduce the carrying value of these assets in
accordance with GAAP. Also, during the fourth quarter of 2001, in connection
with the bankruptcy petitions, the Company ceased marketing for sale four
operating properties that were previously classified as held for sale. Since
these assets were not considered impaired as the estimated future cash flows
from the use of these properties exceeded their carrying values, the Company
recaptured $8.5 million of impairment reserves previously recorded in 1999, 2000
and 2001.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Loss before extraordinary items $ (956) $(11,802) $(15,386) $(13,658)
Extraordinary item 4,419 -- 4,419 --
-------- -------- -------- --------
Net income (loss) $ 3,463 $(11,802) $(10,967) $(13,658)
======== ======== ======== ========
Denominator:
Denominator for basic and diluted earnings (loss)
per share - weighted-average shares 28,480 28,416 28,480 28,353
======== ======== ======== ========
Earnings (loss) per common share - basic and diluted:
Loss before extraordinary items $ (0.03) $ (0.42) $ (0.54) $ (0.48)
Extraordinary item 0.15 -- 0.15 --
-------- -------- -------- --------
Net income (loss) $ 0.12 $ (0.42) $ (0.39) $ (0.48)
======== ======== ======== ========
The computation of diluted earnings per share did not include shares
associated with the assumed conversion of the Convertible Redeemable Equity
Structure Trust Securities (CRESTS) or stock options because their inclusion
would have been antidilutive.
7. OTHER ACCRUED LIABILITIES
At June 30, 2002 and December 31, 2001, other accrued liabilities consisted
of the following:
JUNE 30, DECEMBER 31,
2002 2001
-------------- -----------------
(IN THOUSANDS)
Salaries and related costs.............................................. $ 16,034 $ 13,105
Property and sales taxes................................................ 22,054 16,518
Professional fees....................................................... 375 1,048
Other................................................................... 9,258 7,742
-------- --------
47,721 38,413
Less amounts included in liabilities subject to compromise.............. (8,066) (8,628)
-------- --------
$ 39,655 $ 29,785
======== ========
8. OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS AND PREFERRED
REDEEMABLE SECURITIES
The Company received debtor-in-possession financing of $25 million from
a group of lenders led by Morgan Stanley Funding Inc. and Lehman Brothers Inc.
The DIP Facility along with the rights of the Debtors to use the cash collateral
of these lenders expires one year from the filing or on the effective date of
the Plan, whichever is earlier.
9
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
Under the DIP Facility, the Company has the option to borrow at either
base rate plus 2.5% or at LIBOR plus 3.5%. As of August 14, 2002, the Company
had not borrowed from the facility but had issued two letters of credit totaling
$950,000 against it.
In addition, the Company believes that the estimated value of the
underlying collateral on certain of its debts is less than the principal
obligation outstanding. Therefore, in accordance with SOP 90-7, the Company
ceased accruing interest on these debts as well as the Senior Subordinated Notes
and the CRESTS. Contractual interest not accrued between December 20, 2001 and
June 30, 2002 (including interest on the Senior Subordinated Notes and the
CRESTS) amounted to $24.4 million. This is comprised of $1.3 million for the
period December 20, 2001 to December 31, 2001, $11.4 million for the period
January 1, 2002 to March 31, 2002 and $11.7 million for the period April 1, 2002
to June 30, 2002.
Substantially, all the Company's property and equipment are pledged as
collateral for long-term obligations of which approximately $497 million has
been guaranteed by Lodgian, Inc. Certain of the mortgage notes are subject to a
prepayment penalty if repaid prior to their maturity.
On May 20, 2001, promissory notes of approximately $3.9 million secured
by the pledge of 100% of the ownership interests of Macon Hotel Associates,
L.L.C. ("MHA") were due. The Company owns a 60% controlling interest in MHA.
MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA did
not make this payment on May 20, 2001. MHA was not included in the entities that
filed for reorganization under Chapter 11. On April 19, 2002, MHA and the
lenders entered into a Satisfaction and Release Agreement whereby the lenders
agreed to fully discharge the indebtedness under the promissory note of $3.9
million plus related accrued interest approximating $0.7 million in exchange for
payment by MHA of $0.2 million. The resulting gain on extinguishment of this
indebtedness of $4.4 million is included in these financial statements as an
extraordinary item.
As a result of the Chapter 11 Cases, the Company is technically in
default of its debt agreements with the exception of Macon Hotel Associates,
L.L.C. which was not included in the bankruptcy petitions. All of the Company's
pre-petition debts, with the exception of the debt of Macon Hotel Associates,
L.L.C., are recorded in liabilities subject to compromise in the balance sheets
as of June 30, 2002 and December 31, 2001.
The Company is subject to certain property maintenance and quality
standard compliance requirements under its franchise agreements. The Company
periodically receives notifications from its franchisors of events of
noncompliance with such agreements and may continue to receive notifications if
the liquidity and cash constraints of the Company limit its ability to comply
with its franchise agreements. In the past, management has cured most cases of
noncompliance within the applicable cure periods and the events of noncompliance
did not result in events of default under the respective loan agreements.
However, in selected situations, as warranted, based on economic evaluations,
management may elect to not comply with the franchisor requirements. In such
situations, the Company will either select an alternative franchisor or operate
the property independent of any franchisor. As a result of the Company's
petitions for bankruptcy, the Company is technically in default of its franchise
agreements. However, due to the automatic stay of proceedings, the franchisors
are prohibited from proceeding with certain actions absent approval from the
Bankruptcy Court. Were the automatic stay in respect of these franchise
agreements to be lifted, this could negatively impact operating results and the
value of the Company's hotels. See Note 10 below.
9. INCOME TAXES
The Company recognized an income tax provision of $0.2 million for the
six month period ended June 30, 2002 ($0.1 million for the second quarter 2002).
This related primarily to provisions for state income taxes.
10
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES
On March 7, 2002, Hilton Hotel Corporation, Promus Hotels, Inc.,
Doubletree Hotel Systems, Inc. and Hilton Inns, Inc ("Hilton"). filed a Motion
for Relief from the automatic stay of proceedings (which arose as a result of
the Debtors' petitions under Chapter 11) to terminate certain license agreements
or alternatively to compel the Debtors to reject the license agreements. On
August 7, 2002, the Company and Hilton entered into a stipulation resolving this
matter. Unless an objection is raised, the Company expects this stipulation to
be approved by the Bankruptcy Court in the ensuing days.
The Company is contingently liable in respect to three pre-petition
irrevocable letters of credit totaling $7.1 million issued as guarantees to
Zurich Insurance Company and Safeco Insurance Company of America. The letters of
credit expire in the third quarter of 2002 but may require renewal beyond those
dates. Additionally, two letters of credit for $950,000 (expiring in the fourth
quarter of 2002) were issued against the DIP Facility.
The Company is a party in litigation with Hospitality Restoration and
Builders, Inc. ("HRB"), a general contractor hired to perform work on six of the
Company's hotels. The litigation involves hotels in Texas, Illinois, and New
York. In general, HRB claims that the Company breached contracts to renovate the
hotels by not paying for work performed. The Company contends that it was
over-billed by HRB and that a significant portion of the completed work was
defective. In August 2001, the parties agreed to settle the litigation pending
in Texas and Illinois. In exchange for mutual dismissals and full releases, the
Company paid HRB $750,000. With respect to the matter pending in the state of
New York, HRB claims that it is owed $10.7 million. The Company asserted a
counterclaim of $7 million and believes that it has valid defenses and
counterclaims to the contractor's remaining claims. During the second quarter of
2002, the parties agreed, in principle, to consolidate and transfer this
litigation to the Bankruptcy Court presiding over the Company's Chapter 11
proceedings. The Company hopes to reach a formal agreement regarding this
transfer in the near future.
Thomas Arasi, the Company's former President and Chief Executive
Officer, has asserted a claim against the Company under his employment
agreement. Mr. Arasi alleges that he was terminated without cause and claims
damages in the amount of $3.3 million plus other unspecified amounts. The
Company disputes Mr. Arasi's claims and believes it has valid defenses to this
matter.
The Company and individual directors are parties to a lawsuit alleging
violations of federal securities laws and breach of fiduciary duty in connection
with certain investments made in affiliates of Impac Hotel Group, LLC, a
predecessor of the Company. The Company is unable to determine the impact of
this matter should the plaintiffs succeed, but believes that it has valid
defenses to this matter.
The Company is a party to other legal proceedings arising in the
ordinary course of business, the impact of which would not, either individually
or in the aggregate, in management's opinion, have a material adverse effect on
its financial position or results of operations.
11. SUBSEQUENT EVENTS
On July 12, 2002, Merrill Lynch Mortgage Capital, Inc. and/or its
affiliates (the lender) signed a commitment to provide the Company with first
mortgage exit financing aggregating $286.2 million. The loan is to be made to a
special purpose entity to be owned and controlled by the Company following its
reorganization and is to be secured by certain assets of the Company. On August
7, 2002, the Bankruptcy Court entered an order approving the financing
commitment. However, the commitment is subject to, among other factors, the
completion of the lender's legal due diligence, retention of certain hotel
franchises, the absence of certain events of default with respect to the
Company's other debt agreements, confirmation of the Plan by the Bankruptcy
Court (shall not be stayed pending approval), acceptance of the Plan by the
lender and the achievement of certain debt coverage ratios and EBITDA levels.
11
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
12. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, SFAS 142 "Goodwill and other Intangible Assets"
(effective for fiscal years beginning after December 15, 2001) was issued. SFAS
No. 142 specifies that goodwill and some intangible assets will no longer be
amortized but instead will be subject to periodic impairment testing. SFAS
No.142 was adopted by the Company in the first quarter of 2002. The adoption had
no impact on the Company's financial statements.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations," (effective for fiscal periods commencing after June 15, 2002) was
issued. SFAS No. 143 requires that entities recognize the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. The Company
believes that the adoption of SFAS No. 143 will not have a significant impact on
its financial statements.
In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets," (effective for fiscal periods commencing December 15,
2001) was issued. SFAS No. 144 addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to be disposed of.
The statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and among other
factors, establishes criteria beyond that previously specified in SFAS No. 121
to determine when long-lived assets are to be considered as held for sale. The
Company adopted SFAS 144 in the first quarter of 2002 and believes that the
impairment provisions of SFAS No. 144 are similar to SFAS No. 121. The adoption
did not have a significant impact on the Company's financial statements.
However, with the adoption of SFAS No. 144, the operating results of any real
estate assets sold or returned to the lenders may now be included in
discontinued operations in the statement of operations and balance sheet.
In April 2002, SFAS 145 "Rescission of SFAS No. 4, 44, 64 and Amendment
of SFAS No. 13 and Technical Corrections" was issued. SFAS 145 prevents
treatment as extraordinary, gains or losses on extinguishment of debt not
meeting the criteria of APB 30. SFAS 145 is effective for fiscal years beginning
after May 15, 2002. The adoption of SFAS 145 will affect the classification of
such amounts in the financial statements of subsequent periods and comparative
prior periods. The Company has not elected to early adopt the provisions of SFAS
145 for this reporting period.
In June 2002, SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities", was issued. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including certain costs incurred
in a restructuring)". SFAS 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred as
opposed to when the entity commits to an exit plan under EITF No. 94-3. SFAS 146
is effective for exit or disposal activities initiated after December 31, 2002.
The Company believes the adoption of SFAS 146 will not have a significant impact
on its financial statements.
13. RELATED PARTY TRANSACTIONS
On December 15, 2000, the Company sold a partially constructed hotel
located in Richmond, Virginia to an entity controlled by a shareholder who is a
10.9% beneficial owner of the Company's common stock. The Company received net
proceeds of approximately $12.3 million from the sale and recorded a loss on the
sale of approximately $0.5 million. In addition, the Company entered into a
separate management contract with the purchaser to provide construction
management oversight until completion of the project. The project was completed
in May 2001 and the final outstanding amount due under the Project ($1.2
million) was paid on May 3, 2002.
Richard Cartoon, the Company's Executive Vice President and Chief
Financial Officer, is a principal in a business that the Company retained in
November 2001 to provide Richard Cartoon's services as Chief Financial Officer
and other restructuring support and services. In addition to amounts paid for
Richard Cartoon's services, the Company was billed $61,000 and $246,000 for
other support and services
12
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
provided by associates of Richard Cartoon, LLC for the three and six month
period ended June 30, 2002, respectively. The Company expects to continue to
utilize such support and services as needed through the restructuring process.
14. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the Company's sale of $200 million of 12 1/4% Senior
Subordinated Notes (the "Notes") in July 1999, certain of the Company's
subsidiaries (the "Subsidiary Guarantors") have guaranteed the Company's
obligations to pay principal and interest with respect to the Notes. With the
exception of Servico Center Associates, Ltd (which is a 50%-owned subsidiary),
each Subsidiary Guarantor is wholly-owned and management has determined that
separate financial statements for the Subsidiary Guarantors are not individually
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, 2002 and December 31, 2001, statements of
operations for the three and six month periods ended June 30, 2002 and 2001 and
cash flows for the six months ended June 30, 2002 and 2001. In the condensed
consolidating financial statements, Lodgian, Inc. (the "Parent") accounts for
its investments in wholly owned subsidiaries using the equity method.
13
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 21,210 $ 3,440 $ -- $ 24,650
Cash, restricted -- -- 7,305 -- 7,305
Accounts receivable, net of allowances -- 9,169 7,504 -- 16,673
Inventories -- 3,331 3,973 -- 7,304
Prepaid expenses and other current assets -- 180 8,043 -- 8,223
--------- --------- ------------ ------------ ------------
Total current assets -- 33,890 30,265 -- 64,155
Property and equipment, net -- 523,629 373,845 -- 897,474
Deposits for capital expenditures -- 72 17,075 -- 17,147
Investment in consolidated entities (371,901) -- -- 371,901 --
Due from (to) affiliates 555,488 (255,102) (300,386) -- --
Other assets -- 1,079 1,765 -- 2,844
--------- --------- ------------ ------------ ------------
$ 183,587 $ 303,568 $ 122,564 $ 371,901 $ 981,620
========= ========= ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities Not Subject to Compromise
Current liabilities:
Accounts payable $ -- $ 5,141 $ 8,358 $ -- $ 13,499
Accrued interest -- -- 135 -- 135
Other accrued liabilities -- 7,001 32,654 -- 39,655
Advance deposits -- 1,154 1,184 -- 2,338
Current portion of long-term debt and capital
lease obligations -- -- 266 -- 266
--------- --------- ------------ ------------ ------------
Total current liabilities -- 13,296 42,597 -- 55,893
Other long-term debt and capital lease obligations -- -- 7,312 7,312
Liabilities Subject to Compromise 199,256 427,790 301,786 928,832
Minority interests -- 354 6,298 -- 6,652
Commitments and contingencies
Stockholders' deficit:
Common stock 284 33 448 (481) 284
Additional paid-in capital 263,320 22,619 (46,924) 24,305 263,320
Accumulated deficit (279,273) (159,124) (188,953) 348,077 (279,273)
Accumulated other comprehensive loss -- (1,400) -- -- (1,400)
--------- --------- ------------ ------------ ------------
Total stockholders' deficit (15,669) (137,872) (235,429) 371,901 (17,069)
--------- --------- ------------ ------------ ------------
$ 183,587 $ 303,568 $ 122,564 $ 371,901 $ 981,620
========= ========= ============ ============ ============
14
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 6 $ 6,550 $ 7,451 $ -- $ 14,007
Cash, restricted -- -- 3,218 -- 3,218
Accounts receivable, net of allowances -- 5,921 6,568 -- 12,489
Inventories -- 3,320 3,903 -- 7,223
Prepaid expenses and other current assets -- 143 6,141 -- 6,284
--------- ---------- ------------ ------------ ------------
Total current assets 6 15,934 27,281 -- 43,221
Property and equipment, net -- 532,163 381,805 -- 913,968
Deposits for capital expenditures -- 91 15,722 -- 15,813
Investment in consolidated entities (361,752) -- -- 361,752 --
Due from (to) affiliates 556,300 (247,346) (308,954) -- --
Other assets -- 1,122 1,238 -- 2,360
--------- ---------- ------------ ------------ ------------
$ 194,554 $ 301,964 $ 117,092 $ 361,752 $ 975,362
========= ========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities Not Subject to Compromise:
Current liabilities:
Accounts payable $ -- $ 280 $ 2,426 $ -- $ 2,706
Accrued interest -- -- 1,192 -- 1,192
Other accrued liabilities -- 4,837 24,948 -- 29,785
Advance deposits -- 896 875 -- 1,771
Current portion of long-term debt and
capital lease obligations -- -- 7,717 -- 7,717
--------- ---------- ------------ ------------ ------------
Total current liabilities -- 6,013 37,158 -- 43,171
Other long-term debt and capital lease obligations -- -- 7,652 -- 7,652
Liabilities Subject to Compromise 199,256 428,528 298,110 -- 925,894
Minority interests - other -- -- 5,326 -- 5,326
Commitments and contingencies
Stockholders' deficit:
Common stock 284 33 448 (481) 284
Additional paid-in capital 263,320 22,619 (46,924) 24,305 263,320
Accumulated deficit (268,306) (153,250) (184,678) 337,928 (268,306)
Accumulated other comprehensive loss -- (1,979) -- -- (1,979)
--------- ---------- ------------ ------------ ------------
Total stockholders' deficit (4,702) (132,577) (231,154) 361,752 (6,681)
--------- ---------- ------------ ------------ ------------
$ 194,554 $ 301,964 $ 117,092 $ 361,752 $ 975,362
========= ========== ============ ============ ============
15
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Rooms $ -- $ 41,338 $ 42,611 $ -- $ 83,949
Food and beverage -- 12,684 12,656 -- 25,340
Other -- 2,255 2,160 -- 4,415
--------- ---------- ------------ ------------ ------------
-- 56,277 57,427 -- 113,704
--------- ---------- ------------ ------------ ------------
Operating expenses:
Direct:
Rooms -- 11,288 11,557 -- 22,845
Food and beverage -- 8,868 8,785 -- 17,653
Other -- 1,498 1,530 -- 3,028
--------- ---------- ------------ ------------ ------------
-- 21,654 21,872 -- 43,526
--------- ---------- ------------ ------------ ------------
Gross contribution -- 34,623 35,555 -- 70,178
General, administrative and other -- 21,747 22,413 -- 44,160
Depreciation and amortization -- 7,619 7,102 -- 14,721
Impairment of long-lived assets -- -- -- -- --
Severance and restructuring expenses -- -- 17 -- 17
--------- ---------- ------------ ------------ ------------
Other operating expenses -- 29,366 29,532 -- 58,898
--------- ---------- ------------ ------------ ------------
-- 5,257 6,023 -- 11,280
Other income (expenses):
Interest income and other -- -- 274 -- 274
Interest expense -- (4,033) (3,674) -- (7,707)
Equity in losses of consolidated subsidiaries (880) -- -- 880 --
Minority interests -- 200 (1,058) -- (858)
(Loss) income before income taxes,
reorganization items and
--------- ---------- ------------ ------------ ------------
extraordinary items (880) 1,424 1,565 880 2,989
Reorganization items -- (4,881) 1,012 -- (3,869)
--------- ---------- ------------ ------------ ------------
(Loss) income before income taxes and
extraordinary items (880) (3,457) 2,577 880 (880)
Provision for income taxes (76) -- (76) 76 (76)
--------- ---------- ------------ ------------ ------------
(Loss) income before extraordinary items (956) (3,457) 2,501 956 (956)
Extraordinary item:
Gain on extinguishment of debt (income
taxes estimated at nil) 4,419 -- 4,419 (4,419) 4,419
--------- ---------- ------------ ------------ ------------
Net income (loss) $ 3,463 $ (3,457) $ 6,920 $ (3,463) $ 3,463
========= ========== ============ ============ ============
16
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms $ -- $ 45,087 $ 46,850 $ -- $ 91,937
Food and beverage -- 13,723 14,076 -- 27,799
Other -- 2,890 3,271 -- 6,161
--------- ---------- ------------ ------------ ------------
-- 61,700 64,197 -- 125,897
--------- ---------- ------------ ------------ ------------
Operating expenses:
Direct:
Rooms -- 11,972 12,297 -- 24,269
Food and beverage -- 9,711 9,781 -- 19,492
Other -- 1,537 1,608 -- 3,145
--------- ---------- ------------ ------------ ------------
-- 23,220 23,686 -- 46,906
--------- ---------- ------------ ------------ ------------
Gross contribution -- 38,480 40,511 -- 78,991
General, administrative and other -- 22,228 27,454 -- 49,682
Depreciation and amortization -- 6,702 7,789 -- 14,491
Impairment of long-lived assets -- 4,000 -- -- 4,000
Severance and restructuring expenses -- -- 717 -- 717
--------- ---------- ------------ ------------ ------------
Other operating expenses -- 32,930 35,960 -- 68,890
--------- ---------- ------------ ------------ ------------
-- 5,550 4,551 -- 10,101
Other income (expenses):
Interest income and other -- -- 214 -- 214
Interest expense -- (11,657) (6,947) -- (18,604)
Loss on asset dispositions -- (260) -- -- (260)
Equity in losses of consolidated subsidiaries (11,802) -- -- 11,802 --
Minority interests:
Preferred redeemable securities -- -- (3,283) -- (3,283)
Other -- -- 30 -- 30
--------- ---------- ------------ ------------ ------------
Loss before income taxes (11,802) (6,367) (5,435) 11,802 (11,802)
Benefit for income taxes -- -- -- -- --
--------- ---------- ------------ ------------ ------------
Net loss $ (11,802) $ (6,367) $ (5,435) $ 11,802 $ (11,802)
========= ========== ============ ============ ============
17
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Rooms $ -- $ 75,310 $ 78,424 $ -- $ 153,734
Food and beverage -- 22,954 22,917 -- 45,871
Other -- 4,200 4,261 -- 8,461
--------- ---------- ------------ ------------ ------------
-- 102,464 105,602 -- 208,066
--------- ---------- ------------ ------------ ------------
Operating expenses:
Direct:
Rooms -- 20,938 21,707 -- 42,645
Food and beverage -- 16,637 16,390 -- 33,027
Other -- 2,711 2,985 -- 5,696
--------- ---------- ------------ ------------ ------------
-- 40,286 41,082 -- 81,368
--------- ---------- ------------ ------------ ------------
Gross contribution -- 62,178 64,520 -- 126,698
General, administrative and other -- 41,023 44,952 -- 85,975
Depreciation and amortization -- 14,223 14,761 -- 28,984
Impairment of long-lived assets -- -- -- --
Severance and restructuring expenses -- -- 139 -- 139
--------- ---------- ------------ ------------ ------------
Other operating expenses -- 55,246 59,852 -- 115,098
--------- ---------- ------------ ------------ ------------
-- 6,932 4,668 -- 11,600
Other income (expenses):
Interest income and other -- -- 455 -- 455
Interest expense -- (8,541) (7,722) -- (16,263)
Equity in losses of consolidated subsidiaries (15,235) -- -- 15,235 --
Minority interests -- (202) (1,129) -- (1,331)
--------- ---------- ------------ ------------ ------------
Loss before income taxes, reorganization items and
extraordinary items (15,235) (1,811) (3,728) 15,235 (5,539)
Reorganization items -- (4,881) (4,815) -- (9,696)
--------- ---------- ------------ ------------ ------------
Loss before income taxes and extraordinary items (15,235) (6,692) (8,543) 15,235 (15,235)
Provision for income taxes (151) -- (151) 151 (151)
--------- ---------- ------------ ------------ ------------
Loss before extraordinary items (15,386) (6,692) (8,694) 15,386 (15,386)
Extraordinary item:
Gain on extinguishment of debt (income taxes
estimated at nil) 4,419 -- 4,419 (4,419) 4,419
--------- ---------- ------------ ------------ ------------
Net loss $ (10,967) $ (6,692) $ (4,275) $ 10,967 $ (10,967)
========= ========== ============ ============ ============
18
LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
(UNAUDITED IN THOUSANDS)
Revenues:
Rooms $ -- $ 85,486 $ 90,469 $ -- $ 175,955
Food and beverage -- 26,101 26,900 -- 53,001
Other -- 5,431 6,283 -- 11,714
--------- ---------- ------------ ------------ ------------
-- 117,018 123,652 -- 240,670
--------- ---------- ------------ ------------ ------------
Operating expenses:
Direct:
Rooms -- 23,537 24,840 -- 48,377
Food and beverage -- 18,809 19,346 -- 38,155
Other -- 3,024 3,325 -- 6,349
--------- ---------- ------------ ------------ ------------
-- 45,370 47,511 -- 92,881
--------- ---------- ------------ ------------ ------------
Gross contribution -- 71,648 76,141 -- 147,789
General, administrative and other -- 44,697 56,465 -- 101,162
Depreciation and amortization -- 13,971 16,177 -- 30,148
Impairment of long-lived assets -- 1,265 3,300 -- 4,565
Severance and restructuring expenses -- -- 1,467 -- 1,467
--------- ---------- ------------ ------------ ------------
Total operating expenses -- 59,933 77,409 -- 137,342
--------- ---------- ------------ ------------ ------------
-- 11,715 (1,268) -- 10,447
Other income (expenses):
Interest income and other -- -- 480 -- 480
Interest expense -- (24,691) (14,678) -- (39,369)
Gain on asset dispositions -- (240) 24,349 -- 24,109
Equity in losses of consolidated subsidiaries (10,958) -- -- 10,958 --
Minority interests:
Preferred redeemable securities -- -- (6,509) -- (6,509)
Other -- -- (116) -- (116)
--------- ---------- ------------ ------------ ------------
(Loss) income before income taxes (10,958) (13,216) 2,258 10,958 (10,958)
Provision for income taxes (2,700) -- (2,700) 2,700 (2,700)
--------- ---------- ------------ ------------ ------------
Net loss $ (13,658) $ (13,216) $ (442) $ 13,658 $ (13,658)
========= ========== ============ ============ ============
19
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, 2002
NON-
PARENT AND SUBSIDIARY GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ---------- ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Operating activities:
Net loss $ -- $ (6,692) $ (4,275) $ (10,967)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization -- 14,223 14,761 28,984
Gain on extinguishment of debt -- -- (4,419) (4,419)
Minority interests -- 202 1,129 1,331
Other -- 880 (1,462) (582)
Changes in operating assets and liabilities:
Accounts receivable, net of allowances -- (3,248) (936) (4,184)
Inventories -- (11) (70) (81)
Prepaid expenses, other assets and restricted cash -- (37) (5,989) (6,026)
Accounts payable -- 4,861 4,152 9,013
Accrued liabilities -- 1,484 7,312 8,796
Advance deposits -- 258 309 567
------------ ---------- ------------ ------------
Net cash provided by operating activities -- 11,920 10,512 22,432
------------ ---------- ------------ ------------
Investing activities:
Capital improvements -- (5,035) (4,306) (9,341)
Withdrawals (deposits) for capital expenditures -- 19 (1,353) (1,334)
------------ ---------- ------------ ------------
Net cash used in investing activities -- (5,016) (5,659) (10,675)
------------ ---------- ------------ ------------
Financing activities:
Proceeds (paid to) received from related parties (6) 7,756 (7,750) --
Principal payments on long-term obligations -- -- (1,114) (1,114)
------------ ---------- ------------ ------------
Net cash (used in) provided by financing activities (6) 7,756 (8,864) (1,114)
------------ ---------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (6) 14,660 (4,011) 10,643
Cash and cash equivalents at beginning of period 6 6,550 7,451 14,007
------------ ---------- ------------ ------------
Cash and cash equivalents at end of period $ -- $ 21,210 $ 3,440 $ 24,650
============ ========== ============ ============
20
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, 2001
NON-
PARENT AND SUBSIDIARY GUARANTOR TOTAL
ELIMINATIONS GUARANTORS SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------ ------------
(UNAUDITED IN THOUSANDS)
Operating activities:
Net loss $ -- $ (13,216) $ (442) $ (13,658)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization -- 13,971 16,177 30,148
Impairment of long-lived assets -- 1,265 3,300 4,565
Deferred income tax provision 2,700 -- -- 2,700
Minority interests -- -- 6,625 6,625
Gain on sale of assets -- 240 (24,349) (24,109)
Amortization of deferred loan fees -- 1,746 1,056 2,802
Other 500 (637) (343) (480)
Changes in operating assets and liabilities:
Accounts receivable, net of allowances -- (798) 730 (68)
Inventories -- 207 27 234
Prepaid expenses, other assets and restricted cash -- 13 (930) (917)
Accounts payable -- 265 (5,260) (4,995)
Accrued liabilities -- (1,047) (3,457) (4,504)
Advance deposits -- 229 42 271
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities 3,200 2,238 (6,824) (1,386)
------------ ------------ ------------ ------------
Investing activities:
Capital improvements, net -- (10,452) (5,492) (15,944)
Proceeds from sale of assets, net of selling costs -- 8,862 55,728 64,590
Net withdrawals for capital expenditures -- 830 694 1,524
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities -- (760) 50,930 50,170
------------ ------------ ------------ ------------
Financing activities:
Proceeds from borrowings on working capital revolver -- 16,000 -- 16,000
Proceeds (paid to) received from related parties (3,200) 18,504 (15,304) --
Principal payments on long-term obligations -- (26,046) (25,222) (51,268)
Principal payments on working capital revolver -- (15,000) -- (15,000)
------------ ------------ ------------ ------------
Net cash used in financing activities (3,200) (6,542) (40,526) (50,268)
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents -- (5,064) 3,580 (1,484)
Cash and cash equivalents at beginning of period 6 20,653 343 21,002
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 6 $ 15,589 $ 3,923 $ 19,518
============ ============ ============ ============
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHAPTER 11 PROCEEDINGS
As previously discussed in Note 2 to the Condensed Consolidated
Financial Statements included in this Form 10-Q, on December 20, 2001, the
Company and eighty-one of its subsidiaries filed for voluntary reorganization
with the Bankruptcy Court. The Chapter 11 Cases have been consolidated for
purposes of administration under case number 01-16345. The filing was
precipitated by the weaker US economy, the decline in travel since the events of
September 11 and the Company's heavy debt load. The Debtors are currently
operating their businesses as debtors-in-possession and are subject to the
jurisdiction of the Bankruptcy Court while a reorganization plan ("the Plan") is
being formulated.
Also, on April 17, 2002, one additional operating subsidiary, New
Orleans Airport Motel Associates, LP filed for voluntary reorganization with the
United States Bankruptcy Court for the Southern District of New York under
Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has
also been consolidated with the previously filed Chapter 11 Cases, for purposes
of administration, under case number 01-16345.
As of June 30, 2002, all operating subsidiaries of the Company were
included in the Chapter 11 Cases except for one subsidiary owning one hotel.
CONSOLIDATED FINANCIAL STATEMENTS
The Company's Condensed Consolidated Financial Statements have been
prepared on the going concern basis of accounting and do not reflect any
adjustments that might result if the Company is unable to continue as a going
concern. The Company's recent losses, and the Chapter 11 Cases, raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern and the
appropriateness of using the going concern basis is dependent upon, among other
factors, the Company's ability (i) to comply with the debtor-in-possession
financing agreements, (ii) to obtain exit financing to enable it to exit Chapter
11, (iii) to obtain confirmation of the Plan under the Bankruptcy Code, (iv) to
achieve profitable operations after such confirmation, and (v) to generate
sufficient cash from operations to meet its obligations.
As a result of the filing of the Chapter 11 Cases and related
circumstances, book values of assets may not be realized and liquidation of
liabilities is subject to substantial doubt. While under the protection of
Chapter 11, the Debtors may sell or otherwise dispose of assets and liquidate or
settle liabilities, for amounts other than those reflected in the Condensed
Consolidated Financial Statements. Further, the confirmation of the Plan could
materially change the amounts reported in the accompanying Condensed
Consolidated Financial Statements. The Condensed Consolidated Financial
Statements do not include any adjustments relating to recoverability of the
value of the recorded asset amounts or the amounts and classification of
liabilities that might be necessary as a consequence of the Plan.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
The following discussion should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and related notes thereto
included elsewhere herein.
The discussion below and elsewhere in this Form 10-Q includes
statements that are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These
include management's expectations with respect to the Chapter 11 filing,
statements that describe anticipated revenues, capital expenditures and other
financial items, statements that describe the Company's business plans and
objectives, and statements that describe the expected impact of competition,
government regulation, litigation and other factors on the Company's future
financial 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:
22
o The impact of the Chapter 11 Cases and related circumstances which
could materially reduce the reported amounts of assets and liabilities
included in these Condensed Consolidated Financial Statements.
Liabilities subject to compromise could increase as a result of
negotiations, actions of the Bankruptcy Court, changes in the reported
amounts of disputed claims, proof of claims and other events.
o Risks associated with the Company's ability to maintain its existing
franchise affiliations.
o Risks associated with the Company's ability to obtain approval for its
plan of reorganization.
o Risks associated with the Company's ability to obtain exit financing to
replace the DIP Facility.
o The impact of pending or threatened litigation and/or governmental
inquiries and investigation involving the Company.
o The effect of competition and the economy on the Company's ability to
maintain margins on existing operations, including uncertainties
relating to competition.
o The Company's ability to generate sufficient cash flows from operations
to meet its obligations.
o The effectiveness of changes in management and the ability of the
Company to retain qualified individuals to serve in senior management
positions.
o The potential for additional impairment charges against earnings
related to long-lived assets.
o The impact of increased expenses due to layoffs of employees.
Many of these factors are not within the Company's control and readers are
cautioned not to put undue reliance on these forward looking statements.
GENERAL OVERVIEW
Management believes that results of operations in the hotel industry
are best explained by four key performance measures: occupancy, average daily
rate ("ADR"), revenue per available room ("RevPAR") levels and EBITDA margins.
These measures are influenced by a variety of factors including national,
regional and local economic conditions, the degree of competition with other
hotels in the area and changes in travel patterns. The demand for accommodations
is also affected by normally recurring seasonal patterns and most of the
Company's hotels experience lower occupancy levels in the fall and winter months
(November through February) which may result in lower revenues, lower net income
and less cash flow during these months.
Revenues. Revenues are composed of room revenues, food and beverage
revenues and other revenues. Room revenues are derived from guest room rentals,
whereas food and beverage revenues primarily include sales from hotel
restaurants, room service and hotel catering. Other revenues include charges for
guests' long-distance telephone service, laundry service and use of meeting
facilities.
Operating Expenses. Operating expenses are composed of direct, general
and administrative, other hotel operating expenses and depreciation and
amortization. Direct expenses, including rooms, food and beverage and other
operations, reflect expenses directly related to hotel operations. These
expenses are primarily variable with available rooms and occupancy rates, but
also have a small fixed component, which can be leveraged with increases in
revenues. General and administrative expenses represent corporate salaries and
other corporate operating expenses and are generally fixed. Other expenses
include primarily property level expenses related to general operations such as
marketing, utilities, repairs and maintenance and other property administrative
costs.
23
RESULTS OF OPERATIONS
The downturn in the US economy, the lodging industry and the events of
September 11, 2001 have adversely impacted the Company's results of operations.
In addition, operating results for the first two quarters of 2002 have
been impacted by the disposition of six hotels in 2001 (five of which were sold
in the first two quarters). Gross sales price of the five properties sold in the
first two quarters of 2001 aggregated $72.2 million.
The discussion of results of operations, income taxes, liquidity and
capital resources that follows is derived from the Company's unaudited Condensed
Consolidated Financial Statements set forth in "Item I. Financial Statements"
included in this Form 10-Q and should be read in conjunction with such financial
statements and notes thereto.
24
THREE MONTHS ENDED JUNE 30, 2002 ("SECOND QUARTER 2002") COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 2001 ("SECOND QUARTER 2001")
REVENUES
At June 30, 2002, the Company owned 105 hotels and had a minority
interest in one hotel compared with 106 hotels owned and a minority interest in
one hotel at June 30, 2001.
Revenues for the Company were $113.7 million for the second quarter
2002, a 9.7% decrease compared to revenues of $125.9 million for the second
quarter 2001. Of this $12.2 million decrease, approximately $1.8 million is a
result of the sale of hotels. Revenues on a same unit basis, for hotels owned at
the end of the second quarter 2002 were $113.7 million for the second quarter
2002 and $124.1 million for the second quarter 2001 (a decline of 8.3%). RevPAR,
on a same unit basis, for hotels owned at the end of the second quarter 2002
declined by 7.3% compared with the second quarter 2001 as a result of a decline
in occupancy of 2.0% as well as a decrease in average daily rates of 5.4%.
Revenues and RevPar on the same unit basis for the second quarter 2002 were
adversely impacted by a general decline in the industry, particularly in certain
of the Company's markets. These factors were exacerbated by the events of
September 11, 2001.
OPERATING EXPENSES
Direct operating expenses for the Company were $43.5 million (38.3% of
direct revenues) for the second quarter 2002 and $46.9 million (37.3% of direct
revenues) for the second quarter 2001. This $3.4 million decrease was primarily
attributable to the reduction in revenues offset by reduced operating margins in
the rooms department as well as in other direct revenue activities. Other direct
revenues are comprised of revenues from telephone, laundry services, use of
meeting facilities and other miscellaneous activities.
General, administrative and other expenses were $44.2 million (38.8% of
direct revenues) for the second quarter 2002 and $49.7 million (39.5% of direct
revenues) for the second quarter 2001. The decrease in general administrative
and other expenses is partially due to reduced property level expenses related
to reductions in revenues. Property level expenses include expenses related to
general operations such as marketing, franchise fees, property repairs and
maintenance and other property administrative costs. Property level expenses,
though varying with revenues contain significant elements of fixed costs and
therefore were not reduced proportionately with revenues. General,
administrative and other expenses also declined as a result of significant
reductions in corporate overheads. Corporate overheads decreased as a result of
certain corporate cost-reduction initiatives that were implemented at the
corporate office. These initiatives included reductions in staffing, office
space and technology costs. In addition, certain costs incurred during the
second quarter of 2001 were eliminated during the latter part of 2001. These
related mainly to professional fees principally due to consultants performing
certain financial and accounting management responsibilities within the Company
as well as to certain legal matters.
Depreciation and amortization expense was $14.7 million in the second
quarter 2002 and $14.5 million in the second quarter 2001. The $0.2 million
increase is a result of additional depreciation related to four hotels
previously considered held for sale which are no longer being marketed for sale
($0.3 million) as well as to depreciation related to increased capital
expenditure ($0.2 million). These increases were offset by reductions in
depreciation related to reduced carrying values of certain assets as a result of
the impairment charges recorded in the fourth quarter of 2001 and to a reduction
in the number of hotels in the portfolio.
Impairment charges for the second quarter 2001 were $4.0 million. This
charge related to one property which was identified as held for sale and also
sold in the second quarter of 2001.
There were no significant severance and restructuring charges for the
second quarter 2002 but severance and restructuring charges were $0.7 million
for the second quarter 2001. The second quarter 2001 charges related to senior
level management changes. As previously reported in the Company's Form 10-K for
the year ended December 31, 2001, significant management changes occurred during
2001.
25
OTHER INCOME AND EXPENSES
Interest expense was $7.7 million in the second quarter 2002 and $18.6
million in the second quarter 2001. This decrease is partially attributable to a
reduction in the level of debt and also to a decrease in the cost of debt. In
addition, as previously reported in the Company's Form 10-K for the year ended
December 31, 2001, where the estimated value of the underlying collateral in
respect of certain debt is considered to be less than the debt obligation, the
Company ceased accruing interest on those debts. Contractual interest expense in
respect of these debts that was not recorded for the second quarter of 2002
(excluding the interest on the CRESTs) approximated $8.2 million.
Loss on asset dispositions was $0.3 million for the second quarter
2001. This related to the three hotels sold in the second quarter 2001 and
represented the excess of the net book values of those assets over the net
proceeds of sale.
Minority interest expense was $0.9 million and $3.3 million in the
second quarter 2002 and 2001, respectively. This $2.4 million decrease is
primarily due to the non-accrual of the CREST interest. The Company ceased
accruing interest on the CRESTs as these are considered to be pre-petition
unsecured debts of the Company. CRESTs interest not accrued for the second
quarter 2002 approximated $3.5 million.
Reorganization items (mainly professional fees relating to the Chapter
11 filing) were $3.9 million for the second quarter of 2002.
Gain on extinguishment of debt was $4.4 million for the second quarter
2002 (nil for the second quarter 2001). This relates to a discharge of
indebtedness (principal plus interest accrued) in respect of Macon Hotel
Associates (a 60% subsidiary of the Company) as a result of a Satisfaction and
Release Agreement between Macon Hotel Associates and one of its lenders.
NET INCOME
After a provision for income taxes of $0.1 million and a gain on
extinguishment of debt of $4.4 million for the second quarter 2002 (both nil for
the second quarter 2001), the Company recorded net income of $3.5 million ($0.12
per share) compared with a net loss of $11.8 million ($0.42 loss per share) for
the second quarter 2001, for the reasons discussed above.
SIX MONTHS ENDED JUNE 30, 2002 ("THE 2002 PERIOD") COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 2001 ("THE 2001 PERIOD")
REVENUES
At June 30, 2002, the Company owned 105 hotels and had a minority
interest in one hotel compared with 106 hotels owned and a minority interest in
one hotel at June 30, 2001.
Revenues for the Company were $208.1 million for the 2002 period, a
13.5% decrease compared to revenues of $240.7 million for the 2001 period. Of
this $32.6 million decrease, approximately $6.4 million is a result of the sale
of hotels. Revenues on a same unit basis, for hotels owned at the end of the
2002 period were $208.1 million for the 2002 period and $234.3 million for the
2001 period (a decline of 11.2%). RevPAR, on a same unit basis, for hotels owned
at the end of the 2002 period declined by 10.4% compared with the 2001 period as
a result of a decline in occupancy of 4.5% as well as a decrease in average
daily rates of 6.1%. Revenues and RevPar on the same unit basis for the 2002
period were adversely impacted by a general decline in the industry,
particularly in certain of the Company's markets. These factors were exacerbated
by the events of September 11, 2001.
OPERATING EXPENSES
Direct operating expenses for the Company were $81.4 million (39.1% of
direct revenues) for the 2002 period and $92.9 million (38.6% of direct
revenues) for the 2001 period. This $11.5 million decrease was primarily
attributable to the reduction in revenues offset by reduced operating margins in
the rooms department as well as in other direct revenue activities. Other direct
revenues are comprised of revenues from telephone, laundry services, use of
meeting facilities and other miscellaneous activities.
26
General, administrative and other expenses were $86.0 million (41.3% of
direct revenues) for the 2002 period and $101.2 million (42.0% of direct
revenues) for the 2001 period. The decrease in general administrative and other
expenses is partially due to reduced property level expenses related to
reductions in revenues. Property level expenses include expenses related to
general operations such as marketing, franchise fees, property repairs and
maintenance and other property administrative costs. Property level expenses,
though varying with revenues, contain significant elements of fixed costs and
therefore were not reduced proportionately with revenues. General,
administrative and other expenses also declined as a result of significant
reductions in corporate overheads. Corporate overheads decreased as a result of
certain corporate cost-reduction initiatives that were implemented at the
corporate office. These initiatives included reductions in staffing, office
space and technology costs. In addition, certain costs incurred during the
second quarter of 2001 were eliminated during the latter part of 2001. These
related mainly to professional fees principally due to consultants performing
certain financial and accounting management responsibilities within the Company
as well as to certain legal matters.
Depreciation and amortization expense was $29.0 million in the 2002
period and $30.1 million in the 2001 period. The $1.1 million decrease is a
result of reductions in depreciation related to reduced carrying values of
certain assets arising from the impairment charges recorded in the fourth
quarter of 2001 as well as to a reduction in the number of hotels in the
portfolio. This decrease was offset by additional depreciation related to four
hotels previously considered held for sale which are no longer being marketed
for sale as well as by additional depreciation related to accelerated capital
expenditure taking effect in the second quarter of 2002.
Impairment charges were $4.6 million for the 2001 period. This charge
consisted of $0.6 million recognized in the first quarter 2001 and $4.0 million
recognized in the second quarter 2001. The first quarter charge comprised $4.3
million related to revised estimates of fair value for properties held for sale
and held for investment, net of a recapture of $3.7 million of impairment
charges as one hotel previously held for sale was no longer being actively
marketed. The second quarter charge related to one property which was identified
as held for sale and also sold in the second quarter of 2001.
Severance and restructuring charges for the 2002 period were $0.1
million and $1.5 million for the 2001 period. The charges for 2002 and 2001
related to senior level management changes occurring mainly in 2001. As
previously reported in the Company's Form 10-K for the year ended December 31,
2001, significant management changes occurred during 2001.
OTHER INCOME AND EXPENSES
Interest expense was $16.3 million in the 2002 period and $39.4 million
in the 2001 period. This decrease is partially attributable to a reduction in
the level of debt and also to a decrease in the cost of debt. In addition, as
previously reported in the Company's Form 10-K for the year ended December 31,
2001, where the estimated value of the underlying collateral in respect of
certain debt is considered to be less than the debt obligation, the Company
ceased accruing interest on those debts. Contractual interest expense in respect
of these debts that was not recorded for the 2002 period (excluding interest on
the CRESTs) approximated $16.1 million.
Gain on asset dispositions was $24.1 million for the 2001 period. This
related to the five hotels sold in the 2001 period and represented the excess of
the net proceeds of sale over the net book values of those assets.
Minority interest expense was $1.3 million in the 2002 period and $6.6
million for the 2001 period. This $5.3 million decrease is primarily due to the
non-accrual of the CREST interest offset by an increase in other minority
interest expense due to higher net income levels for those hotels which the
Company co-owns with its third-party minority equity partners. The Company
ceased accruing interest on the CRESTs as these are considered to be unsecured
debts of the Company. CREST interest not accrued for the 2002 period
approximates $7.0 million.
Reorganization items (mainly professional fees relating to the Chapter
11 filing) were $9.7 million for the 2002 period.
27
Gain on extinguishment of debt was $4.4 million for the 2002 period
(nil for the 2001 period). This relates to a discharge of indebtedness
(principal plus interest accrued) in respect of Macon Hotel Associates (a 60%
subsidiary of the Company) as a result of a Satisfaction and Release Agreement
between Macon Hotel Associates and one of its lenders.
NET INCOME
After a provision for income taxes of $0.2 million ($2.7 million for
the 2001 period) and a gain on extinguishment of debt of $4.4 million for the
2002 period (nil for the 2001 period), the Company recorded a net loss of $11.0
million ($0.39 loss per share) compared with a net loss of $13.7 million ($0.48
loss per share) for the 2001 period, for the reasons discussed above.
INCOME TAXES
As of December 31, 2001, Lodgian had net operating loss carryforwards
of approximately $235 million for federal income tax purposes, which expire in
2004 through 2021. It is likely that under the Plan, substantial amounts of net
operating losses will be utilized relating to debt cancellations. The Company's
ability to use any remaining net operating loss carryforwards to offset future
income is subject to other limitations, and may be subject to additional
limitations in the future. Due to these limitations, a portion or all of these
net operating loss carryforwards could expire unused. In addition, the Company
recognized an income tax provision of $0.2 million for the 2002 period ($2.7
million for the 2001 period), which related primarily to provisions for state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Lodgian's principal sources of liquidity consist of existing cash
balances, cash flow from operations and financing.
On December 20, 2001, the Company and eighty-one of its subsidiaries
filed for voluntary reorganization with the United States Bankruptcy Court for
the Southern District of New York under Chapter 11 of the Bankruptcy Code. The
Chapter 11 Cases have been consolidated for purposes of administration under
case number 01-16345. The filing was precipitated by the weaker US economy, the
decline in travel since the events of September 11 and the Company's heavy debt
load. The Debtors are currently operating their businesses as
debtors-in-possession and are subject to the jurisdiction of the Bankruptcy
Court while the Plan is being formulated.
Also, on April 17, 2002, one additional operating subsidiary, New
Orleans Airport Motel Associates, LP filed for voluntary reorganization with the
United States Bankruptcy Court for the Southern District of New York under
Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has
also been consolidated with the previously filed Chapter 11 Cases, for purposes
of administration, under case number 01-16345.
As a result of the Chapter 11 filing, the Company is prohibited from
paying pre-petition claims (unless these are approved by the Bankruptcy Court)
and creditors are prohibited from attempting to collect loans or debts arising
prior to December 20, 2001. The Company, at its option, may assume or reject
contracts entered into prior to the date of filing. Claims related to rejected
contracts entered into prior to the date of the petitions would be treated as
unsecured claims.
The Company received approval from the Bankruptcy Court to pay
pre-petition employee wages, salaries, benefits and other employee obligations.
The Bankruptcy Court also approved orders granting the Debtors authority to pay,
among other things, certain pre-petition claims of its critical service vendors.
The Company has been paying and intends to continue to pay its post-petition
obligations arising in the ordinary course of business.
The Debtors received debtor-in-possession financing of $25 million from
a group of lenders led by Morgan Stanley Funding Inc. and Lehman Brothers Inc.
The DIP Facility, along with the rights of the Debtors to use the cash
collateral of these lenders expires, one year from the date of filing or on the
effective date of the Plan, whichever is earlier. This financing will allow the
Company to operate in the normal course during the bankruptcy proceedings.
28
Further, on July 12, 2002, Merrill Lynch Mortgage Capital, Inc. and/or
its affiliates (the lender) signed a commitment to provide the Company with
first mortgage exit financing aggregating $286.2 million. The loan is to be made
to a special purpose entity to be owned and controlled by the Company following
its reorganization and is to be secured by certain assets of the Company. On
August 7, 2002, the Bankruptcy Court entered an order approving the financing
commitment. However, the commitment is subject to, among other factors, the
completion of the lender's legal due diligence, retention of certain hotel
franchises, the absence of certain events of default with respect to the
Company's other debt agreements, confirmation of the Plan by the Bankruptcy
Court (shall not be stayed pending approval), acceptance of the Plan by the
lender and the achievement of certain debt coverage ratios and EBITDA levels.
In addition, the Company received approval from the Bankruptcy Court to
pay the post-petition interest on debts relating to 76 of its properties. The
Company has not paid any post-petition interest in relation to the Senior
Subordinated Notes, CRESTS and the other 29 properties. Contractual interest not
accrued between December 20, 2001 and June 30, 2002 amounted to $24.4 million.
This is comprised of $1.3 million for the period December 20, 2001 to December
31, 2001, $11.4 million for the period January 1, 2002 to March 31, 2002 and
$11.7 million for the period April 1, 2002 to June 30, 2002.
As of August 14, 2002, the Debtors had not yet filed the Plan with the
Bankruptcy Court but management believes that the Plan will result in most
unsecured claims being settled for less than 100% of their face value and that
the interests of the common stock holders will be significantly diluted.
Under the DIP Facility, the Company has the option to borrow at either
base rate plus 2.5% or at LIBOR plus 3.5%. The Company is currently in
compliance with the terms of the DIP Facility. As of August 14, 2002, the
Company had not borrowed from the facility but had issued two letters of credit
totaling $950,000 against it.
The Company had earnings from operations before interest, taxes,
depreciation and amortization ("EBITDA"), as adjusted in the 2002 period of
$40.7 million, a 12.7% decrease from the $46.6 million in the 2001 period. The
EBITDA margins for the 2002 period and the 2001 period were 19.6% and 19.4%,
respectively. The Company has computed EBITDA without regard to the unusual
items. During the 2002 period, the unusual items consisted of reorganization
costs of $9.7 million and severance and restructuring costs of $0.1 million. The
unusual charges for the 2001 period consisted of impairment charges of $4.6
million and severance and restructuring costs of $1.5 million. EBITDA is a
widely regarded industry measure of lodging performance used in the assessment
of hotel property values, although EBITDA is not indicative of and should not be
used as an alternative to net income or net cash provided by operations as
specified by generally accepted accounting principles. Net cash provided by
operating activities for the 2002 period was $22.4 million compared with net
cash used in operating activities of $1.4 million for the 2001 period.
Cash flows used in investing activities were $10.7 million for the 2002
period and cash flows provided by investing activities were $50.2 million in the
2001 period. The 2002 amount includes capital expenditures of $9.4 million and
deposits for capital expenditure escrows of $1.3 million. The 2001 amount
includes capital expenditures of $15.9 million, net proceeds from the sale of
assets of $64.6 million and withdrawals from capital expenditure escrows of $1.5
million.
Cash flows used in financing activities were $1.1 million for the 2002
period and $50.2 million for the 2001 period. The 2002 amount consists of
principal payments in respect of capital leases and payments on long-term
obligations for debts not included in the Chapter 11 filing. The 2001 amount
consists primarily of borrowings on the working capital revolver and repayments
of long-term obligations.
At June 30, 2002, the Company had a working capital surplus of $8.3
million as compared with a working capital surplus of $50,000 at December 31,
2001.
The Company has a capital improvement program to address the capital
improvements required at the hotels related to product improvement plans
specified by license agreements with franchisors, re-branding of several hotels
and general renovation projects intended to ultimately improve the operations of
the hotels. The Company's capital improvement plan for its properties for 2002
and 2003 is estimated at $71.6 million. Of the $71.6 million, $11.0 million was
committed through July 31, 2002 and an additional $26.4 million is expected to
be spent before the end of December 31, 2002. The Company expects to fund
29
its capital expenditures from a combination of amounts escrowed for such
expenditures, its current cash position, cash from operations and if needed,
from its DIP Facility or financing obtained on exiting Chapter 11.
On May 20, 2001, promissory notes of approximately $3.9 million secured
by the pledge of 100% of the ownership interests of Macon Hotel Associates,
L.L.C. ("MHA") were due. The Company owns a 60% controlling interest in MHA.
MHA's sole asset is the Crowne Plaza Hotel located in Macon, Georgia. MHA did
not make this payment on May 20, 2001. MHA was not included in the entities that
filed for reorganization under Chapter 11. On April 19, 2002, MHA and the
lenders entered into a Satisfaction and Release Agreement whereby the lenders
agreed to fully discharge the indebtedness under the promissory note of $3.9
million plus related accrued interest approximating $0.7 million in exchange for
payment by MHA of $0.2 million. The resulting gain on extinguishment of this
indebtedness of $4.4 million is included in the Condensed Consolidated Financial
Statements as an extraordinary item.
As a result of the Chapter 11 Cases, the Company is technically in
default of its debt agreements with the exception of Macon Hotel Associates,
L.L.C which was not included in the bankruptcy petitions. All of the Company's
pre-petition debts, with the exception of the debt of Macon Hotel Associates,
L.L.C, are recorded in liabilities subject to compromise in the balance sheets
as of June 30, 2002 and December 31, 2001.
The Company is subject to certain property maintenance and quality
standard compliance requirements under its franchise agreements. The Company
periodically receives notifications from its franchisors of events of
noncompliance with such agreements and may continue to receive notifications if
the liquidity and cash constraints of the Company limit its ability to comply
with its franchise agreements. In the past, management has cured most cases of
noncompliance within the applicable cure periods and the events of noncompliance
did not result in events of default under the respective loan agreements.
However, in selected situations, as warranted, based on economic evaluations,
management may elect to not comply with the franchisor requirements. In such
situations, the Company will either select an alternative franchisor or operate
the property independent of any franchisor. As a result of the Debtors'
petitions for bankruptcy, the Company is technically in default of its franchise
agreements. However, due to the automatic stay of proceedings, the franchisors
are prohibited from proceeding with certain actions absent approval from the
Bankruptcy Court. Were the automatic stay, in respect of these franchise
agreements, to be lifted, this could negatively impact operating results and the
value of the Company's hotels. See Note 10 to the Condensed Consolidated
Financial Statements.
Management believes that the combination of its current cash position,
cash flow from operations, and the DIP Facility will provide sufficient
liquidity to fund the Company's operating, capital expenditure and debt service
obligations during the Chapter 11 proceedings. However, there can be no
assurance that this will be achieved. The Company's recent losses and the
Chapter 11 cases raise substantial doubt about the Company's ability to continue
as a going concern. The ability of the Company to continue as a going concern
and the appropriateness of using the going concern basis is dependent upon,
among other factors, the Company's ability (i) to comply with the
debtor-in-possession financing agreements, (ii) to obtain exit financing to
enable it to exit Chapter 11, (iii) to obtain confirmation of the Plan under the
Bankruptcy Code, (iv) to achieve profitable operations after such confirmation,
and (v) to generate sufficient cash from operations to meet its obligations. In
addition, the Company's debtor-in-possession financing agreements expire in
December 2002; there can be no assurance that the Company will be successful in
obtaining confirmation of the Plan by December 2002 and, if not, there can be no
assurance that the existing debtor-in-possession lenders will agree to continue
to provide debtor-in-possession financing. Management believes that the DIP
Facility, along with its current cash and cash provided by operations, will
provide sufficient liquidity to fund its operations in the foreseeable future;
however, there can be no assurance that the sources of liquidity will be
available or sufficient to meet the Company's needs.
INFLATION
The rate of inflation has not had a material effect on the Company's
revenues or costs and expenses in recent years and it is not anticipated that
inflation will have a material effect on the Company in the near term.
30
CHANGES IN ACCOUNTING STANDARDS
See Note 12 in the Notes to the Condensed Consolidated Financial
Statements included in this Form 10-Q for a discussion of changes in accounting
standards.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
The accounting policies followed for quarterly reporting are the same as those
disclosed in Note 1 of the Notes to Consolidated Financial Statements included
in the Company's Form 10-K for the year ended December 31, 2001. The preparation
of the financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from these estimates. The critical accounting policies adopted by the Company
relate to capitalization, useful/depreciable lives of fixed assets, revenue
recognition, impairment evaluations, income taxes and liabilities subject to
compromise.
Capitalization and depreciable lives of assets
Capital improvements are capitalized when they extend the useful lives
of the related asset. Management estimates the depreciable lives of the
Company's fixed assets. All items considered to be repair and maintenance items
are expensed as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets (buildings and improvements
10-40 years; furnishings and equipment 3-10 years). Property under capital
leases is amortized using the straight-line method over the shorter of the
estimated useful lives of the assets or the lease term.
Revenue recognition
Revenues are recognized when the services are rendered. Revenues are
composed of rooms, food and beverage and other revenues. Room revenues are
derived from guest room rentals, whereas food and beverage revenues primarily
include sales from hotel restaurants, room service and hotel catering. Other
revenues include charges for guests' long-distance telephone service, laundry
service and use of meeting facilities.
Asset impairment evaluation
Under GAAP, real estate assets are stated at the lower of depreciated
cost or fair value, if deemed impaired. As required by GAAP, the Company
periodically evaluates its real estate assets to determine if there has been any
impairment in carrying value and records impairment losses if there are
indicators of impairment and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts. The
Company recorded impairment losses of $4.0 million and $4.6 million for the
three and six months ended June 30, 2001, respectively. As a result of the
filing of the Chapter 11 Cases and related circumstances, the Company may
ultimately sell or otherwise dispose of its hotel assets for amounts less than
the carrying value of such assets and future actions by the Company, its
creditors or the Bankruptcy Court could adversely impact the Company's ability
to hold its assets for periods sufficient for it to recover the carrying value
of its assets on an undiscounted cash flow basis. As a result, the Company could
recognize additional impairment losses in future periods.
Also, as previously reported in the Company's Form 10-K for the year
ended December 31, 2001, in connection with its bankruptcy petitions on December
20, 2001, the Company determined that 29 of its hotels were significantly
overleveraged in that the estimated fair value of these hotels did not exceed
the outstanding debt on these hotels. Therefore, with the approval of the
Bankruptcy Court, the Company ceased paying interest to the secured lenders of
these properties from the date of the bankruptcy petitions. The Company also
concluded that it no longer had the ability to hold these hotels for a period
sufficient for their estimated future undiscounted cash flows to cover their
carrying values. Therefore in accordance with the provisions of SFAS 144, the
Company determined that an impairment charge of $69 million was necessary to
reduce the carrying value of these assets in accordance with GAAP. Also, during
the fourth
31
quarter of 2001, in connection with the bankruptcy petitions, the Company ceased
marketing for sale four operating properties that were previously classified as
held for sale. Since these assets were not considered impaired as the estimated
future cash flows from the use of these properties exceeded their carrying
values, the Company recaptured $8.5 million of impairment reserves previously
recorded in 1999, 2000 and 2001.
Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS 109) "Accounting for Income Taxes", which requires
the use of the liability method of accounting for deferred income taxes. As a
result of the Company's financial condition, continued losses and the Chapter 11
Cases, the Company has provided a full valuation allowance against its deferred
tax asset as it is more likely than not that the deferred tax asset will not be
realized.
Liabilities subject to compromise
Liabilities subject to compromise refers to known liabilities incurred
prior to the commencement of the Chapter 11 Cases including those considered by
the Bankruptcy Court to be pre-petition claims. These liabilities consist
primarily of amounts outstanding under long-term debt and also include accounts
payable, accrued interest and other accrued expenses. These amounts represent
the Company's estimate of known or potential claims to be resolved in the
Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments
may result from (1) negotiations, (2) actions of the Bankruptcy Court, (3)
further development with respect to disputed claims, (4) proofs of claim, or (5)
other events. Payment terms for these amounts will be established under a plan
of reorganization.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in the Company's market risk sensitive instruments is
the potential loss arising from adverse changes in interest rates. There has
been no meaningful changes in the Company's market risk sensitive instruments
since the filing of the Company's Form 10-K for the year ended December 31,
2001.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 20, 2001, the Company and eighty-one of its subsidiaries
filed for voluntary reorganization with the United States Bankruptcy Court for
the Southern District of New York under Chapter 11 of the Bankruptcy Code. The
Chapter 11 Cases have been consolidated for purposes of administration under
case number 01-16345. The filing was precipitated by the weaker US economy, the
decline in travel since the events of September 11 and the Company's heavy debt
load. The Debtors are currently operating their businesses as
debtors-in-possession and are subject to the jurisdiction of the Bankruptcy
Court while a reorganization plan is being formulated.
Also, on April 17, 2002, one additional operating subsidiary, New
Orleans Airport Motel Associates, LP filed for voluntary reorganization with the
United States Bankruptcy Court for the Southern District of New York under
Chapter 11 of the Bankruptcy Code. The Chapter 11 case for this subsidiary has
also been consolidated with the previously filed Chapter 11 Cases, for purposes
of administration, under case number 01-16345.
As of August 14, 2002, the Debtors had not yet filed a plan of
reorganization with the Bankruptcy Court but management believes that the plan
of reorganization will result in most unsecured claims being settled for less
than 100% of their face value and that the interests of the common stock holders
will be significantly diluted.
On March 7, 2002, Hilton Hotel Corporation, Promus Hotels, Inc.,
Doubletree Hotel Systems, Inc. and Hilton Inns, Inc. ("Hilton") filed a Motion
for Relief from the automatic stay of proceedings (which arose as a result of
the Debtors' petitions under Chapter 11) to terminate certain license agreements
or alternatively to compel the Debtors to reject the license agreements. On
August 7, 2002, the Company and Hilton entered into a stipulation resolving this
matter. Unless an objection is raised, the Company expects this stipulation to
be approved by the Bankruptcy Court in the ensuing days.
The Company is a party in litigation with Hospitality Restoration and
Builders, Inc. ("HRB"), a general contractor hired to perform work on six of the
Company's hotels. The litigation involves hotels in Texas, Illinois, and New
York. In general, HRB claims that the Company breached contracts to renovate the
hotels by not paying for work performed. The Company contends that it was
over-billed by HRB and that a significant portion of the completed work was
defective. In July 2001, the parties agreed to settle the litigation pending in
Texas and Illinois. In exchange for mutual dismissals and full releases, the
Company paid HRB $750,000. With respect to the matter pending in the state of
New York, HRB claims that it is owed $10.7 million. The Company asserted a
counterclaim of $7 million and believes that it has valid defenses and
counterclaims to the contractor's remaining claims and that the outcome will not
have a material adverse effect on its financial position or results of
operations. During the second quarter of 2002, the parties agreed, in principle,
to consolidate and transfer this litigation to the Bankruptcy Court presiding
over the Company's Chapter 11 proceedings. The Company hopes to reach a formal
agreement regarding this transfer in the near future.
Thomas Arasi, the Company's former President and Chief Executive
Officer, has asserted a claim against the Company under his employment
agreement. Mr. Arasi alleges that he was terminated without cause and claims
damages in the amount of $3.3 million plus other unspecified amounts. The
Company disputes Mr. Arasi's claims and believes it has valid defenses to this
matter.
The Company and individual directors are parties to a lawsuit alleging
violations of federal securities laws and breach of fiduciary duty in connection
with certain investments made in affiliates of Impac Hotel Group, LLC, a
predecessor of the Company. The Company is unable to determine the impact of
this matter should the plaintiffs succeed, but believes that it has valid
defenses to this matter.
The Company is a party to other legal proceedings arising in the
ordinary course of business, the impact of which would not, either individually
or in the aggregate, in management's opinion, have a material adverse effect on
its financial position or results of operations.
33
ITEM 2. CHANGES IN SECURITIES
The Company has not paid any cash dividends since the Merger and has no
current plans to initiate the payment of dividends and is currently prohibited
under various credit agreements from paying any dividends. The Company currently
anticipates that it will retain any future earnings for use in its business. On
exiting Chapter 11, the Board of Directors of the Company will determine future
dividend policies based on the Company's financial condition, profitability,
cash flow, capital requirements and business outlook, among other factors. The
Company's ability to pay dividends was previously restricted by the Indenture
governing the Company's 12 1/4 % Senior Subordinated Notes Due 2009 (the
"Notes"), the Company's credit agreement dated as of July 23, 1999 among the
Company, Lodgian Financing Corp., certain other of the Company's subsidiaries
and the banks named therein, and the Indenture governing the Company's
Convertible Redeemable Equity Structured Trust Securities ("CRESTS"). Payment
restrictions contained in the Company's Notes allowed the Company to defer
dividend payments on the CRESTS beginning June 30, 2000. Pursuant to the terms
of the instrument, the Company had the right to defer payment for up to twenty
quarters (the "Extension Period"), during which Extension Period no interest was
due and payable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of the exhibits required to be filed as part of this Report on
Form 10-Q, is set forth in the "Exhibit Index" which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
(i) A report on Form 8-K was filed on January 2, 2002 relating to the
Chapter 11 filing of the Company and eighty-one of its subsidiaries.
(ii) A report on Form 8-K was filed on June 6, 2002 relating to the
dismissal of the Company's previous independent public accountants,
Arthur Andersen LLP and the appointment of new independent public
accountants, Deloitte and Touche LLP.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LODGIAN, INC.
Date: August 14, 2002 By: /s/ DAVID E. HAWTHORNE
--------------------------------------
DAVID E. HAWTHORNE
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ RICHARD CARTOON
--------------------------------------
RICHARD CARTOON
Executive Vice President and
Chief Financial Officer
35
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO
10.1 - Commitment letter from Merrill Lynch Mortgage Capital Inc. to provide first mortgage
financing in the aggregate amount of $286,200,000 ("the Loan") to a special purpose
entity ("the Borrower"), to be owned and controlled by Lodgian, Inc. ("the Company")
following its reorganization.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
36