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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
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
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LODGIAN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2093696
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(State or other jurisdiction of incorporation or organization) (I.R.S. Identification No.)
3445 Peachtree Road N.E., Suite 700, Atlanta, Georgia 30326
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (404) 364-9400
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Securities registered pursuant to Section 12(b)of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock, par value $.01 per share, held by
non-affiliates of the registrant as of March 30, 1999, was $150,599,007 based on
the closing price of $5.0625 per share of the Common Stock as reported by the
New York Stock Exchange on such date.
The registrant had 29,747,952 shares of Common Stock, par value $.01,
outstanding as of March 30, 1999.
Documents incorporated by reference: Certain information in Lodgian, Inc.'s
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year, is
incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS
Lodgian, Inc. ("Lodgian" or the "Company") is a successor to Servico, Inc.
("Servico") as a result of Servico's merger (the "Merger") with Impac Hotel
Group, LLC, a privately owned hotel ownership, management and development
company ("Impac"). The Merger was completed on December 11, 1998. Because the
Merger was accounted for under the purchase accounting method, Lodgian's
results for the year ended 1998 reflect Impac's contributions only since
December 11, 1998.
GENERAL
The Company is one of the largest owners and operators of full-service
hotels in the United States. The Company operated 144 hotels containing
approximately 27,230 rooms located in 35 states, Canada and Europe at December
31, 1998. The Company's hotels include 124 wholly owned hotels, 17 hotels owned
in partnership where the Company has a fifty percent or greater equity
interest, 1 hotel owned in partnership where the Company has a minority equity
interest and 2 hotels managed for third parties. Substantially all of the
Company's hotels are affiliated with nationally recognized hospitality
franchises, including Crowne Plaza, Doubletree, Hilton, Holiday Inn, Marriott,
Omni, Radisson, Sheraton and Westin. The Company owns and operates 83 hotels
under franchise agreements with Holiday Inn and 18 hotels under franchise
agreements with Marriott. These relationships make the Company the second
largest Holiday Inn franchisees and one of the largest Marriott franchisees
nationally.
The Company's hotels are primarily full-service properties which offer
food and beverage services, meeting space and banquet facilities and compete in
the mid-price and upscale segments of the lodging industry. Management believes
that these segments have more inelastic demand than other segments of the
lodging industry and that they have recently experienced less development of
new properties than other lodging segments, such as the limited service,
economy and budget segments.
The Company's success in managing, developing, renovating and
repositioning its hotels has resulted in strong relationships with its
franchisors. The Company prides itself on the recognition and awards the
Company has received from its franchisors. These awards include, among others:
(i) Best New Hotel Opening in 1997 for the Courtyard by Marriott, Tulsa and in
1998 for the Denver Airport Marriott; in each case by Marriott International
(ii) President's Award for three hotels for 1998 from Marriott International;
(iii) Modernization Award for the last four consecutive years from Bass Hotels
and Resorts; (iv) Torchbearer Award for several hotels from Bass Hotels and
Resorts; and (v) Hotel of the Year for the Club Hotel by Doubletree in
Philadelphia from Promus Hotels. The Company was also named "Best New
Franchisee" by Marriott International in 1995.
The Company's operating strategy emphasizes (i) experienced and hands-
on management, with performance-based incentives at corporate, regional and
individual hotel levels, (ii) effective centralized corporate and regional
support personnel, who closely monitor hotel-level performance and provide
substantial accounting, payroll, human resources, sales
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and marketing, information technology and data processing, training and other
support services, (iii) the use of centralized reservations and sales support,
(iv) the use of banquet facilities, food and beverage operations and meeting
space to maximize occupancy and improve profitability, (v) a commitment to
reinvest capital into its owned hotels, and (vi) an emphasis on premium brands,
as nearly 80% of the Company's portfolio is comprised of hotels operating under
the Crowne Plaza, Doubletree, Hilton, Holiday Inn, Marriott, Radisson, Sheraton,
and Westin brands.
RECENT DEVELOPMENTS
At the beginning of 1998, Servico operated 71 hotels with 14,500 rooms
in 23 states and Canada. In June, 1998, Servico completed the acquisition from
AMI of 14 hotel properties located in the Northeast and mid-Atlantic states and
containing 2,298 rooms for an aggregate acquisition value of $75 million. Three
of these properties were subsequently sold for an aggregate price of
approximately $7.68 million. In November 1998, Servico made an equity
investment in six European hotel properties.
On December 11, 1998 Servico completed its Merger with Impac Hotel
Group to form Lodgian. As a result of the Merger, the Company acquired 55 owned
or managed hotels with 9,236 rooms in 24 states from Impac.
In accordance with the Merger agreement, Servico shareholders received
18,439,809 newly issued shares of the Company's Common Stock having an
aggregate fair market value of $112,943,830, and Impac members received 8
million newly issued shares of the Company's Common Stock having an aggregate
fair market value of $49 million and $15 million in cash consideration. An
additional 1.4 million shares were issued to Impac unitholders and are held in
escrow. The shares will be released from escrow upon completion of newly
developed hotels in Denver, Colorado; Livermore, California; Rio Rancho, New
Mexico; Portland, Oregon; and Lake Oswego, Oregon.
The Company believes the Merger enhances its growth potential and
provides significant opportunities for operating synergies, due to the
complementary nature of the two companies' property portfolios, strategies and
core competencies. Management believes that the addition of Impac's in-house
development capabilities and relationships with high quality franchisors, such
as Marriott, will enable the Company to take advantage of more opportunities to
redevelop its existing hotels as well as to selectively acquire and develop new
hotels. The Company also believes it has opportunities to improve the operating
performance of Impac's hotels by applying Servico's operating expertise and
"best practices". In addition, the Company believes that it will be able to
generate greater value from Servico's portfolio through operating synergies
(including opportunities for cost savings in overhead, purchasing, insurance and
related activities) and by leveraging Impac's skills to redevelop, renovate and
reposition selected properties.
On November 10, 1998, David Buddemeyer, Servico's Chairman and Chief
Executive Officer, resigned from Servico. In addition, on February 28, 1999,
Warren Knight, the Company's Chief Financial Officer, resigned and was replaced
on an interim basis by Lawrence Carballo. The Company is currently actively
seeking a new Chief Financial Officer. Upon completion of the merger, the
Company closed its headquarters in West Palm Beach, Florida and relocated to
Atlanta, Georgia.
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PERFORMANCE
In order to adequately address the Company's performance as compared
to prior years, the Company discusses in this section only those activities
undertaken by Servico without regard for the Merger with Impac.
Servico generally classified its hotels as either "Stabilized Hotels"
or "Reposition Hotels." The Stabilized Hotels currently include all hotels
which were acquired by Servico through 1995 and 12 of the hotels acquired
during 1996 and 1997 which, based on management's determination, have achieved
normalized operations. The Reposition Hotels currently include 11 of the hotels
acquired by Servico during 1996 and 1997, all of which are still the subject of
management's post acquisition repositioning and renovation initiatives. Since
January 1996, Servico acquired ownership interests in a total of 42 hotel
properties and closed or sold a total of 4 properties. The following table sets
forth information concerning the acquisition of ownership interests in hotels
during 1997 and 1998:
TOTAL WHOLLY OWNED PARTIALLY OWNED
-------------------- -------------------- --------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
--------- --------- --------- --------- --------- ---------
Fiscal Year-End 1996 ......... 57 11,059 43 7,950 14 3,109
1997 Additions ............... 12 3,002 15 3,689 (3) (687)
-- ------ -- ------ -- ------
Fiscal Year-End 1997 ......... 69 14,061 58 11,639 11 2,422
1998 Net Additions ........... 20 3,933 13 2,729 6 1,204
-- ------ -- ------ -- ------
Fiscal Year-End 1998 ......... 89 17,994 71 14,318 17 3,626
== ====== == ====== -- ======
During the repositioning period (generally 12 to 18 months) hotels
will usually experience lower operating results such as revenue per available
room ("RevPAR") and profit margins. Nonetheless, these hotels still contribute
to the Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") and net income. Moreover, the Company expects significant
improvements in the operating performance of those hotels which have undergone
a renovation or repositioning.
To better illustrate and demonstrate execution of the Company's
repositioning strategy and same-store sales comparisons, the Company, beginning
in 1999, will reclassify its hotels as either "Stabilized Hotels", "Stabilizing
Hotels" or "Being Repositioned Hotels". Stabilized Hotels are properties which
have experienced little or no disruption to their operations over the past 36
months as the result of redevelopment or repositioning efforts or
newly-constructed hotels which have been in service for 24 months or more.
Stabilizing Hotels are properties which have undergone substantial renovation
or repositioning investment within the last 36 months, which work is now
completed, or newly developed properties placed into service within the past 24
months. Management believes that these properties should experience higher
growth in RevPAR and cash flow than the Stabilized Hotels. On average, the
Company's hotels which have undergone substantial renovation have generally
reached stabilization in approximately 24 to 36 months after their completion
date and the Company's newly developed hotels have reached stabilization in
approximately 12 to 18 months after their completion date. Being Repositioned
Hotels are hotels currently experiencing substantial disruption to their
operations due to extensive renovation and repositioning investment. Once this
work is completed these properties will be reclassified as Stabilizing.
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The Company is in the process of repositioning and renovating the
Being Repositioned Hotels based on strategic plans designed to address the
opportunities presented by each hotel and the hotel's particular market.
Renovations are chosen based on meeting return on investment criteria and brand
standards. These renovations include enhancing lobbies, restaurants and public
areas, upgrading guest rooms and converting unprofitable lounge areas to
meeting rooms to accommodate the needs of business travelers. In certain
instances, hotel properties are rebranded to improve market share and further
identify the improved property to the community. The following properties are
currently under renovation:
LODGIAN HOTELS UNDER RENOVATION
HOTELS AND CURRENT BRAND NEW BRAND # OF LOCATION
ROOMS
Niagara Inn Four Points by Sheraton 190 Niagara Falls, NY
Clarion Niagara Falls, NY Holiday Inn Select 395 Niagara Falls, NY
Holiday Inn Grand Island 265 Grand Island, NY
Comfort Inn Boston (Revere) Courtyard by Marriott 120 Boston, MA
Club Hotel by Doubletree 399 Louisville, KY
Holiday Inn Express 210 Nashville, TN
Holiday Inn Belmont, MD 135 Baltimore, MD
Holiday Inn BWI Airport, MD 259 Baltimore, MD
Holiday Inn Cromwell Bridge, MD 139 Baltimore, MD
Holiday Inn East Hartford, CT 130 E. Hartford, CT
Holiday Inn Frederick, MD 157 Baltimore, MD
Holiday Inn Glen Burnie North, MD 128 Baltimore, MD
Holiday Inn Inner Harbor, MD 373 Baltimore, MD
Holiday Inn Lancaster (East), PA 189 Lancaster, PA
Holiday Inn New Haven, CT 160 New Haven, CT
Holiday Inn York, PA (Arsenal Rd.) 100 York, PA
Holiday Inn Rolling Meadows 422 Rolling Meadows, IL
Ramada Plaza Houston, TX Crowne Plaza 298 Houston, TX
Sheraton West Palm Beach, FL 350 West Palm Beach, FL
Hotel Arenburg, Belgium 155 Brussels
Hotel Diplomat, Belgium 68 Brussels
Hotel Royal Astor, Belgium 95 Brussels
Delta Hotel, Belgium 246 Brussels
Galaxy Hotel, Netherlands Holiday Inn 282 Amsterdam
Crowne Plaza Brussels 358 Brussels
The Company has developed 16 properties since 1995 that are currently
operating and have an additional 3 upscale properties under construction, as
shown below. On average, the Company's newly developed hotels have reached
stabilization in approximately 12 to 18 months after their completion date.
PROPERTIES UNDER CONSTRUCTION
HOTEL NUMBER OF ROOMS LOCATION
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Courtyard by Marriott - Livermore, CA 122 San Francisco, CA
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Marriott City Center - Portland, OR 249 Portland, OR
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Hilton Garden Inn Lake Oswego, OR 160 Lake Oswego, OR
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The Company's management team has successfully managed hotels in all
segments of the hotel industry. Management believes that the Company's past
success and future performance depend on its ability (i) to identify
underperforming hotels and quickly implement successful turnaround plans; (ii)
to develop and implement marketing plans that position each hotel property
within its local market and (iii) to develop and implement business plans that
focus on maximizing revenues and improving market share, guest satisfaction,
and cost controls. The Company's management culture stresses accountability of
results, entrepreneurship and use of state-of-the-art technology.
PORTFOLIO
The Company has significantly increased the size of its hotel
portfolio through acquisition and new development, as shown below:
LODGIAN HOTEL PORTFOLIO
HOTELS # OF LOCATION
ROOMS
Best Western Central Omaha 213 Omaha, NE
Best Western Council Bluffs 89 Council Bluffs, IA
Best Western Northwoods Atrium Inn 197 Charleston, SC
Clarion Royce Hotel 193 Pittsburgh, PA
Comfort Inn Roseville 118 Roseville, MN
Comfort Inn San Antonio 203 San Antonio, TX
Comfort Suites Greenville 85 Greenville, SC
Courtyard by Marriott - Abilene 99 Abilene, TX
Courtyard by Marriott - Bentonville 90 Bentonville, AR
Courtyard by Marriott - Buckhead 181 Atlanta, GA
Courtyard by Marriott - Florence 78 Florence, KY
Courtyard by Marriott - Lafayette 90 Lafayette, LA
Courtyard by Marriott - Livermore 122 San Francisco, CA
Courtyard by Marriott - Paducah 100 Paducah, KY
Courtyard by Marriott - Revere 120 Boston, MA
Courtyard by Marriott - Tifton 90 Tifton, GA
Courtyard by Marriott - Tulsa 122 Tulsa, OK
Crowne Plaza Cedar Rapids 275 Cedar Rapids, IA
Crowne Plaza Houston 298 Houston, TX
Crowne Plaza Macon 298 Macon, GA
Crowne Plaza Saginaw 177 Saginaw, MI
Crowne Plaza Worcester 243 Worcester, MA
Crowne Plaza Brussels 358 Brussels
Days Inn Silver Spring 140 Silver Spring, MD
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Doubletree Club Hollywood 160 Hollywood, CA
Doubletree Club Louisville 399 Louisville, KY
Doubletree Club Philadelphia 188 Philadelphia, PA
Fairfield Inn Augusta 117 Augusta, GA
Fairfield Inn Colchester 117 Burlington, VT
Fairfield Inn Jackson 105 Jackson, TN
Fairfield Inn Merrimack 116 Merrimack, NH
Fairfield Inn Valdosta 108 Valdosta, GA
Four Point by Sheraton Niagara Falls 190 Niagara Falls, NY
Four Points Hilton Head 139 Hilton Head, SC
Four Points Omaha 168 Omaha, NE
Four Points West Des Moines 161 Des Moines, IA
Hampton Inn Dothan 113 Dothan, AL
Hampton Inn Pensacola 124 Pensacola, FL
Hilton Fort Wayne 245 Ft. Wayne, IN
Hilton Garden Lake Oswego 160 Lake Oswego, OR
Hilton Garden Rio Rancho 129 Rio Rancho, NM
Hilton Inn Columbia 152 Columbia,MD
Hilton Inn Northfield 186 Northfield, MI
Hilton Inn Sioux City 193 Sioux City, IA
Holiday Inn, Netherlands 282 Amsterdam
Holiday Inn Anchorage 251 Anchorage, AK
Holiday Inn Arden Hills/St. Paul 156 St. Paul, MN
Holiday Inn Augusta 239 Augusta, GA
Holiday Inn Austin (South) 210 Austin, TX
Holiday Inn Belmont 135 Baltimore, MD
Holiday Inn Birmingham 166 Birmingham, AL
Holiday Inn Bloomington 187 Bloomington, IN
Holiday Inn Boise 265 Boise, ID
Holiday Inn Brunswick (I-95) 126 Brunswick, GA
Holiday Inn BWI Airport 259 Baltimore, MD
Holiday Inn Cincinnati 244 Cincinnati, OH
Holiday Inn City Center 240 Columbus, OH
Holiday Inn Clarksburg 160 Clarksburg, WV
Holiday Inn Cromwell Bridge 139 Baltimore, MD
Holiday Inn Dothan 102 Dothan, AL
Holiday Inn East Hartford 130 E. Hartford, CT
Holiday Inn Express Fort Pierce 100 Ft. Pierce, FL
Holiday Inn Express Gadsden 141 Gadsden, AL
Holiday Inn Express Nashville 210 Nashville, TN
Holiday Inn Express Palm Desert 129 Palm Desert, CA
Holiday Inn Express Pensacola 214 Pensacola, FL
Holiday Inn Fairmont 106 Fairmont, WV
Holiday Inn Fayetteville 198 Fayetteville, NC
Holiday Inn Florence 106 Florence, KY
Holiday Inn Fort Mitchell 214 Ft. Mitchell, KY
Holiday Inn Fort Wayne 208 Ft. Wayne, IN
Holiday Inn Frederick 157 Baltimore, MD
Holiday Inn Frisco 216 Frisco, CO
Holiday Inn Glen Burnie North 128 Baltimore, MD
Holiday Inn Grand Island 265 Grand Island, NY
Holiday Inn Greentree 200 Pittsburgh, PA
Holiday Inn Hamburg 129 Buffalo, NY
Holiday Inn Hilton Head 201 Hilton Head, SC
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Holiday Inn Inner Harbor 373 Baltimore, MD
Holiday Inn Jamestown 150 Jamestown, NY
Holiday Inn Jekyll Island 199 Jekyll Island, GA
Holiday Inn Lancaster (East) 189 Lancaster, PA
Holiday Inn Lancaster (North)* 160 Lancaster, PA
Holiday Inn Lansing West 239 Lansing, MI
Holiday Inn Lawrence 192 Lawrence, KS
Holiday Inn Manhattan 197 Manhattan, KS
Holiday Inn Marietta 196 Atlanta, GA
Holiday Inn Market Center Dallas 246 Dallas, TX
Holiday Inn McKnight Rd 147 Pittsburgh, PA
Holiday Inn Meadow Lands 138 Pittsburgh, PA
Holiday Inn Melbourne 293 Melbourne, FL
Holiday Inn Memphis 175 Memphis, TN
Holiday Inn Monroeville 189 Pittsburgh, PA
Holiday Inn Morgantown 147 Morgantown, WV
Holiday Inn Myrtle Beach 133 Myrtle Beach, SC
Holiday Inn New Haven 160 New Haven, CT
Holiday Inn North Miami 98 Miami, FL
Holiday Inn Parkway East 180 Pittsburgh, PA
Holiday Inn Phoenix West 144 Phoenix, AZ
Holiday Inn Raleigh Downtown 202 Raleigh, NC
Holiday Inn Richfield 219 Richfield, OH
Holiday Inn Rolling Meadows 422 Rolling Meadows, IL
Holiday Inn Santa Fe 130 Santa Fe, NM
Holiday Inn Select Airport Phoenix 298 Phoenix, AZ
Holiday Inn Select DFW 282 Dallas, TX
Holiday Inn Select Niagara Falls 395 Niagara Falls, NY
Holiday Inn Select Riverside 286 Riverside, CA
Holiday Inn Select Strongsville 304 Cleveland, OH
Holiday Inn Select Wilsonville 169 Portland, OR
Holiday Inn Select Windsor, Ontario 214 Windsor, Ontario
Holiday Inn Sheffield 201 Sheffield, AL
Holiday Inn Silver Spring 232 Silver Spring, MD
Holiday Inn St. Louis North 391 St. Louis, MO
Holiday Inn St. Louis West 249 St. Louis, MO
Holiday Inn Syracuse 153 Syracuse, NY
Holiday Inn University Mall 152 Pensacola, FL
Holiday Inn Valdosta 173 Valdosta, GA
Holiday Inn Wichita Airport 152 Wichita, KS
Holiday Inn Winter Haven 225 Winter Haven, FL
Holiday Inn York (Arsenal Rd.) 100 York, PA
Holiday Inn York (Market St.)* 120 York, PA
Howard Johnson Flagstaff 100 Flagstaff, AZ
Marriott - Denver 238 Denver, CO
Marriott - Portland 249 Portland, OR
Omni Albany 386 Albany, NY
Omni West Palm Beach 219 West Palm Beach, FL
Quality Hotel & Conference Ctr. 204 New Orleans, LA
Radisson Chattanooga 238 Chattanooga, TN
Radisson New Orleans 244 New Orleans, LA
Radisson Phoenix Hotel 163 Phoenix, AZ
Residence Inn Dedham 96 Boston, MA
Residence Inn Little Rock 81 Little Rock, AR
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Sheraton Hotel Concord 323 Concord, CA
Sheraton West Palm Beach 350 West Palm Beach, FL
Super 8 Hazard 86 Hazard, KY
Super 8 Prestonsburg 80 Prestonsburg, KY
Westin William Penn Hotel 595 Pittsburgh, PA
Town Center Hotel Silver Spring 254 Silver Spring, MD
Mayfair House Miami 179 Miami, FL
French Quarter Suites Memphis 105 Memphis, TN
Hotel Arenburg, Belgium 155 Brussels
Hotel Diplomat, Belgium 68 Brussels
Hotel Royal Astor, Belgium 95 Brussels
Delta Hotel, Belgium 246 Brussels
FRANCHISE AFFILIATIONS
In recent years, operators of hotels not owned or managed by major
lodging companies have affiliated their hotels with national hotel franchisors
as a means of remaining competitive with hotels owned by or affiliated with
national lodging companies. Franchisors provide a number of services to hotel
operators which can positively contribute to the improved financial performance
of their properties, including national reservation systems, marketing and
advertising programs and direct sales programs. The Company believes that hotel
franchisors with larger numbers of hotels enjoy greater brand awareness among
potential hotel guests than those with fewer numbers of hotels. Hotels
typically operate with high fixed costs, and increases in revenues generated by
affiliation with a national franchisor can, at times, contribute positively to
a hotel's financial performance.
At December 31, 1998, substantially all of the Company's owned or
managed hotels were affiliated with national hotel franchisors, as set forth in
the following table:
TOTAL WHOLLY OWNED PARTIALLY OWNED
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FRANCHISOR # OF HOTELS # OF ROOMS # OF HOTELS # OF ROOMS # OF HOTELS # OF ROOMS
- - ---------------------- ----------- ---------- ----------- ---------- ----------- ----------
Bass Hotels & Resorts 83 16,876 72 14,172 11 2,704
Marriott International 18 2,229 18 2,229 0 0
Best Western 3 499 3 499 0 0
Choice Hotels 5 803 5 803 0 0
H.F.S. 4 406 4 406 0 0
Hilton 6 1,065 5 872 1 193
Omni 2 605 1 386 1 219
Promus 5 984 5 984 0 0
Radisson 2 407 1 163 1 244
Starwood 7 1,926 7 1,926 0 0
Other 7 1,102 3 538 4 564
Totals 142(a) 26,902 124 22,978 18 3,924
(a) Does not include hotels managed, but not owned, by Lodgian.
The Company believes that its strong brand affiliations bring many
benefits in terms of guest loyalty and market share premiums. With 71% of the
portfolio composed of Holiday Inn and Marriott, the Company is well-positioned
to take advantage of superior brand equity,
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quality standards and reservation contribution. As a result of renovations and
improvements by the Company, as well as improvements made by other franchisees
across the country due to the "Holiday Inn Worldwide Core Modernization"
program, the Company believes that the Holiday Inn image will be greatly
enhanced. In addition, the Company believes that Marriott continues to be a
very strong name among travelers and in the industry, providing consistently
high quality products and service. The Company hotels also benefit from both
franchise 800 reservation numbers, which contribute approximately 30-35% of
reservations Company wide.
The Company's license agreements with the national hotel franchises
typically authorize the operation of a hotel under the licensed name, at a
specific location or within a specific area, and require that the hotel be
operated in accordance with standards specified by the licensor. The license
agreements also permit the Company to utilize the licensor's reservation
system. Generally, the license agreements require the Company to pay a royalty
fee, an advertising/marketing fee, a fee for the use of the licensor's
nationwide reservation system and certain ancillary charges. Royalty fees under
the Company's various license agreements generally range from 3% to 5% of gross
room revenues, while advertising/marketing fees provided for in the agreements
generally range from 1% to 2% of gross room revenues and reservation system
fees generally are 1% of gross room revenues. The license agreements are
subject to cancellation in the event of a default, including the failure to
operate the hotel in accordance with the quality standards and specifications
of the licensor. The license agreements generally have an original ten-year
term, although certain license agreements provide for original 15 and 20-year
terms. The majority of the Company's license agreements have five to ten years
remaining on the term. The licensor may require the Company to upgrade its
facilities at any time to comply with the licensor's then current standards.
The licensee may apply for a license renewal as existing licenses expire. In
connection with license renewals, the licensor may require payment of a renewal
fee, increased royalty and other recurring fees and substantial renovation of
the facility or the licensor may elect not to renew the license. It is the
Company's policy to review individual property franchise affiliations at the
time of property acquisition and, thereafter, on a regular basis. These reviews
may result in changes in such affiliations.
MANAGEMENT AGREEMENTS
At December 31, 1998, the Company managed two hotels for third
parties. All hotels managed for third parties are done so in accordance with
written management agreements. These management agreements provide that the
Company be paid a base fee calculated as a percentage of gross revenues, and
generally provide for an accounting services fee and an incentive management
fee. The incentive fees are generally a percentage of gross operating profits
exceeding negotiated amounts. All operating and other expenses are paid by the
owner. The management agreements provide for original terms of from one to five
years. Fees payable to the Company under the management agreements range from
3% to 4% of gross sales.
One of the Company's hotels, the Westin William Penn Hotel located in
Pittsburgh, Pennsylvania, is managed by an unaffiliated third party. The terms
of this management agreement provide for the manager to receive the greater of
a base fee of 3% of gross revenues or an incentive fee based on profits
available for debt service. The agreement
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also provides that it is the Company's responsibility to make funds available
for capital improvements.
COMPETITION AND SEASONALITY
The hotel business is highly competitive. The demand for
accommodations and the resulting cash flow vary seasonally. The off-season
tends to be the winter months for properties located in colder weather climates
and the summer months for properties located in warmer weather climates. Levels
of demand are dependent upon many factors including general and local economic
conditions and changes in levels of tourism and business-related travel. The
Company's hotels depend upon both commercial and tourist travelers for
revenues. Generally, the Company's hotels operate in areas that contain
numerous other competitive lodging facilities, including hotels associated with
franchisors which may have more extensive reservation networks than those which
may be available to the Company. The Company competes with other facilities on
various bases, including room prices, quality, service, location and amenities
customarily offered to the traveling public.
OPERATING STRATEGY
The Company has developed a highly focused operating strategy designed
to maximize the financial performance of its hotels while providing its guests
with high quality service and value. Key elements of the Company's operating
strategy include:
Experienced and Targeted Management. The Company seeks to maximize the
performance of its hotels by developing marketing and management plans
specifically tailored for each individual hotel. The Company develops and
implements marketing plans that position each hotel property within its local
market and facilitate targeted sales and marketing efforts. These plans focus
on maximizing revenues and improving market share, guest satisfaction, and cost
controls. The Company believes that experienced and hands-on management of
hotel operations is the most critical element in maximizing revenue and cash
flow of hotels, especially in full service hotels, and the Company's management
culture stresses accountability of results, entrepreneurship and use of leading
edge technology.
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Effective Centralized Controls and Assistance. The Company has
implemented centralized support and controls which seek to provide corporate
and group support services while promoting flexibility and encouraging
employees to develop innovative solutions. The Company's hotels are organized
into six regions, each headed by a regional vice president who reports to the
chief operating officer. This structure enables the Company to provide close
oversight of property managers at the regional and local level while ensuring
that information, standards and goals are communicated effectively across the
entire portfolio. The Company has established certain uniform productivity
standards and skill requirements for hotel employees which management believes
increase operating efficiencies by enhancing the Company's ability to measure
performance and to interchange certain employees within its hotel system.
Leading Edge Technology. The Company has invested substantial capital
in state-of-the-art information technology, which allows for real-time
reporting, among many other capabilities. The Company is also in the process of
implementing Oracle web-based technology, which will permit (i) more accurate
and efficient revenue and expense forecasting, (ii) labor and cash management
and (iii) the ability to monitor daily revenue results, labor costs, and
expenses of every one of our hotels from anywhere in the country. In addition,
these systems are expected to streamline the process and reduce the costs of
our financial reporting. Lastly, through the Company's proprietary network, the
Company can provide real-time reporting, distribute corporate communications,
and disseminate critical information to over 10,000 associates company-wide
Centralized Reservations and Sales Support. Lodgian's sophisticated
telecommunication and information technology has enabled its Revenue Center to
provide centralized reservations for many of the Company's hotels by seamlessly
transferring incoming reservation calls from hotels to the Revenue Center,
thereby freeing up hotel associates to service guests. The Company believes that
properly trained, dedicated reservation agents generate a higher conversion
ratio per call. Specialists at the Revenue Center have complete access to the
property management systems and price each room according to market demand,
inventory supply, and competitor strategies.
The Revenue Center not only houses Individual Reservations but also an
entire Group Sales Center enabling hotel salespeople to focus on specific sales
and marketing efforts while Revenue Center associates service the accounts.
Event planning, detailed banquet orders, and contracts are all generated from
the Revenue Center to alleviate the administrative burden at certain hotels.
Along these lines, a Research and Development team concentrates on qualifying
leads before turning them over to the hotel for follow up and closing the sale.
The specialists at the Revenue Center are responsible for a number of functions,
including bidding on business, servicing accounts and executing contracts, while
the hotel is held accountable for direct sales efforts, developing
relationships, and actually hosting the event.
Selective Use of Premium Brands. The Company believes that the
selection of an appropriate franchise brand is essential in positioning a hotel
optimally within its local market. Because the Company is not bound by a single
franchise brand, the Company can choose a franchise relationship that will
maximize a hotel's performance in its particular market and complement the
management strategies of both the individual hotel and the Company itself. The
Company selects brands based on factors such as revenue contribution, product
quality standards, local presence of the franchisor, brand recognition, target
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demographics and efficiencies offered by franchisors. The Company believes that
its relationships with many major hotel franchisors place it in an advantageous
position when dealing with those franchisors and allows the Company to
negotiate favorable franchise agreements. The Company believes its continued
growth will further strengthen its relationships with franchisors as the
Company focuses on choosing brands that meet market demands and Company
expectations.
GROWTH STRATEGY
The Company has developed a strategy designed to increase its revenues,
cash flow and profitability while focusing on return on investment as the
primary criterion or growth. The key components of the Company's strategy
include those targeted to achieve internal growth through capital investment and
operational improvements and those targeted to achieve external growth through
acquisition and new development.
INTERNAL GROWTH
Generate Internal Growth Through Focused Operating Strategy. The
Company seeks to improve the performance of its hotels by applying its operating
strategy and initiatives. The Company's operating strategy provides for
marketing and business plans tailored for each individual hotel, accountability
and performance-based compensation for individual hotel and regional vice
presidents, effective centralized controls and assistance, centralized
reservations and sales support, and selective use of a multiple branding
strategy.
Enhance Hotel Performance Through Disciplined Capital Investment. The
Company seeks to reposition and renovate hotels based on strategic plans
designed to address the opportunities presented by each hotel and the hotel's
particular market. These renovations include enhancing lobbies, restaurants and
public areas, upgrading guest rooms and converting unprofitable lounge areas to
meeting rooms to accommodate the needs of business travelers. Renovations often
include a substantial exterior renovation to improve the property's overall
appearance and appeal. Such renovations generate attractive returns on
investment by increasing occupancy and profitability and generate predictable
cash flow and earnings growth.
EXTERNAL GROWTH
The Company's external growth strategy primarily consists of (i)
acquiring existing full-service, mid-price and upscale hotels which are in need
of substantial renovation and repositioning and (ii) developing new
full-service, mid-price and upscale hotels, primarily franchised under Marriott
brands.
Acquire and Improve Underperforming Hotels. As a fully integrated
owner and manager, the Company seeks to capitalize on its management expertise
by continuing to acquire underperforming hotels and implement operational
initiatives and repositioning and renovation programs to achieve revenue and
margin improvements. The Company has generally invested significant capital to
renovate and reposition newly acquired hotels. In certain instances, the
Company re-brands hotels in order to highlight property improvements to the
marketplace and to improve market share.
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The Company believes that a number of lodging industry trends will
enable it to continue to successfully execute its acquisition and
renovation/repositioning strategy. The Company believes that there has generally
been less competition to purchase underperforming hotels than other properties
because of the level of expertise and amount of capital required to purchase and
efficiently reposition such hotels, construction difficulties often encountered
during the renovation phase, and the negative impact on earnings and cash flows
during the repositioning period. In addition, a number of major franchisors,
such as Holiday Inn, have launched quality improvement initiatives under which
owners are required to invest substantial amounts of capital to upgrade older
properties or have those properties lose their franchise. Management believes
that these initiatives will provide the Company with new acquisition
opportunities as individual or small-portfolio owners are unable or unwilling to
invest the capital required to raise quality standards to the level required by
franchisors. The Company successfully renovates and repositions hotels in
situations with varying levels of service, room rates and market types, and the
Company plans to continue such renovation programs as the Company acquires new
hotels. Management expects that the Company's relationships throughout the
industry and its in-house development capabilities will continue to provide it
with a competitive advantage in identifying, evaluating, redeveloping and
managing hotels that meet its criteria.
Selectively Develop New Hotels. The Company plans to continue to
selectively develop new full-service, mid-price and upscale hotels. The Company
intends to develop these properties primarily under the Marriott and Courtyard
by Marriott brands due to the high quality image, strong reservations and
marketing networks and overall quality management of these brands. The Company
has focused its development in suburbs of large metropolitan areas that are
experiencing significant demand growth. The Company believes that the cost and
expertise required of building such assets generally limits access to the
marketplace, and that its in-house development and construction departments
enable it to develop hotels more efficiently.
The Company's historical objective has been to develop each property
as cost efficiently as possible while meeting quality standards. The Company
has developed 16 hotels with 2,010 rooms since 1995 that are currently
operating, including the Marriott in Denver, Colorado (238 rooms) and the
Hilton Garden Inn in Rio Rancho, New Mexico (129 rooms) which opened in Nov.
and Dec. 1998, respectively. The Company has an additional 3 hotels with 531
rooms under construction, including the Marriott in Portland (249 rooms), the
Courtyard by Marriott in Livermore, California (122 rooms) and the Hilton
Garden Inn in Lake Oswego, Oregon (181 rooms) which are scheduled to open in
the third Quarter of 1999 and in the first Quarter of 2000. In addition, at
December, 1998 the Company owned or held options on land parcels that would
permit the development of 7 new hotels with a total of 1,512 rooms.
FINANCING ARRANGEMENTS
Substantially all of the Company's hotels are subject to mortgage
financing, which at December 31, 1998, totaled approximately $852.8 million.
Approximately $403.2 million of the mortgage financing collateralized by the
Company's hotels, and entered into by the various subsidiaries, is guaranteed
by the Company. The Company's guarantees of mortgage financing generally
provide for direct recourse by the lender against the Company,
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without requiring the lender to seek recourse against either the applicable
subsidiary or the hotel property securing the mortgage financing. As a
consequence, if payments under mortgage financing guaranteed by the Company are
not timely made, the Company may be required to make payments in accordance
with its guarantees.
EMPLOYEES
At December 31, 1998, the Company had approximately 8,000 full-time
and 4,000 part-time employees. There are 150 full time employees of the Company
engaged in administrative and executive activities. The balance of the
Company's employees manage, operate and maintain the Company's properties. At
December 31, 1998, approximately 1,500 of the Company's full- and part-time
employees located at 11 hotels were covered by collective bargaining
agreements. Management considers its relations with its employees to be
satisfactory.
INSURANCE
The Company maintains insurance covering liabilities for personal
injuries and property damage. The Company also maintains, among other types of
insurance coverage, real and personal property insurance, directors and
officers liability insurance, liquor liability insurance, workers' compensation
insurance, travel accident insurance for certain of its employees, fiduciary
liability insurance and business automobile insurance. The Company believes it
maintains sufficient insurance coverage for the operation of its business.
REGULATION
The Company's hotels are subject to state and local regulations with
respect to the sale of alcoholic beverages, and the Company must obtain and
maintain various licenses and permits. All such licenses and permits must be
periodically renewed and may be revoked or suspended for cause at any time.
Certain of these licenses and permits are material to the Company's business
and the loss of such licenses could have a material adverse effect on the
Company's financial condition and results of operations. The Company is not
aware of any reason why it should not be in a position to maintain its
licenses. The Company is also subject in certain states to dramshop statutes,
which may give an injured person the right to recover damages from any
establishment which wrongfully served alcoholic beverages to the person who,
while intoxicated, caused the injury. The Company believes that its insurance
coverage with respect to any such liquor liability is adequate.
The Company is subject to certain federal and state labor laws and
regulations such as minimum wage requirements, regulations relating to working
conditions, laws restricting the employment of illegal aliens and the Americans
with Disabilities Act. As a provider of restaurant services, the Company is
also subject to certain federal, state and local health laws and regulations.
The Company believes it complies with such laws and regulations in all material
respects.
To date, federal and state environmental regulations have not had a
material effect on the Company's operations. However, such laws potentially
impose cleanup costs for hazardous waste contamination on property owners. If
any material hazardous waste
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contamination problems do exist on any of the Company's properties, the Company
may be exposed to liability for the costs associated with the cleanup of such
sites.
BACKGROUND
A predecessor of the Company was incorporated in 1956 under the laws
of the state of Delaware. From 1956 through 1990, the predecessor engaged in
the ownership and operation of hotels under a series of different ownerships.
In September 1990, the predecessor filed for protection under Chapter 11 of the
United States Bankruptcy Code. The predecessor emerged from reorganization
proceedings in August 1992 as Servico, Inc., a Florida corporation. Servico
completed the Merger with Impac in December 1998.
ITEM 2. PROPERTIES
At December 31, 1998, the Company had ownership interests in 142
hotels containing 26,902 rooms. The Company's hotels generally target
commercial, convention, association and vacation travelers as customers.
Substantially all of the hotels are "full-service" properties with lodging,
food, beverage and meeting facilities, and are subject to financing as
described in "Item 1. Business."
Set forth below is information regarding the Company's owned hotels at
December 31, 1998*:
TOTAL(a) WHOLLY OWNED PARTIALLY OWNED(b)
-------------------------- ------------------------ -----------------------
FRANCHISE # OF HOTELS # OF ROOMS # OF HOTELS # OF ROOMS # OF HOTELS # OF ROOMS
- - ------------ ----------- ---------- ----------- ---------- ----------- ----------
Canada 1 214 1 214 0 0
Central 21 3,842 21 3,842 0 0
Europe 6 1,204 0 0 6 1,204
Mid Atlantic 21 3,717 21 3,717 0 0
Midwest 19 4,303 14 3,266 5 1,037
Northeast 25 4,869 23 4,479 2 390
Southeast 38 6,510 33 5,217 5 1,293
Western 11 2,243 11 2,243 0 0
-------------------------------------------------------------------------------
Totals 142 26,902 124 22,978 18 3,924
===============================================================================
*excludes the two managed hotels
(a) Excluded from this figure are two hotels managed, but not owned, by
the Company.
(b) Partially owned hotels are owned by partnerships of which Company
subsidiaries, in most instances, are the general partner. The Company's
partially owned hotels consist of 30% ownership of one hotel containing
240 rooms, 50% ownership of ten hotels (including six European hotels)
containing 2,107 rooms, 51% ownership of six hotels containing 1,279
rooms and 60% ownership of one hotel with 298 rooms.
20 of the Company's hotels are located on land subject to long-term
leases. Generally, the leases are for terms in excess of the depreciable lives
of the improvements or contain a purchase option and provide for fixed rents. In
certain instances, additional rents, based on a percentage of revenue or cash
flow, may be payable. The leases generally require the Company to pay the cost
of repairs, insurance and real estate taxes.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings arising in the ordinary
course of its business, the impact of which would not, either individually or
in the aggregate, in management's opinion, have a material adverse effect on
the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1998, the shareholders of Servico
and the members of Impac were given an opportunity to change their votes
approving the Merger. Servico's shareholders voted to approve the Merger at
Servico's annual meeting held on September 18, 1998 and a majority of the
members of Impac submitted consents in favor of the Merger. The Merger
agreement, however, was amended on September 16, 1998. Due to the proximity of
the amendment date to the date of approval of the Merger, in November 1998,
Servico shareholders and Impac members were given an opportunity to change their
votes and withdraw their consents with respect to the Merger through the
solicitation of proxies. 89.5% of shares outstanding were voted pursuant to the
November proxy, of which 100% of shares voted approved the Merger.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Lodgian's common stock is listed on the New York Stock Exchange and
its trading symbol is LOD. Prior to June 19, 1997, Servico's common stock was
listed on the American Stock Exchange. The following table sets forth the high
and low sales prices of the Company's common stock on the New York Stock and
American Exchanges, as appropriate, on a quarterly basis for the past two
years.
1998 1997
-------------------- ----------------
HIGH LOW HIGH LOW
------- ------- ---- -----
First Quarter $20.4375 $15.5 $20.5 $16.0
Second Quarter 22.375 14.6875 17.0 13.75
Third Quarter 15.875 7.25 18.0 14.25
Fourth Quarter 7.0625 3.125 19.0 14.0
As of March 26, 1999, there were 429 shareholders of record of Lodgian
common stock. In addition, there are 2,645 Servico shareholders who have not
yet converted their shares into shares of the Company. When all Servico
shareholders have converted their shares, the Company will have 3,074
shareholders.
The Company has not paid any cash dividends since its reorganization
and has no current plans to initiate the payment of dividends. The Company
currently anticipates that it will retain any future earnings for use in its
business. The Board of Directors of the Company will determine future dividend
policies based on the Company's financial condition,
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profitability, cash flow, capital requirements and business outlook, among
other factors. There are no restrictions on the Company's ability to pay
dividends.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected financial data derived from the
Company's historical financial statements for the years ended December 31, 1994
through 1998. This financial data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data" included
in this Form 10-K.
1998 1997 1996 1995 1994
--------- ----------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues .............................. $395,214 $ 276,657 $ 239,526 $ 178,480 $ 149,683
(Loss) income before non-recurring
items, net of taxes ................. 18,049 12,570 5,398 4,264 2,588
Non-recurring items, net of taxes(a) .. (21,194) -- 3,150 (356) 193
(Loss) income before extraordinary
items, net of taxes ................. (3,145) 12,570 8,548 3,909 2,781
Extraordinary items, net of taxes ..... (2,076) (3,751) (348) -- 1,436
Net (loss) income ..................... (5,221) 8,819 8,200 3,909 4,217
EBITDA (b) ............................ 98,225 69,559 57,915 36,894 26,376
Earnings per common share (c):
Income before non-recurring items,
net of taxes ..................... .89 .83 .58 .49 .33
(Loss) income before extraordinary
items, net of taxes .............. (.16) .83 .92 .45 .36
Net (loss) income .................. (.26) .58 .88 .45 .54
Earnings per common share-assuming
dilution:
Income before non-recurring items,
net of taxes ..................... .89 .80 .55 .46 .31
(Loss) income before extraordinary
items, net of taxes .............. (.16) .80 .88 .42 .33
Net (loss) income .................. (.26) .56 .84 .42 .51
Basic weighted average shares ......... 20,230,000 15,183,258 9,295,358 8,651,444 7,826,945
Diluted weighted average shares ....... 20,230,000 15,639,719 9,751,139 9,318,670 8,334,520
Cash dividends per common share ....... -- -- -- -- --
End of period:
Total assets ....................... $1,497,921 $ 627,651 $ 439,786 $ 324,202 $ 228,900
Long-term obligations .............. 816,644 323,320 284,880 210,242 143,830
Total stockholders' equity ......... 283,767 239,535 74,738 62,820 46,740
- - ------------------------------------------
(a) Non-recurring items, net of taxes, are as follows:
Gain on litigation settlement...... $ -- $ -- $ 3,653 $ -- $ --
Other non-recurring income (expense) (259) -- (503) (356) 193
Settlement on swap transaction..... (18,895) -- -- -- --
Severance and other................ (2,040) -- -- -- --
(b) EBITDA is a widely regarded industry measure of lodging performance used in
the assessment of hotel property values. 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.
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(c) All prior-period earnings per share amounts have been restated to conform
to the Financial Accounting Standards Board Statement No. 128 "Earnings per
Share".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management believes that results of operations in the hotel industry
are best explained by four key performance measures: occupancy levels, average
daily rate, RevPAR and EBITDA margins. These measures are influenced by a
variety of factors including national, regional and local economic conditions,
the degree of competition with other hotels in the area and, in the case of
occupancy levels, changes in travel patterns. The demand for accommodations is
also affected by normally recurring seasonal patterns and most Company hotels
experience lower occupancy levels in the fall and winter (November through
February) which may result in lower revenues, lower net income and less cash
flow during these months.
The Company's business strategy includes the acquisition of
underperforming hotels and the implementation of the Company's operational
initiatives and repositioning and renovation programs to achieve revenue and
margin improvements. Such initiatives typically require a twelve to eighteen
month period before newly acquired underperforming hotels are repositioned and
stabilized. During this period, the revenues and earnings of these hotels may
be adversely affected and may negatively impact consolidated RevPAR, average
daily rate, and occupancy rate performance as well as consolidated earnings
margins.
During 1997 and 1998, the Company purchased 88 hotels and sold 3
hotels. These figures include 53 hotels acquired in connection with the Merger.
The Company's operating results were materially impacted by these acquisition
and renovation activities. Accordingly, in order to better illustrate
underlying trends of the Company's core hotel base, the Company has
historically tracked the performance of both Stabilized Hotels and Reposition
Hotels. The Stabilized Hotels currently include all hotels which were acquired
by the Company through 1995 and 12 of the hotels acquired by Servico during
1996 and 1997 which, based on management's determination, have achieved
normalized operations. The Reposition Hotels currently include 11 of the hotels
acquired by Servico during 1996 and 1997 and the 20 hotels acquired during 1998
(the "1998 Acquisitions"), all of which are still the subject of management's
post acquisition repositioning and renovation initiatives. The Impac hotels
were acquired during the last quarter of 1998; therefore, the performance
measures for the Reposition Hotels are not comparable to prior periods and the
Impac hotels are not included in these performance measures.
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The discussion of results of operations, income taxes and liquidity
and capital resources that follows is derived from the Company's Audited
Consolidated Financial Statements set forth in "Item 8, Financial Statements
and Supplementary Data" included in this Form 10-K and should be read in
conjunction with such financial statements and notes thereto.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 ("1998") as Compared to the Year Ended
December 31, 1997 ("1997")
At December 31, 1998, the Company owned 142 hotels, managed 2 hotels
for third party owners and had a minority investment in one hotel compared with
68 hotels owned, two managed for third party owners and a minority investment in
one hotel at December 31, 1997. The 1998 occupancy and average daily rate for
owned hotels was 69.20% and $73.18, respectively, compared with 66.7% and
$71.91, respectively, for 1997.
RevPAR for the Stabilized Hotels increased .1% during 1998 to $50.78
from $50.71 during 1997. The occupancy level and average daily rate for the
Stabilized Hotels during 1998 was 70.5% and $72.03 respectively, compared with
69.0% and $73.49 respectively for 1997. These changes for the Stabilized Hotels
during 1998 are attributable to varied performance among those hotels that have
recently completed major renovations. RevPAR, occupancy and average daily rate
for the Reposition Hotels during 1998 were $50.25, 65.1% and $77.19
respectively. The Company is currently implementing new marketing strategies and
operational improvements at all of the Reposition Hotels and expects to complete
significant renovations at many of these hotels during 1999. In addition, the
Company is currently negotiating to obtain new franchise affiliations at certain
of the properties.
Revenues are comprised of room, food and beverage and other revenues.
Room revenues are derived from guest room rentals, while food and beverage
revenues primarily include sales from the Company's hotel restaurants, room
service and hotel catering. Other revenues include charges for guests'
long-distance telephone service, laundry service, use of meeting facilities and
fees earned by the Company for services rendered in conjunction with managed
properties. Revenues for the Company were $395.2 million for 1998, a 42.8%
increase over revenues of $276.7 million for 1997. The Reposition Hotels
contributed approximately $49.5 million to the increase in revenues. The 1998
Acquisitions contributed the remaining balance of approximately $33.6 million.
Operating expenses are comprised of direct, general and
administrative, other hotel operating costs and depreciation and amortization.
Direct expenses, including both rooms and food and beverage operations, reflect
expenses directly related to hotel operations. General and administrative
expenses represent corporate salaries and other corporate operating expenses.
Other expenses include primarily property level expenses related to general
operations such as advertising, utilities, repairs and maintenance and other
property
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administrative costs. Direct operating expenses for the Company were $156.9
million for 1998 and $110.5 million for 1997. Of the $46.4 million increase,
$19.3 million is directly attributable to the Reposition Hotels with
approximately $12.5 million relating to 1998 Acquisitions. The direct operating
expenses for the Stabilized Hotels were $118.2 million (30% of related direct
revenues) for 1998 as compared to $87.3 million (41.7% of related direct
revenues) for 1997. The decrease in operating expenses as a percentage of
revenues was a result of the combined effect of strong revenue growth and
continued emphasis on cost controls. Other operating expenses for the Company
were $130 million for 1998 and $88 million for 1997. This increase of $42
million represents the expenses incurred with respect to the 1998 acquisitions
and by the Reposition Hotels associated with the generation of the $83.1 million
increase in revenues discussed above. Depreciation and amortization expense for
the Company was $31.1 million for 1998 and $23 million for 1997. Included in
this $8.1 million increase was $3 million associated with the Reposition Hotels
and the remaining increase was related to the 1998 acquisitions, and to
equipment purchases and improvements made at the Stabilized Hotels.
As a result of the above, income from operations was $67.1 million for
1998 as compared to $46.1 million for 1997.
The Company incurred $21.2 million (net of a tax benefit of $14.1
million) in non recurring charges during 1999. During August 1998, the Company
entered into treasury rate lock transactions with notional amount of $175
million and $200 million (collectively, the "Swaps") with a lender for the
purpose of hedging their interest rate exposure on two anticipated financing
transactions. During September 1998, the Company determined that it was not
probable that it could consummate the anticipated transactions and recognized a
loss of $18.9 million (net of tax benefit of $12.6 million). In addition, the
Company incurred approximately $3.4 million of severance and other expenses in
connection with the Merger which have been substantially paid at December 31,
1998. These expenses consisted primarily of costs associated with the closing
and relocation of the Company's West Palm Beach, FL Corporate headquarters to
the Company's headquarters in Atlanta, GA and termination and relocation of
certain employees.
Interest expense, net of interest income, was $29.1 million for 1998, a
$4.9 million increase from the $24.2 million for 1997. The increase was
primarily a result of an increase in the level of debt associated with the 1998
acquisitions.
Minority interests in net income of consolidated partnerships were
approximately $1.4 million for 1998 and $1 million for 1997.
During 1998 the Company repaid, prior to maturity, approximately $247
million in debt, and as a result recorded an extraordinary loss on early
extinguishment of debt of approximately $2.1 million (net of income tax benefit
of $1.4 million) relating to the write-off of unamortized loan costs associated
with the debt. The Company recognized an extraordinary loss on early
extinguishment of debt of $3.8 million, after taxes, in 1997 which related to
the refinancing of certain hotels.
After a benefit for income taxes of $2.1 million in 1998 and a
provision for income taxes of $8.4 million in 1997, the Company had net (loss)
income of $(5.2) million ($(.26) per share) for 1998 and $8.8 million ($.56 per
share) for 1997. Excluding the non-recurring items discussed above, the
Company had recurring income of $18 million for 1998 ($.89 per share) and $12.6
million for 1997 ($.80 per share) in 1998 and 1997, respectively.
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Year Ended December 31, 1997 as Compared to the Year Ended December
31, 1996 ("1996")
At December 31, 1997, the Company owned 68 hotels, managed two hotels
for third party owners and had a minority investment in one hotel compared with
56 hotels owned, four managed for third party owners and a minority investment
in one hotel at December 31, 1996. Occupancy and average daily rate for owned
hotels for 1997 was 66.7% and $71.91, respectively, compared with 66.0% and
$68.01, respectively, for 1996.
RevPAR for the Stabilized Hotels increased 6.4% during 1997 to $50.71
from $47.68 during 1996. The occupancy level and average daily rate for the
Stabilized Hotels during 1997 was 69.0% and $73.49 respectively, compared with
67.4% and $70.74 respectively for 1996. The increase in occupancy and average
daily rate for the Stabilized Hotels during 1997 is attributable to successful
yield management and marketing strategies primarily in those hotels that have
recently completed major renovations. RevPAR, occupancy and average daily rate
for the Reposition Hotels during 1997 were $39.52, 59.7% and $66.20
respectively.
Revenues for the Company were $276.7 million for 1997, a 15.5%
increase over revenues of $239.5 million for 1996. Of this $37.2 million
increase in revenues, approximately $9.2 million was attributable to the
Stabilized Hotels primarily as a result of the 6.4% increase in RevPAR
discussed above. The Reposition Hotels contributed approximately $28 million to
the increase in revenues, of which approximately $14.6 million related to the
Reposition Hotels acquired in 1996 which were not operated for the full year of
1996 but were operated for the full year of 1997. Reposition Hotels acquired in
1997 contributed the remaining balance of approximately $13.4 million.
Direct operating expenses for the Company were $110.5 million for 1997
and $96.4 million for 1996. Of the $14.1 million increase, $13.1 million is
directly attributable to the Reposition Hotels with approximately $5.9 million
relating to Reposition Hotels acquired in 1997. The direct operating expenses
for the Stabilized Hotels were $87.3 million (41.7% of related direct revenues)
for 1997 as compared to $86.2 million (42.9% of related direct revenues) for
1996. The decrease in operating expenses as a percentage of revenues was a
result of the combined effect of strong revenue growth and continued emphasis
on cost controls. Other operating expenses for the Company were $88 million for
1997 and $77.2 million for 1996. This increase of $10.8 million represents the
expenses incurred by the Reposition Hotels associated with the generation of
the $28 million increase in revenues discussed above. Depreciation and
amortization expense for the Company was $23 million for 1997 and $18.7 million
for 1996. Included in this $4.3 million increase was $2.7 million associated
with the Reposition Hotels and the remaining increase was related to equipment
purchases and improvements made at the Stabilized Hotels.
As a result of the above, income from operations was $46.1 million for
1997 as compared to $37.9 million for 1996. (Included in 1996 was a
non-recurring charge of $.8 million relating to a severance payment.)
Interest expense, net of interest income, was $24.2 million for 1997,
a $3.6 million decrease from the $27.8 million for 1996. The decrease was
offset in part by a $1.2
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million increase relating to the 1997 Acquisitions. The decrease was primarily
a result of a reduction in the level of debt and effective interest rate in
connection with certain debt which was repaid with the proceeds of a common
stock offering.
Included in other income for 1996 was a non-recurring $3.6 million
gain on litigation settlement (net of expenses) in connection with a lawsuit
brought on behalf of the Company against a bank group and law firm based on
alleged breaches of their duties to the Company.
Minority interests in net income of consolidated partnerships were
approximately $1 million for 1997 and $2.1 million for 1996. Of this $1.1
million decrease, $.9 million related to three hotels in which the Company
increased its ownership from 51% to 100% during 1997.
During 1997 the Company repaid, prior to maturity, approximately $128
million in debt, and as a result recorded an extraordinary loss on early
extinguishment of debt of approximately $3.8 million (net of income tax benefit
of $2.5 million) relating to the write-off of unamortized loan costs associated
with the debt. The Company recognized an extraordinary loss on early
extinguishment of debt of $.3 million, after taxes in 1996 which related to the
refinancing of certain hotels.
After a provision for income taxes of $8.4 million for 1997 and $3.2
million for 1996, the Company had net income of $8.8 million ($.56 per share)
for 1997 and $8.2 million ($.84 per share) for 1996. Without consideration of
the non-recurring items discussed above, the Company had recurring income of
$12.6 million for 1997 ($.80 per share) and $5.4 million for 1996 ($.55 per
share).
INCOME TAXES
As of December 31, 1998, the Company had a net operating loss
carryforward of approximately $45.3 million for federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are existing cash balances
and cash flow from operations. The Company had earnings from operations before
interest, taxes, depreciation and amortization ("EBITDA") for 1998 of $98.2
million, a 41% increase over the $69.6 million from 1997. 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 1998 was $293 million as compared to $42 million for 1997.
At December 31, 1998, the Company had a working capital deficit of
$65.1 million as compared to working capital deficit of $1.3 million at December
31, 1997. Current maturities of long-term obligations increased by $30.4
million, primarily due to financing that the Company incurred at the time of the
merger with Impac. Subsequent to year end, a lender released approximately $15.0
million from deposits for capital expenditures. This amount became available to
pay correct obligations.
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24
At December 31, 1998, the Company's long-term obligations were $816.6,
not including $175 million of Convertible Redeemable Equity Structure Trust
Securities ("CRESTS"). The Company's long-term obligations were $323.3 million
at December 31, 1997.
Certain of the Company's hotels are operated under license agreements
that require the Company to make capital improvements in accordance with a
specified time schedule. Additionally, in connection with the refinancing of
hotels, the Company has agreed to make certain capital improvements and, as of
December 31, 1998, has approximately $30 million escrowed for such
improvements. The Company estimates its remaining obligations for all of such
commitments to be approximately $85 million, of which approximately $50
million is expected to be spent during 1999 and 2000.
In June 1997, Servico completed a secondary offering of 10,000,000
shares of common stock, at $14.50 per share. An additional 1,500,000 shares
were issued in July 1997 upon exercise by the underwriter of the over-allotment
option. The offering resulted in net proceeds to Servico of $156 million, which
were used to repay $128 million of debt, to purchase the minority interests in
three majority owned hotels for $11.8 million and as additional working
capital.
In June 1998 the Company completed the acquisition of an entity owning
14 hotels containing 2,298 guest rooms. The Company has sold 3 of these
hotels and intends to sell 2 additional hotels, which aggregate 526 guest
rooms, and will spend approximately 35 million to renovate and reposition the
remaining 10 hotels. The acquisition price for the 14 hotels was $74 million
and was paid for by the assumption of $58 million in existing debt and $1.5
million in other liabilities and the balance with existing cash.
Additionally in June 1998, $175 million of CRESTS were issued. The
CRESTS bear interest at 7% and are convertible into shares of the Company's
common stock at an initial conversion price of $21.42 per share. The sale of the
CRESTS generated $168.5 million in net proceeds, substantially all of which were
used to repay existing debt.
In connection with the Merger on December 11, 1998 the Company
obtained $265 million of mortgage financing from Lehman Brothers Holding, Inc.
("Lehman"). The net proceeds were used to repay existing debt and the $31.5
million due as a result of two swap transactions. This financing contains
various covenants and coverage ratios, which the Company is in compliance
with at December 31, 1998.
In March 1999, Lehman released $15 million of an original $23 million
escrow, which was established at the time the $265 million loan was closed. This
escrowed amount was for future capital improvements. Simultaneously, Lehman
issued the Company a commitment for $15 million to replenish this escrow at a
future date. Upon closing of this additional $15 million, the Lehman loan would
be increased to $280 million at the same terms and conditions as previously
described.
Continuation of the Company's previous growth strategy would require
additional financing. Further, under the terms of the Lehman financing, future
acquisitions would be subject to Lehman's prior approval and the Company does
not currently have any lines of credit. The Company's financial position may,
in the future, be strengthened through an increase in revenues, the refinancing
of its properties or capital from equity or debt markets. There is no assurance
the Company will be successful in these efforts.
-23-
25
INFLATION
The rate of inflation has not had a material effect on the Company's
revenues or costs and expenses in the three most recent fiscal years, and it is
not anticipated that inflation will have a material effect on the Company in
the near term.
YEAR 2000 MATTERS
The Year 2000 Issue is the result of certain computer programs being
written using two digits rather than four to define the applicable year.
Certain of the Company's computer programs may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in miscalculations
causing disruptions of operations, including a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on its recently completed assessment, the Company determined
that it will be required to modify or replace portions of its existing software
so that its computer systems will properly utilize dates beyond December 31,
1999.
The Company has divided its year 2000 issues into what it considers to
be critical and non-critical issues. The Company believes that in its line of
business the critical issues revolve around the ability to process retail
transactions from the reservation stage through settlement and collection at
the hotel. Additionally, of prime importance is the maintenance of accurate
accounting and corporate records.
The systems that the Company has identified as being critical include
but may not be limited to the following: Unix Operating System, Property
Management Systems, Point of Sale Systems, Oracle General Ledger System, Credit
Card Processing, banking relationships and its telecommunications vendors.
The Company has also identified non-critical issues including, but not
limited to, stand alone personal computers, computerized irrigation systems,
other third party vendors and possible security issues.
The Company has initiated formal communications with its significant
suppliers to determine the Company's vulnerability to those third parties'
failure to remediate their own Year 2000 Issue. There can be no guarantee that
the systems of the Company's suppliers will be timely converted and would not
have an adverse effect on the Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company has not determined the total cost of the year 2000 project. However,
the costs are not expected to exceed $1,000,000 nor have a material effect on
its financial statements. All expenditures have been appropriately allocated
for through the 1999 capital improvements budget by property. The
-24-
26
Company has spent less than $150,000 to date, all of which has been expensed.
The Company anticipates completing the Year 2000 project not later than August
31, 1999, which is prior to any anticipated impact on its operating systems.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K which express "belief", "anticipation" or
"expectation", as well as other statements which are not historical fact, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve risks and uncertainties. Moreover,
there are important factors which include, but are not limited to, general and
local economic conditions, risks relating to the operation and acquisition of
hotels, government legislation and regulation, changes in interest rates, the
impact of rapid growth, the availability of capital to finance growth, the
historical cyclicality of the lodging industry and other factors described in
Part I of this Form 10-K and other Lodgian, Inc. filings with the United States
Securities and Exchange Commission, all of which are difficult to predict and
many of which are beyond the control of the Company. Actual results could
differ materially from these forward-looking statements. In light of the risks
and uncertainties, there is no assurance that the forward-looking statements
contained in this From 10-K will in fact prove correct or occur. The Company
does not undertake any obligation to publicly release the results of any
revisions to these forward-looking statements to reflect future events or
circumstances.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's financial
instruments which are sensitive to changes in interest rates, including
Redeemable Preferred Stock and debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates. Weighted average variable rates are based on
implied forward rates in the yield curve at the reporting date. As of December
31, 1998, the change in current yields between one-year and five-year and
five-year U.S. Treasury bonds is three basis points, thus, minimal fluctuations
in the average interest rates are anticipated over the maturity periods.
Expected Maturity Date
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
(in thousands)
Liabilities
Long-term Debt:
Mortgage notes payable with
interest at variable rate of LIBOR
plus 3.25% $18,000 $247,000 $ 0 $ 0 $ 0 $ 0 $265,000 $265,000
Credit facilities totalling $396
million with interest at variable
rate of LIBOR plus 2.25% to
2.75% maturing through 2001.
At maturity, each loan converts
to term loans with a fixed rate
of interest and a 20 year
amortization period 722 3,842 6,816 7,940 8,580 295,844 323,744 323,744
Mortgage notes payable with
an interest rate of 9% 10,000 62,000 0 0 0 0 72,000 72,000
Mortgage notes payable with
fixed rates ranging from 8.6%
to 10.7% payable through 2010 3,715 4,174 4,584 5,024 38,655 107,957 164,109 164,109
Other 3,697 8,033 5,197 279 307 10,412 27,925 27,925
------- -------- ------- ------- ------- -------- -------- --------
Total $36,134 $325,049 $16,597 $13,243 $47,542 $414,213 $852,778 $852,778
======= ======== ======= ======= ======= ======== ======== ========
Average interest rate 11.2% 11.9% 8.6% 8.6% 8.6% 8.5% 10.0%
Other:
Convertible preferred securities 0 0 0 0 0 0 $175,000 $ 78,750
-25-
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 for a list of the Lodgian, Inc. Consolidated Financial
Statements and schedules filed as part of this report.
SUPPLEMENTARY INFORMATION--QUARTERLY RESULTS OF OPERATIONS
The following table summarizes the unaudited quarterly financial data
(in thousands, except share data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, 1998
Revenues............................................... $82,881 $102,388 $101,360 $108,585
Income from operations................................. 12,481 21,716 17,374 15,540
Income before extraordinary item....................... 2,996 7,323 (13,715) 251
Loss on early extinguishment of debt, net of
income taxes of $2,500............................. -- (1,095) (47) (934)
Net (loss)............................................. 2,996 6,228 (13,762) (683)
Earnings per share:
Income (loss) before extraordinary item............ .14 .35 (.71) .01
Extraordinary item................................. -- (.05) -- (.05)
Net income (loss).................................. .14 .30 (.71) (.03)
Earnings per share - assuming dilution (a):
Income (loss) before extraordinary item............ .14 .34 (.71) .01
Extraordinary item................................. -- (.05) -- (.05)
Net income (loss).................................. .14 .29 (.71) (.03)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, 1997
Revenues............................................... $62,647 $71,176 $68,591 $74,243
Income from operations................................. 8,681 14,927 12,335 10,155
Income before extraordinary item: 310 4,143 4,955 3,162
Extraordinary item:
Loss on early extinguishment of debt, net of income
of taxes of $2,500................................. -- (3,751) -- --
Net Income............................................. 310 392 4,955 3,162
Earnings per share:
Income before extraordinary item................... .03 .43 .24 .15
Extraordinary item................................. -- (.39) -- --
Net income......................................... .03 .04 .24 .15
Earnings per share - assuming dilution (a):
Income before extraordinary item................... .03 .42 .23 .15
Extraordinary item................................. -- (.38) -- --
Net income......................................... .03 .04 .23 .15
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13
Information required by Items 10, 11, 12 and 13 of Part III of this
Form 10-K is incorporated by reference from Lodgian, Inc.'s definitive Proxy
Statement for its 1999 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission, pursuant to Regulation 14A, not later
than 120 days after the end of the fiscal year, all of which information is
hereby incorporated by reference in, and made part of, this Form 10-K.
-27-
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, FINANCIAL
STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following are filed as part of this report:
(1)(2) Financial Statements
The financial statements, financial statement schedules and
supplementary information listed in the accompanying Index to Financial
Statement Covered by Report of Independent Certified Accountants.
(3) Exhibits
The exhibits listed in the accompanying Index to Exhibits.
(b) Reports on Form 8-K:
On December 28, 1998, the Company filed a Current Report on
Form 8-K reporting the completion of the merger between Servico, Inc. and Impac
Hotel Group, L.L.C. The financial statements of Servico, Inc. and Impac Hotel
Group, L.L.C. were filed as part of this report.
-28-
30
INDEX TO EXHIBITS
2.1 Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") among Lodgian, Inc., Servico, Inc, Impac Hotel Group,
L.L.C., SHG-S Sub, Inc., SHG-I Sub, L.L.C., P-Burg Lodging Associates,
Inc., SHG-II Sub, Inc., Hazard Lodging Associates, Inc., SHG-III Sub,
Inc., Memphis Lodging Associates, Inc., SHG-IV Sub, Inc., Delk Lodging
Associates, Inc., SHG-V Sub, Inc., Impac Hotel Development, Inc.,
SHG-VI Sub, Inc., Impac Design and Constructions, Inc., SHG-VII Sub,
Inc., Impac Hotel Group, Inc. and SHG-VIII Sub, Inc., dated as of July
22, 1998. (a)
2.2 Amendment to the Merger Agreement, dated as of September 16, 1998
(incorporated by reference to Servico's Form 8-K filed on September
17, 1998 (SEC File No. 001-11342)).
3.1 Restated Certificate of Incorporation of Lodgian, Inc. (a)
3.2 Restated Bylaws of Lodgian, Inc. (a)
4.1 Indenture, dated as of June 17, 1998, between Servico, Inc., Lodgian,
Inc. and Wilmington Trust Company, as Trustee. (a)
4.2 First Supplemental Indenture, dated as of June 17, 1998, between Servico,
Inc., Lodgian, Inc. and Wilmington Trust Company, as Trustee. (a)
4.3 Registration Rights Agreement, dated June 17, 1998, among Lodgian Capital
Trust I, Servico, Inc. and NationsBanc Montgomery Securities, LLC. (a)
4.4 Registration Rights Agreement between Lodgian, Inc. and certain unitholders
of Impac Hotel Group, L.L.C. (a)
10.1 Lodgian 1998 Short-Term Incentive Compensation Plan. (a)
10.2 Lodgian 1998 Stock Incentive Plan. (a)
10.3 Lodgian Non-Employee Directors' Stock Plan. (a)
10.4 Guarantee Agreement, dated as of June 17, 1998, between Servico, Inc.,
Lodgian, Inc. and Wilmington Trust Company, as Guarantee Trustee. (a)
10.5 Amended and Restated Declaration of Trust of Lodgian Capital Trust I,
dated as of June 17, 1998, between Servico, Inc., as Sponsor, David A.
Buddemeyer, Charles M. Diaz and Phillip R. Hale, as Regular Trustees,
and Wilmington Trust Company, as Delaware Trust and Property Trustee.
(a)
10.6 Severance Agreement, dated November 10, 1998, between Servico, Inc. and
David Buddemeyer.
10.7 Severance Agreement, dated February 28, 1999, between the Company and
Warren M. Knight.
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31
10.8 Employment Agreement between the Company and Robert S. Cole. (a)
10.9 Employment Agreement, dated May 2, 1997, between Karyn Marasco and
Servico, Inc. (incorporated by reference to Servico's Form 10-Q for
the period ended June 30, 1997, filed on August 14, 1997 (SEC File No.
001-11342)).
10.10 Acquisition Agreement, dated as of November 7, 1997, by and among Prime
Motor Inns Limited Partnership, Prime-American Realty Corp. and Servico,
Inc. (b)
10.11 Stock Purchase Agreement, dated as of December 9, 1997, by and among
Prime-American Realty Corp., Prime Hospitality, Inc. and Servico, Inc. (b)
10.12 First Amendment to Acquisition Agreement, dated March 12, 1998, by and
among Prime Motor Inns Limited Partnership, Prime-American Realty Corp. and
Servico, Inc. (b)
10.13 Voting Agreement, dated as of March 20, 1998, between Servico, Inc. and
Certain Members of Impac. (c)
10.14 Voting Agreement, dated as of March 20, 1998, between Servico, Inc. and
Certain Other Members of Impac. (c)
10.15 Loan Agreement, dated as of December 11, 1998, between Servico
Windsor, Inc., Secore Financial Corporation and the borrowers listed
on the signature pages thereto. (d)
10.16 Pledge Agreement, dated as of December 11, 1998, among Secore
Financial Corporation, Lehman Brothers Holdings Inc., Lodgian, Inc.,
Servico, Inc., Servico Operations Corporation, Sharon Motel
Enterprises, Inc., KDS Corporation, AMIOP Acquisition Corp., Servico
Acquisition Corp. and Palm Beach Motel Enterprises. (d)
10.17 Guaranty, dated as of December 11, 1998, by Servico, Inc., Lodgian, Inc.,
Servico Operations Corporation, Sharon Motel Enterprises, Inc., KDS
Corporation, AMIOP Acquisition Corp., Servico Acquisition Corp. and Palm Beach
Motel Enterprises in favor of Secore Financial Corporation. (d)
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule. (For SEC use only)
99.1 Press Release, dated November 9, 1998. (d)
99.2 Press Release, dated December 11, 1998. (d)
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32
(a) This exhibit is incorporated by reference to exhibits and appendices
to the Company's Registration Statement on Form S-4, as amended, filed
on July 17, 1998 (SEC File No. 333-59315).
(b) This exhibit is incorporated by reference to Servico, Inc.'s Form 10-K
for the year ended December 31, 1997, filed on March 31, 1998 (SEC
File No. 001-11342).
(c) This exhibit is incorporated by reference to Servico, Inc.'s Form 8-K
dated March 20, 1998, filed on March 26, 1998.
(d) This exhibit is incorporated by reference to the Company's Form 8-K
dated December 11, 1998, filed on December 28, 1998 (SEC File No.
001-14537).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 1999.
LODGIAN, INC.
By: /s/ Robert S. Cole
----------------------------------------
Robert S. Cole, Chief Executive Officer,
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities indicated, on March 31, 1999.
SIGNATURE
/s/ Robert S. Cole
-------------------------------------------
Robert S. Cole
Chief Executive Officer, President and Director
/s/ Lawrence Carballo
-------------------------------------------
Lawrence Carballo
Interim Chief Financial and Principal Accounting
Officer
/s/ Joseph C. Calabro
--------------------------------------------
Joseph C. Calabro
Chairman of the Office of the Chairman of the
Board of Directors
/s/ John Lang
--------------------------------------------
John Lang
Director
/s/ Michael A. Leven
--------------------------------------------
Michael A. Leven
Director
/s/ Peter R. Tyson
--------------------------------------------
Peter R. Tyson
Director
/s/ Richard H. Weiner
--------------------------------------------
Richard H. Weiner
Director
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34
Lodgian, Inc. and Subsidiaries
Index to Financial Statements
Covered by Report of Independent
Auditors
[Item 14(a)(1) and (2)]
Consolidated Financial Statements Page
----
Report of Independent Auditors.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................ F-3
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.................................................................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 ................................................................. F-6
Notes to Consolidated Financial Statements.............................................................. F-8
All schedules have been omitted since the required information is not applicable
or is not present in amounts sufficient to require submission of the schedules
or because the information required is included in the consolidated financial
statements or notes thereto.
F-1
35
Report of Independent Auditors
The Stockholders and
Board of Directors
Lodgian, Inc.
We have audited the accompanying consolidated balance sheets of Lodgian, Inc.
(formerly known as Servico, Inc) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lodgian, Inc.
(formerly known as Servico, Inc.) and subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
March 31, 1999
F-2
36
Lodgian, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1998 1997
----------- ----------
(In Thousands, except share data)
Assets
Current assets:
Cash and cash equivalents $ 19,185 $ 15,243
Cash, restricted 6,302 --
Accounts receivable, net of allowances 25,498 11,023
Inventories 9,263 4,485
Prepaid expenses 8,697 7,469
Other current assets 9,996 3,684
----------- ---------
Total current assets 78,941 41,904
Property and equipment, net 1,317,470 534,080
Deposits for capital expenditures 30,386 30,901
Other assets, net 71,124 20,766
----------- ---------
$ 1,497,921 $ 627,651
=========== =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 57,253 $ 7,543
Accrued liabilities 50,633 27,355
Current portion of long-term obligations 36,134 5,728
----------- ---------
Total current liabilities 144,020 40,626
Long-term obligations, less current portion 816,644 323,320
Deferred income taxes 63,469 10,615
Commitments and contingencies -- --
Minority interests:
Preferred redeemable securities 175,000 --
Other 15,021 13,555
Stockholders' equity:
Common stock, $.01 par value-
shares authorized; 27,937,057 and 20,974,852
shares issued and outstanding at
December 31, 1998 and 1997, respectively 278 210
Additional paid-in capital 261,976 211,577
Retained earnings 23,106 28,327
Accumulated other comprehensive loss (1,593) (579)
----------- ---------
Total stockholders' equity 283,767 239,535
----------- ---------
Total liabilities and stockholders' equity $ 1,497,921 $ 627,651
=========== =========
See accompanying notes
F-3
37
Lodgian, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1998 1997 1996
--------- --------- ---------
(In Thousands, except per share data)
Revenues:
Rooms $ 267,862 $ 179,956 $ 156,564
Food and beverage 107,334 80,335 68,803
Other 20,018 16,366 14,159
--------- --------- ---------
395,214 276,657 239,526
Operating expenses:
Direct:
Rooms 75,316 49,608 43,667
Food and beverage 81,643 60,919 52,761
General and administrative 10,080 8,973 9,297
Depreciation and amortization 31,114 23,023 18,677
Other 129,950 88,036 77,183
--------- --------- ---------
328,103 230,559 201,585
--------- --------- ---------
67,111 46,098 37,941
Other income (expenses):
Interest income and other 1,260 1,720 1,723
Gain on litigation settlement -- -- 3,612
Loss on asset disposition (432) -- --
Interest expense (30,378) (25,909) (29,443)
Settlement on swap transactions (31,492) -- --
Severance and other expenses (3,400) -- --
Minority interests:
Preferred redeemable securities (6,475) -- --
Other (1,436) (960) (2,060)
--------- --------- ---------
(Loss) income before income
taxes and extraordinary item (5,242) 20,949 11,773
(Benefit) provision for income taxes (2,097) 8,379 3,225
--------- --------- ---------
(Loss) income before
extraordinary item (3,145) 12,570 8,548
Extraordinary item:
Loss on extinguishment of
indebtedness, net of income tax
benefit of $1,384, $2,500 and
$232 in 1998, 1997 and 1996,
respectively (2,076) (3,751) (348)
--------- --------- ---------
Net (loss) income $ (5,221) $ 8,819 $ 8,200
========= ========= =========
Earnings (loss) per common share:
(Loss) income before extraordinary
item $ (.16) $ .83 $ .92
Extraordinary item (.10) (.25) (.04)
--------- --------- ---------
Net (loss) income per common share $ (.26) $ .58 $ .88
========= ========= =========
Earnings (loss) per common share-
assuming dilution:
(Loss) income before extraordinary
item $ (.16) $ .80 $ .88
Extraordinary item (.10) (.24) (.04)
--------- --------- ---------
Net (loss) income per common
share-assuming dilution $ (.26) $ .56 $ .84
========= ========= =========
See accompanying notes
F-4
38
Lodgian, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumu-
lated
Other
Common Stock Additional Compre- Total
--------------------- Paid-in Retained hensive Stockholder's
Shares Amount Capital Earnings Loss Equity
---------- -------- ---------- -------- ---------- -------------
(In Thousands, except share data)
Balance at December 31, 1995 8,846,269 $ 88 $ 51,424 $11,308 $ - $ 62,820
401(k) Plan contribution 25,536 1 465 - - 466
Exercise of stock options 497,800 5 2,008 - - 2,013
Tax benefit from exercise
of stock options - - 1,239 - - 1,239
Net income - - - 8,200 - 8,200
---------- -------- --------- --------- ---------- ---------
Balance at December 31, 1996 9,369,605 94 55,136 $ 19,508 - 74,738
Issuance of common stock 11,500,000 115 156,085 - - 156,200
401(k) Plan contribution 49,847 - 282 - - 282
Exercise of stock options 86,600 1 437 - - 438
Tax benefit from exercise
of stock options - - 175 - - 175
Purchase of common stock (31,200) - (538) - - (538)
Net income - - - 8,819 - 8,819
Currency translation
adjustments - - - - (579) (579)
---------
Comprehensive income - - - - - 8,240
---------- -------- --------- --------- ---------- ---------
Balance at December 31, 1997 20,974,852 210 211,577 28,327 (579) 239,535
Issuance of common stock in
connection with purchase
of Impac 9,400,000 94 82,626 - - 82,720
401(k) Plan contribution 88,205 - 430 - - 430
Exercise of stock options 134,900 1 1,143 - - 1,144
Tax benefit from exercise
of stock options - - 245 - - 245
Purchase of common stock (2,660,900) (27) (34,045) - - (34,072)
Net loss - - - (5,221) - (5,221)
Currency translation
adjustments - - - - (1,014) (1,014)
---------
Comprehensive loss - - - - - (6,235)
---------- -------- --------- --------- ---------- ---------
Balance at December 31, 1998 27,937,057 $ 278 $261,976 $23,106 $(1,593) $283,767
========== ======== ========= ========= ========== =========
See accompanying notes.
F-5
39
Lodgian, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1998 1997 1996
--------- ----------- ------------
(In Thousands)
Operating activities
Net (loss) income $ (5,221) $ 8,819 $ 8,200
Adjustments to reconcile net (loss) income to
net cash provided by operating
activities:
Depreciation and amortization 31,114 23,023 18,677
Loss on extinguishment of
indebtedness 3,460 6,251 580
Deferred income taxes (726) 2,216 1,252
Minority interests - other 1,430 960 2,060
401(k) Plan contributions 430 282 548
Provision for (recoveries of) losses on
receivables 77 (69) 27
Equity in (profit) loss of
unconsolidated entities (782) (107) 63
Gain on litigation settlement - - (3,868)
Gain on recovery of investments - - (134)
Changes in operating assets and
liabilities, net of effect of
acquisitions:
Accounts receivable (6,563) (2,017) (824)
Inventories (1,883) (1,458) (761)
Other assets (18,412) 425 1,875
Accounts payable 14,913 1,174 200
Accrued liabilities 11,464 2,522 3,075
--------- ---------- ----------
Net cash provided by operating activities 29,301 42,021 30,970
Investing activities
Acquisitions of property and equipment (67,717) (143,406) (70,312)
Acquisitions of Impac - -
Capital improvements, net (118,667) (48,252) (26,323)
Purchase of minority interests - (11,748) -
Net deposits for capital expenditures 3,860 (17,247) (7,074)
Purchase of marketable securities - (500) -
Payments on notes receivable issued to
related parties - 470 1,200
Decrease in investment in unconsolidated
entities - 17 2,198
Notes receivable issued to related parties - - (1,670)
Net proceeds from litigation settlement - - 3,868
Net proceeds from recovery of investments - - 556
-------- ---------- -----------
Net cash used in investing activities (182,524) (220, 666) (97,557)
F-6
40
Lodgian, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1998 1997 1996
--------- ------------ -------------
(In Thousands)
Financing activities
Proceeds from issuance of long-term obligations $ 600,284 $ 191,560 $ 166,317
Proceeds from issuance of common stock 1,144 156,638 2,013
Principal payments of long-term obligations (390,026) (167,647) (92,216)
Payments of deferred loan costs (20,165) (4,652) (6,533)
(Distributions to) contributions from minority
interests - (946) 5,078
Payments for repurchase of common stock (34,022) (538) -
--------- ------------ -------------
Net cash provided by financing activities 157,165 174,415 74,659
--------- ------------ -------------
Net increase (decrease) in cash and cash
equivalents 3,942 (4,230) 8,072
Cash and cash equivalents at beginning of year 15,243 19,473 11,401
--------- ------------ -------------
Cash and cash equivalents at end of year $ 19,185 $ 15,243 $ 19,473
========= ============ =============
Supplemental cash flow information Cash paid during the year for:
Interest, net of amount capitalized $ 31,512 $ 22,109 $ 23,147
========= ============ =============
Income taxes paid, net of refunds $ 5,210 $ 1,091 $ 2,531
========= ============ =============
Supplemental disclosure of non cash investing
and financing activities
Non cash acquisition and related financing of
property and equipment $ 696,851 $ - $ -
========= ============ =============
Issuance of stock in $ 82,700 $ - $ -
connection with acquisition of Impac ========= ============ =============
See accompanying notes.
F-7
41
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Summary of Significant Accounting Policies
Description of Business
On December 11, 1998 Servico, Inc. (Servico) merged with Impac Hotel Group, LLC
(Impac), pursuant to which Servico and Impac formed a new company Lodgian, Inc.
("Lodgian" or the "Company"). This transaction has been accounted for under the
purchase method of accounting, whereby Servico is considered the acquiring
company. For further discussion of the merger see Note 2.
As a result of the merger, Lodgian its wholly owned subsidiaries and
consolidated partnerships (collectively, the "Company"), own or manage hotels in
35 states, Canada and Europe. At December 31, 1998 and 1997, the Company owned,
either wholly or partially, or managed 144 and 71 hotels, respectively.
Principles of Consolidation
The financial statements consolidate the accounts of Lodgian, its wholly owned
subsidiaries and partnerships in which Lodgian exercises control over the
partnerships' assets and operations. Lodgian believes it has control of
partnerships when the Company manages and has control of the partnerships'
assets and operations, has the ability and authority to enter into financing
arrangements on behalf of the entity or to sell the assets of the entity within
reasonable business guidelines.
An unconsolidated entity (owning 1 hotel) and a joint venture which owns and
operates six hotels in Belgium and the Netherlands, in which the Company
exercises significant influence over operating and financial policies, are
accounted for on the equity method. The Company's investments in unconsolidated
entities was $10,091,000 December 31, 1998, and is included in other assets, net
in the accompanying consolidated balance sheets. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Inventories
Inventories consist primarily of food and beverage, linens, china, tableware and
glassware and are valued at the lower of cost (computed on the first-in,
first-out method) or market.
Minority Interests - Other
Minority interests represent the minority interests' proportionate share of
equity or deficit of partnerships which are accounted for by the Company on a
consolidated basis. The Company generally allocates to minority interests their
share of any profits or losses in accordance with the provisions of the
applicable agreements. However, if the loss applicable to a minority interest
exceeds its total investment and advances, such excess is charged to the
Company.
F-8
42
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Minority Interests - Preferred Redeemable Securities
Minority interests-preferred redeemable securities, represents Convertible
Redeemable Equity Structure Trust Securities ("CRESTS"). The CRESTS bear
interest at 7% and are convertible into shares of the Company's common stock.
For further discussion of the CRESTS, see Note 5.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Property
under capital leases is amortized using the straight line method over the
shorter of the estimated useful lives of the assets or the lease term.
The Company capitalizes interest costs incurred during the renovation and
construction of capital assets. During the years ended December 31, 1998, 1997
and 1996, the Company capitalized $3,499,000, $1,650,000 and $644,000 of
interest, respectively.
Management periodically evaluates the Company's property and equipment to
determine if there has been any impairment in the carrying value of the assets
in accordance with Financial Accounting SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of". SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Deferred Costs
Deferred franchise, financing, and other deferred costs of $41,336,000 and
$16,371,000 at December 31, 1998 and 1997, respectively, are included in other
assets, net of accumulated amortization of $3,061,000 and $2,509,000 at
December 31, 1998 and 1997, respectively, which is computed using the
straight-line method, over the terms of the related franchise, loan or other
agreements. The straight-line method of amortizing deferred financing costs
approximates the interest method.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash, consists of amounts reserved for capital improvements, debt
service, taxes and insurance.
F-9
43
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Fair Values of Financial Instruments
The fair values of current assets and current liabilities are assumed to be
equal to their reported carrying amounts. The fair values of the Company's
long-term debt are estimated using discounted cash flow analysis, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. In the opinion of management, the carrying value of long-term debt
approximates market value as of December 31, 1998 and 1997. The fair market
value of the Company's CRESTS which is $78,750,000 at December 31, 1998, is
based on quoted market prices. Management has estimated the fair value of the
Company's interest rate protection agreements to be approximately $5,000,000 at
December 31, 1998 based on dealer quotes.
Concentration of Credit Risk
Concentration of credit risk associated with cash and cash equivalents is
considered low due to the credit quality of the issuers of the financial
instruments held by the Company and due to their short duration to maturity.
Accounts receivable are primarily from major credit card companies, airlines and
other travel related companies. The Company performs ongoing evaluations of its
significant customers and generally does not require collateral. The Company
maintains an allowance for doubtful accounts at a level which management
believes is sufficient to cover potential credit losses. At December 31, 1998
and 1997, these allowances were $979,000 and $300,000, respectively.
Earnings Per Common and Common Equivalent Share
The Company adopted SFAS 128 "Earnings Per Share" effective for the year ended
December 31, 1998. Basic earnings per share is calculated based on the weighted
average number of common shares outstanding during the periods and include
common stock contributed or to be contributed by the Company to its employees
401(k) Plan (the "401(k)"). Dilutive earnings per common share include the
Company's outstanding stock options and shares convertible under the Company's
CRESTS, if dilutive.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25,
F-10
44
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Stock Based Compensation (continued)
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations.
Under APB 25, because the exercise price of the Company's employee stock options
is equal to the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Under Financial SFAS 123, "Accounting for
Stock-Based Compensation", net income and earnings per share are not materially
different from amounts reported, therefore, no pro forma information has been
presented.
The Financial Accounting Standards Board is expected to issue an interpretation
of APB 25 (the "Interpretation") in the third quarter of 1999. Two of the
key areas affected by the proposal are the accounting for stock option
repricings and options issued to non-employee directors. The interpretation
would be applied prospectively to transactions that occur after December 15,
1998.
The Interpretation will require that once an option granted to an employee is
repriced, that option would be accounted for as if it were a variable plan,
giving rise to compensation expense for subsequent changes in stock price, from
the date the option is repriced to the date it is exercised. Under the
proposal, no compensation expense would be recorded on the date of the
repricing. However, compensation would be recorded quarterly through the date
of exercise to the extent that the fair market value of the common stock is in
excess of the exercise price of the options adjusted for the repricing. The
interpretation requires, in measuring compensation expense, the use of the
higher of the repriced exercise price of the options or the fair market value
of the stock on the date the interpretation is effective.
Additionally, under the proposed Interpretation, options granted to non-employee
directors subsequent to December 15, 1998, would no longer be accounted for
under APB 25's intrinsic value method. Instead, such options would be
accounted for under the fair value method.
The Company repriced options totaling 1,408,400 on December 18, 1998 that will
be subject to these requirements when the new Interpretation becomes effective.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$2,162,000, $1,867,000 and $1,613,000 in advertising costs during 1998, 1997 and
1996, respectively.
F-11
45
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with SFAS 52, "Foreign Currency Translation." All balance
sheet accounts have been translated using the exchange rates in effect at the
balance sheet dates. Income statement amounts have been translated using the
average rate for the year. The gains and losses resulting from the changes in
exchange rates from year to year have been reported in other comprehensive
income. The effects on the statements of operations of transaction gains and
losses is insignificant for all years presented.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Impact of Recently Issued Accounting Pronouncements
Effective January 1, 1998, the Company adopted the SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
superseded SFAS 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. It is the belief of management that the Company operates under one
reporting segment-hotel ownership and management. Therefore, the adoption of
SFAS 131 did not have a material impact on the Company's financial statement
disclosures.
As of January 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's results of operations or shareholders' equity.
SFAS 130 requires the Company's foreign currency translation adjustments, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income.
F-12
46
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Merger, Acquisitions and Related Items
On December 11, 1998, Servico merged with Impac in a transaction accounted for
under the purchase method of accounting, pursuant to APB 16, "Business
Combinations", whereby Servico is considered the acquiring company. The
operations of Impac are included in the consolidated statement of operations
from the date of acquisition. Under the terms of the Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement"), Servico's existing
shareholders received one share of Lodgian common stock for each of Servico
stock held by them (approximately 18,440,000 million shares). The purchase price
of Impac approximated $104,367,000, consisting of $15 million in cash, the
issuance of 9.4 million shares of common stock of Lodgian at $8.80, of which 1.4
million shares are contingent upon the completion of construction of five
hotels, and acquisition related costs of approximately $6,647,000. The purchase
price has been allocated to the fair value of the net assets acquired as follows
(in thousands):
Cash $ 7,027
Inventory 2,685
Accounts receivable 12,239
Property and equipment 616,000
Goodwill and other assets 12,089
Accounts payable (58,432)
Long term obligations (429,466)
Deferred income taxes (47,900)
Accrued liabilities (9,875)
Total purchase price $ 104,367
===========
In connection with the purchase, of Impac, the Company recorded goodwill of
approximately $11 million, included in other assets above, which is being
amortized over 20 years.
The allocation of the purchase price is tentative pending completion of
valuations of the property and equipment acquired. The allocation may change
upon the completion of these valuations.
F-13
47
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Merger, Acquisitions and Related Items (continued)
In connection with the merger with Impac, Servico incurred approximately
$3,400,000 of expenses which consisted primarily of expenses associated with the
closing and relocation of Servico's West Palm Beach, Florida corporate
headquarters to the Company's headquarters in Atlanta, Georgia and termination
and relocation of certain Servico employees. These costs have been expensed as
incurred and are included in severance and other expenses in the 1998
consolidated statement of operations. Substantially all of these costs have been
paid by December 31, 1998.
On June 1, 1998, the Company acquired the issued and outstanding units of AMI
Operating Partners, L.P. (AMI), in a transaction accounted for under the
purchase method of accounting. The purchase price of AMI approximated $74
million which included cash of $16 million and the assumption of $58 million in
debt. The operations of AMI are included in the consolidated statement of
operations from the date of acquisition. The purchase price was principally
allocated to the 15 hotel properties acquired.
The pro forma unaudited results of operations for the years ended December 31,
1998 and 1997, assuming the purchase of Impac had been consummated on
January 1, 1997, follows:
1998 1997
---------- ---------
(In Thousands,
except per share data)
Revenues $545,794 $396,516
Net (loss) income (21,146) (8,837)
Net (loss) income before
extraordinary item (19,070) 2,917
Net (loss) income per
common share:
Basic and Diluted $ (.75) $ (.38)
During November 1998, the President and Chief Executive Officer of Servico
announced his resignation effective the date of the merger with Impac. In
connection with his resignation, Mr. Buddemeyer was provided a severance package
approximating $1.3 million. This amount was expensed during the fourth quarter
of 1998 and is included in severance and other expenses in the 1998 consolidated
statement of operations. Approximately $164,000 of this amount relates to
compensation expense associated with the extension of the terms of his stock
options, pursuant to APB 25.
F-14
48
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property and Equipment
At December 31, 1998 and 1997, property and equipment consisted of the
following:
Useful
Lives
(Years) 1998 1997
------- --------- ---------
(In Thousands)
Land - $ 168,303 $ 48,798
Buildings and improvements 10-40 976,608 430,363
Furnishings and equipment 3-10 187,055 99,487
---------- ---------
1,331,966 578,648
Less accumulated depreciation
and amortization (104,528) (75,976)
Construction in progress 90,032 31,408
---------- ---------
$1,317,470 $ 534,080
========== =========
During the year ended December 31, 1997, the Company purchased 12 hotels for an
aggregate purchase price of $140,300,000 which were paid for by the delivery of
mortgage notes totaling $72,655,000 and cash for the balance. The 12 hotels
purchased, containing an aggregate of 3,002 guest rooms, are operated under
license agreements with nationally recognized franchisors and are managed by the
Company. In addition, the Company increased its ownership interests in the
partnerships, owning three hotels, from 51% to 100% for approximately
$11,800,000.
F-15
49
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Accrued Liabilities
At December 31, 1998 and 1997, accrued liabilities consisted of the
following:
1998 1997
--------- --------
(In Thousands)
Salaries and related costs $26,798 $10,775
Real estate taxes 9,095 4,118
Interest 4,370 1,969
Advance deposits 3,799 1,666
Sales taxes 5,412 2,523
Other 1,159 6,304
------- -------
$50,633 $27,355
======= =======
F-16
50
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Obligations and Preferred Redeemable Securities
Long-term obligations consisted of the following at December 31:
1998 1997
-------- --------
(In Thousands)
Mortgage notes payable with
interest at a variable rate of LIBOR
(5% at December 31, 1998 plus
3.25%). The notes are payable
through 2000 $265,000 $ -
Credit facilities, of $396
million with interest LIBOR + 2.25%
to 2.75% maturing through 2001. At
maturity, each loan converts to term
loans amortizing over a 20 year
period 323,744 -
Mortgage notes with an interest
rate of 9% payable through 2000 72,000 -
Mortgage notes with fixed rates
ranging from 8.6% to 10.7% payable
through 2010 164,109 152,469
Mortgage notes with variable
rates of interest - 166,817
Other 27,925 9,762
-------- --------
852,778 329,048
Less current portion of long-term
obligations (36,134) (5,728)
-------- --------
$816,644 $323,320
======== ========
Substantially, all of the Company's property and equipment are pledged as
collateral for long-term obligations of which approximately $403,249,000 has
been guaranteed by Lodgian, Inc. Certain of the mortgage notes are subject to a
prepayment penalty if repaid prior to their maturity.
F-17
51
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Obligations and Preferred Redeemable Securities (continued)
On December 11, 1998, the Company consummated financing agreements, which
resulted in net proceeds of approximately $337 million. The net proceeds were
primarily used to pay the costs of the merger with Impac, escrow funds for
renovations on certain properties and to repay, prior to maturity, approximately
$142,205,000 in debt secured by 27 of its hotels. As a result, the Company
recorded an extraordinary loss on early extinguishment of debt of approximately
$934,000 (net of income tax benefit of $622,000) relating to the write-off of
unamortized deferred financing costs. Approximately $31.5 million of the $337
million relates to the settlement on two swap transactions entered into by the
Company with its lender. For further discussion of swap transaction see Note 6.
In June 1998, the Company issued $175 million of Convertible Redeemable Equity
Structures Trust Securities ("CRESTS"). The CRESTS bear interest at 7% and are
convertible into shares of the Company's common stock at an initial conversion
price of $21.42 per share. The sale of the CRESTS generated $168.5 million in
net proceeds, substantially, all of which were used to repay existing debt prior
to maturity. As a result, the Company recorded an extraordinary loss on early
extinguishment of debt of approximately $1,142,000 (net of income tax benefit of
$761,000) relating to the write off of unamortized financing costs. The CRESTS
are included in the accompany consolidated balance sheet as Minority Interests-
Preferred Redeemable Securities. The interest expense incurred on the CRESTS
have been included as Minority Interests - Preferred Redeemable Securities in
the Consolidated Statement of Operations.
During 1997 Lodgian completed a secondary offering of 11.5 million shares of
common stock at $14.50 per share, which resulted in net proceeds to Lodgian of
$156,000,000. The Company repaid, prior to maturity, approximately $128,000,000
in debt secured by 21 of its hotels and, as a result, recorded an extraordinary
loss on early extinguishment of debt of approximately $3,800,000 (net of income
tax benefit of $2,500,000) relating to the write-off of unamortized loan costs
associated with the debt. Seventeen of these hotels have subsequently been used
to secure approximately $81,200,000 in new variable rate mortgage notes which
generated approximately $78,300,000 of net proceeds for use in the acquisition
of new properties. The Company has also refinanced eight other properties
generating approximately $3,100,000 in net proceeds.
The Company has entered into an interest rate protection agreement on $54
million related to one of the above credit facilities. Pursuant to the terms of
this agreement, when the loan matures in 2001 and converts to term loans, the
interest rate will be based on a benchmark treasury rate of 7.235%. In the event
the company determines that it is in its best interest to "break" that interest
rate lock, it may be required to pay a significant fee to the lender.
F-18
52
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Obligations and Preferred Redeemable Securities (continued)
Maturities of long-term obligations for each of the five years after December
31, 1998 and thereafter, are as follows (in thousands):
1999 $ 36,134
2000 325,049
2001 16,597
2002 13,243
2003 47,542
Thereafter 414,213
--------
$852,778
========
6. Settlement on Swap Transactions
During August 1998, the Company entered into treasury rate lock transactions
with notional amounts of $175 million and $200 million (collectively, the
"Swaps") with a lender for the purpose of hedging their interest rate exposure
on two anticipated financing transactions. During September 1998, the Company
determined that it was not probable that it would consummate the anticipated
transactions and recognized a loss in the consolidated statement of operations
of $31.5 million related to the settlement of the Swaps. The obligation related
to the settlement of the Swaps was included in the $337 million financing
transaction discussed in Note 5.
7. Stockholders' Equity
During 1998, in accordance with previously announced share buyback programs, the
Company has repurchased in open market transactions and retired 2,660,900 shares
of its common stock.
F-19
53
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
Provision for income taxes for the Company is as follows:
Year ended December 31
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
-------- -------- ------- ------- -------- ------ ------- -------- ------
Federal $(1,140) $(481) $(1,621) $3,289 $3,186 $6,475 $1,322 $1,170 $2,492
State and
local (423) (53) (476) 1,693 211 1,904 651 82 733
-------- ------- ------- ------- -------- ------ ------- -------- ------
$(1,563) $(534) $(2,097) $4,982 $3,397 $8,379 $1,973 $1,252 $3,225
======== ======== ======= ======= ======== ====== ======= ======== ======
The components of the cumulative effect of temporary differences in the deferred
income tax liability and asset balances at December 31, 1998 and 1997, are as
follows:
1998 1997
----------------------------------- ------------------------------------
Current Non-Current Current Non-Current
Total Asset Liability Total Asset Liability
-------- ------- ----------- ------- ------- ------------
(In Thousands)
Property and
equipment $ 78,523 $ - $ 78,523 $ 21,151 $ - $ 21,151
Net operating loss
carryforward (16,015) (605) (15,410) (7,905) (605) (7,300)
Alternative
minimum tax
credits (999) - (999) (3,739) - (3,739)
Self-insurance
reserve (1,360) (1,360) - (878) (878) -
Vacation pay
accrual (745) (745) - (681) (681) -
Other 1,239 (115) 1,354 413 (90) 503
-------- -------- ----------- -------- ------- -----------
$ 60,644 $ (2,825) $ 63,469 $ 8,361 $(2,254) $ 10,615
======== ======== =========== ======== ======= ===========
F-20
54
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The difference between income taxes using the effective income tax rate and the
federal income tax statutory rate of 34% is as follows:
Year ended December 31
1998 1997 1996
------- ------ -------
Federal income tax at
statutory federal rate $(1,782) $7,123 $ 4,003
State income taxes, net (315) 1,256 483
Tax benefit with respect to
legal settlement - - (1,261)
------- ------ -------
$(2,097) $8,379 $ 3,225
======= ====== =======
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $45,300,000 for federal income tax purposes which expire in years
2005 through 2018. The full amount of the income tax benefit of this net
operating loss carryforward has been reflected in the Consolidated Financial
Statements of the Company in prior years.
9. Related Party Transactions
The Company's President was a shareholder of Impac Hotel Development ("IHD"),
which provided acquisition and property development services to Impac for a
development fee of four percent of the total project cost of each property
acquired or developed. Impac agreed to terminate this agreement prior to the
consummation of the Merger so that Impac and its subsidiaries will have no
further obligations under the agreement after the Merger other than the payment
of up to a four percent development fee (not to exceed $2.5 million in the
aggregate) in the event Lodgian acquires or develops any of the hotels or
properties identified in the Merger Agreement as Impac's acquisition pipeline.
F-21
55
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1998 1997 1996
------------ ------------ ----------
Numerator:
(Loss) income before extraordinary
item $ (3,145,000) $ 12,570,000 $8,548,000
Extraordinary item (2,076,000) (3,751,000) (348,000)
------------ ------------ ----------
Net loss income $ (5,221,000) $ 8,819,000 $8,200,000
============ ============ ==========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 20,245,000 15,183,000 9,295,000
Effect of dilutive securities:
Employee stock options - 457,000 456,000
------------ ------------ ----------
Denominator for dilutive earnings per
share - adjusted weighted-average 20,245,000 15,640,000 9,751,000
shares ============ ============ ==========
Basic earnings per share:
(Loss) income before extraordinary
item $ (.16) $ .83 $ .92
Extraordinary item (.10) (.25) (.04)
------------ ------------ ----------
Net loss income $ .(26) $ .58 $ .88
============ ============ ==========
Diluted earnings per share:
Income before extraordinary item $ (.16) $ .80 $ .88
Extraordinary item (.10) (.24) (.04)
------------ ------------ ----------
Net income $ (.26) $ .56 $ .84
============ ============ ==========
All prior-period earnings per share amounts have been restated to conform to the
SFAS 128 "Earnings per share".
The computation of diluted EPS did not include shares associated with the
assumed conversion of the CRESTS or stock options totaling 8,169,935 because
their inclusion would have been antidilutive.
F-22
56
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies
Six of the Company's hotels are subject to long-term ground leases expiring from
2014 through 2075 which provide for minimum payments as well as incentive rent
payments and most of the Company's hotels have noncancellable operating leases,
mainly for operating equipment. The land covered by one lease can be purchased
by the Company for approximately $2,600,000. For the years ended December 31,
1998, 1997 and 1996, lease expense for the five noncancellable ground leases
was approximately $2,400,000, $1,624,000 and $1,381,000, respectively.
At December 31, 1998, the future minimum commitments for noncancellable ground
leases are as follows (in thousands):
1999 $ 3,438
2000 3,444
2001 3,427
2002 3,434
2003 2,405
Thereafter 73,429
--------
$89,577
========
The Company has entered into license agreements with various hotel chains which
require annual payments for license fees, reservation services and advertising
fees. The license agreements generally have an original ten year term. The
majority of the Company's license agreements have five to ten years remaining on
the term. The licensors may require the Company to upgrade its facilities at any
time to comply with the licensor's then current standards. Upon the expiration
of the term of a license, the Company may apply for a license renewal. In
connection with the renewal of a license, the licensor may require payment of a
renewal fee, increased license, reservation and advertising fees, as well as
substantial renovation of the facility. Payments made in connection with these
agreements totaled approximately $19,268,000, $14,498,000 and $12,401,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
The license agreements are subject to cancellation in the event of a default,
including the failure to operate the hotel in accordance with the quality
standards and specifications of the licensors. The Company believes that the
loss of a license for any individual hotel would not have a material adverse
effect on the Company's financial condition and results of operations. The
Company believes it will be able to renew its current licenses or obtain
replacements of a comparable quality.
F-23
57
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
Twenty-five hotels which the Company owns are operated under license agreements
that require the Company to make certain capital improvements in accordance
with a specified time schedule. Further, in connection with the financing of
the Company's hotels (see Note 4) and the acquisition of other hotels (see Note
2), the Company has agreed to make certain capital improvements and had
approximately $30 million escrowed for such improvements which is included in
other assets on the accompanying balance sheet. The Company estimates its
remaining obligations for all the above commitments to be approximately $85
million of which approximately $50 million is expected to be spent in 1999 and
the balance during 2000 and 2001.
The Company has maintenance agreements, primarily on a one to three year basis,
which resulted in expenses of approximately $3,557,000, $2,497,000 and
$2,106,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
A wholly-owned subsidiary of Lodgian, Inc. has provided a guarantee of the
debt of a joint venture in which the Company accounts for under the equity
method of accounting. As of December 31, 1998, the balance of this
obligation approximated $80 million. Assets with a carrying value of
approximately $100 million collateralize this obligation.
The Company is a party to legal proceedings arising in the ordinary course of
its business, the impact of which would not, either individually or in the
aggregate, in management's opinion, based upon the facts known by management and
the advice of counsel, have a material adverse effect on the Company's financial
condition or results of operations.
F-24
58
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Benefits Plans and Stock Option Plan
The Company makes contributions to several multi-employer pension plans for
employees of various subsidiaries covered by collective bargaining agreements.
These plans are not administered by the Company and contributions are determined
in accordance with provisions of negotiated labor contracts. Certain withdrawal
penalties may exist, the amount of which are not determinable at this time. The
cost of such contributions during the years ended December 31, 1998, 1997 and
1996, was approximately $500,000, $412,000 and $499,000, respectively.
The Company adopted, the 401(k) for the benefit of its non-union employees under
which participating employees may elect to contribute up to 10% of their
compensation. The Company may match an employee's elective contributions to the
401(k), subject to certain conditions, with shares of the Company's common stock
equal to up to 100% of the amount of such employee's elective contributions.
These employer contributions vest at a rate of 20% per year beginning in the
third year of employment. The cost of these contributions during the years ended
December 31, 1998, 1997 and 1996, was $430,000, $282,000 and $548,000,
respectively. The 401(k) does not require a contribution by the Company.
The Company has also adopted the Lodgian, Inc. Stock Option Plan, as amended,
(the "Option Plan"). In accordance with the Option Plan, options to acquire up
to 3,250,000 shares of common stock may be granted to employees, directors,
independent contractors and agents as determined by a committee appointed by the
Board of Directors. Options may be granted at an exercise price not less than
fair market value on the date of grant. These options will generally vest over
five years.
In addition, in August 1997 each non-employee director was awarded an option to
acquire 20,000 shares of common stock at an exercise price equal to the fair
market price on date of grant. Such options became exercisable upon date of
grant and were granted outside of the Lodgian Stock Option plan.
On December 18, 1998, the Company re-priced its options. See discussion of
impact of pending accounting pronouncement related to stock option repricings in
Note 1.
F-25
59
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Benefits Plans and Stock Option Plan (continued)
The following table indicates all options granted and their status:
Option Price
Number of Range per
Shares Share
--------- --------------
Balance December 31, 1995 1,137,200 $ 4.00 - $ 9.50
Granted 216,500 10.75 - 16.13
Exercised (497,800) 4.00 - 9.50
Forfeited (38,900) 8.63 - 10.75
--------- ---------------
Balance December 31, 1996 817,000 4.00 - 16.13
Granted 977,700 15.5 - 16.81
Exercised (86,600) 4.00 - 10.75
Forfeited (19,400) 8.63 - 10.75
--------- ---------------
Balance December 31, 1997 1,688,700 4.00 - 16.81
Granted 755,000 6.13
Exercised (134,900) 4.00 - 16.75
Forfeited (27,900) 8.63 - 16.75
--------- ---------------
Balance December 31, 1998 2,280,900 $ 4.00 - $ 6.15
========= ===============
At December 31, 1998, there were 911,280 options exercisable. The income tax
benefit, if any, associated with the exercise of stock options is credited to
additional paid-in capital.
13. Certain Other Events
In January 1996, the Company entered into an agreement with its former Chief
Executive Officer in connection with his resignation from the Company and its
Board of Directors. This agreement provided for payments totaling approximately
$830,000 over a twenty-four month period, the cost of which is included in other
operating expenses for the year ended December 31, 1996.
F-26
60
Lodgian, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Certain Other Events (continued)
In March 1996, the Company received approximately $3,900,000 in connection with
the settlement of a lawsuit brought on behalf of Servico, against a bank group
and law firm, based on alleged breaches prior to 1990 of their duties to the
Company. This amount, less approximately $300,000 of associated expenses, is
included in other income for the year ended December 31, 1996.
14. Subsequent Events
In March 1999, a lender released $15 million of an original $23 million escrow
initiated at the time their $265 million loan was closed. This holdback related
to future capital improvements. Simultaneously, the lender issued the Company a
commitment for $15 million to replenish this escrow at a future date subject to
the same terms and conditions as the original loan.
On March 30, 1999, the board of directors adopted a Shareholder Rights Plan and
declared one Right on each outstanding share of the Company's common stock. The
dividend will be paid on April 19, 1999 to stockholders of record on April 14,
1999. Initially the Rights will trade with the common stock of the Company and
will not be exercisable. The Right will separate from the common stock and
become exercisable upon the occurrence of events typical of shareholder rights
plans. In general, such separation will occur when any person or group of
affiliated persons acquires or makes an offer to acquire 15% or more of the
Company's common stock. Thereafter, separate Right Certificates will be
distributed and each Right will entitle its holder to purchase one- hundredth of
a share of the Company's Participating Preferred Stock for an exercise price of
$25. Each one-hundredth of a share of Preferred Stock has economic and voting
terms equivalent to those of one share of the Company's common stock.
F-27