##### Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Period ended September 30, 2003

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
____________ to ______________

Commission File No.1-14537

LODGIAN, INC.(Exact name of registrant as specified in its charter)

Delaware
    
    52-2093696(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)3445 Peachtree Road, N.E., Suite 700, Atlanta, GA
    
    30326(Address of
principal executive offices)
    
    (Zip Code)


Registrants telephone number, including area code(404) 364-9400

(Former name, former address and former fiscal year, if changed since last
report): Not applicable

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   x     No   o

Indicate by check mark whether the registrant is an accelerated filer as
defined by section 12-b  2 of the Act. Yes   o     No   x

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes   x     No   o

Indicate the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date.

Class
    
    Outstanding as of November 12, 2003Common
    
    
    7,024,391


This Form 10-Q is available, free of charge, on the registrants website
(www.lodgian.com)





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TABLE OF CONTENTS



|                                             |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION              
|                                             | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                             | CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|                                             | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|                                             | CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                                     
|                                             | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|                                             | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                             | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                             | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                 
|                                             | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                             | ITEM 2. CHANGES IN SECURITIES                                                                
|                                             | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|EX-31.1 SECTION 302 CERTIFICATION OF CEO    
|EX-31.2 SECTION 302 CERTIFICATION OF CFO    
|EX-32 SECTION 906 CERTIFICATION OF CEO & CFO



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
INDEX

PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 (unaudited)
    
    1Condensed Consolidated Statements of Operations for the Successor
Three Months Ended September 30, 2003, the Predecessor Three Months Ended September 30, 2002, the Successor Nine Months Ended
September 30, 2003 and the Predecessor Nine Months Ended
September 30, 2002 (unaudited)
    
    2Condensed Consolidated Statement of Stockholders Equity
for the Successor Nine Months Ended September 30, 2003 (unaudited)
    
    3Condensed Consolidated Statements of Cash Flows for the Successor
Nine Months Ended September 30, 2003 and the Predecessor Nine
    
    4Months Ended September 30, 2002 (unaudited)Notes to Condensed Consolidated Financial Statements (unaudited)
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    41Item 4.
    
    Controls and Procedures
    
    41PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    43Item 2.
    
    Changes in Securities
    
    43Item 6.
    
    Exhibits and Reports on Form 8-K
    
    43Signatures
    
    
    
    45






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##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2003
    
    December 31, 2002(Unaudited in thousands, except per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,529
    
    
    $
    10,875Cash, restricted
    
    
    7,607
    
    
    
    19,384Accounts receivable ( net of allowances: 2003 - $1,382; 2002 -$1,594)
    
    
    9,930
    
    
    
    10,681Inventories
    
    
    5,497
    
    
    
    7,197Prepaid expenses and other current assets
    
    
    17,078
    
    
    
    15,118Assets held for sale
    
    
    78,383
    
    
    
    Total current assets
    
    
    129,024
    
    
    
    63,255Property and equipment, net
    
    
    579,892
    
    
    
    664,565Deposits for capital expenditures
    
    
    16,036
    
    
    
    22,349Other assets
    
    
    13,747
    
    
    
    12,495$
    738,699
    
    
    $
    762,664LIABILITIES AND STOCKHOLDERS EQUITYLiabilities not subject to compromiseCurrent liabilities:Accounts payable
    
    $
    10,060
    
    
    $
    12,380Other accrued liabilities
    
    
    37,287
    
    
    
    43,625Advance deposits
    
    
    2,150
    
    
    
    1,786Current portion of long-term debt
    
    
    18,123
    
    
    
    14,550Liabilities related to assets held for sale
    
    
    60,570
    
    
    
    Total current liabilities
    
    
    128,190
    
    
    
    72,341Long-term debt:12.25% Cumulative preferred shares subject to mandatory redemption
    
    
    138,131
    
    
    
    Long-term debt  other
    
    
    411,993
    
    
    
    387,924Total long-term debt
    
    
    550,124
    
    
    
    387,924Liabilities subject to compromise
    
    
    
    
    
    
    93,816Total liabilities
    
    
    678,314
    
    
    
    554,081Minority interests
    
    
    3,724
    
    
    
    3,616Commitments and contingencies
12.25% Cumulative preferred shares subject to mandatory redemption
    
    
    
    
    
    
    126,510Stockholders equity:Common stock, $.01 par value, 30,000,000 shares authorized;
7,200,000 and 7,000,000 issued and outstanding at September 30, 2003
and December 31, 2002, respectively
    
    
    72
    
    
    
    70Additional paid-in capital
    
    
    89,821
    
    
    
    89,223Unearned stock compensation
    
    
    (558
    )
    
    
    Accumulated deficit
    
    
    (33,600
    )
    
    
    (10,836
    )Accumulated other comprehensive gain
    
    
    926
    
    
    
    Total stockholders equity
    
    
    56,661
    
    
    
    78,457$
    738,699
    
    
    $
    762,664


See notes to condensed consolidated financial statements.

1



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LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited in thousands, except per share data)Three months ended
    
    Nine months endedSeptember 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002Successor
    

    Predecessor
    
    Successor
    

    PredecessorRevenues:Rooms
    
    $
    63,246
    
    

    $
    64,361
    
    
    $
    178,855
    
    

    $
    186,802Food and beverage
    
    
    16,524
    
    

    
    16,954
    
    
    
    52,339
    
    

    
    54,469Other
    
    
    2,807
    
    

    
    3,186
    
    
    
    8,360
    
    

    
    10,01482,577
    
    

    
    84,501
    
    
    
    239,554
    
    

    
    251,285Operating expenses:Direct:Rooms
    
    
    17,942
    
    

    
    17,646
    
    
    
    50,430
    
    

    
    50,385Food and beverage
    
    
    12,126
    
    

    
    12,672
    
    
    
    36,465
    
    

    
    39,012Other
    
    
    2,026
    
    

    
    2,161
    
    
    
    5,847
    
    

    
    6,69132,094
    
    

    
    32,479
    
    
    
    92,742
    
    

    
    96,08850,483
    
    

    
    52,022
    
    
    
    146,812
    
    

    
    155,197General, administrative and other
    
    
    34,232
    
    

    
    32,512
    
    
    
    104,726
    
    

    
    98,525Depreciation and amortization
    
    
    7,707
    
    

    
    12,084
    
    
    
    22,765
    
    

    
    34,633Other operating expenses
    
    
    41,939
    
    

    
    44,596
    
    
    
    127,491
    
    

    
    133,1588,544
    
    

    
    7,426
    
    
    
    19,321
    
    

    
    22,039Other income (expenses):Interest income and other
    
    
    113
    
    

    
    176
    
    
    
    321
    
    

    
    4,865Interest expense:Preferred stock dividend
    
    
    (4,027
    )
    

    
    
    
    
    
    (4,027
    )
    

    
    Other interest expense
    
    
    (7,692
    )
    

    
    (8,386
    )
    
    
    (20,962
    )
    

    
    (24,214
    )(Loss) income before income taxes,
reorganization items and minority
interests
    
    
    (3,062
    )
    

    
    (784
    )
    
    
    (5,347
    )
    

    
    2,690Reorganization items
    
    
    
    
    

    
    (3,408
    )
    
    
    (2,045
    )
    

    
    (11,159
    )Loss before income taxes and minority
interest
    
    
    (3,062
    )
    

    
    (4,192
    )
    
    
    (7,392
    )
    

    
    (8,469
    )Minority interests
    
    
    99
    
    

    
    1,348
    
    
    
    (118
    )
    

    
    17Loss before income taxes  continuing
operations
    
    
    (2,963
    )
    

    
    (2,844
    )
    
    
    (7,510
    )
    

    
    (8,452
    )Provision for income taxes -
continuing operations
    
    
    (76
    )
    

    
    (76
    )
    
    
    (227
    )
    

    
    (227
    )Loss  continuing operations
    
    
    (3,039
    )
    

    
    (2,920
    )
    
    
    (7,737
    )
    

    
    (8,679
    )Discontinued operations:Loss from discontinued operations
before income taxes
    
    
    (607
    )
    

    
    (1,637
    )
    
    
    (7,433
    )
    

    
    (6,845
    )Income tax provision
    
    
    
    
    

    
    
    
    
    
    
    
    

    
    Loss from discontinued operations
    
    
    (607
    )
    

    
    (1,637
    )
    
    
    (7,433
    )
    

    
    (6,845
    )Net loss
    
    
    (3,646
    )
    

    
    (4,557
    )
    
    
    (15,170
    )
    

    
    (15,524
    )Preferred stock dividend
    
    
    
    
    

    
    
    
    
    
    (7,594
    )
    

    
    Net loss attributable to common stock
    
    $
    (3,646
    )
    

    $
    (4,557
    )
    
    $
    (22,764
    )
    

    $
    (15,524
    )Basic and diluted loss per common share:Net loss attributable to common stock
    
    $
    (0.52
    )
    

    $
    (0.16
    )
    
    $
    (3.25
    )
    

    $
    (0.54
    )


Upon emergence from Chapter 11, the Company adopted fresh start reporting. As a result, all assets and liabilities were restated
to reflect their fair values. The consolidated financial statements of the new reporting entity (the Successor) are not
comparable to the reporting entity prior to the Companys emergence from Chapter 11 (the Predecessor).

See notes to condensed consolidated financial statements.

2



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LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

ACCUMULATEDCOMMON STOCK
    
    ADDITIONAL
    
    UNEARNED
    
    
    
    OTHER
    
    TOTALPAID-IN
    
    STOCK
    
    ACCUMULATED
    
    COMPREHENSIVE
    

STOCKHOLDERSSHARES
    
    AMOUNT
    
    CAPITAL
    
    COMPENSATION
    
    DEFICIT
    
    GAIN (net of tax)
    
    EQUITY(Unaudited in thousands, except share data)Balance, December 31, 2002
    
    
    7,000,000
    
    
    $
    70
    
    
    $
    89,223
    
    
    $
    
    
    
    $
    (10,836
    )
    
    $
    
    
    
    $
    78,457Issuance of restricted stock
    
    
    200,000
    
    
    
    2
    
    
    
    598
    
    
    
    (600
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    42Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,170
    )
    
    
    
    
    
    
    (15,170
    )Currency translation
adjustments (related taxes estimated at nil)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    926
    
    
    
    926Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,244
    )Preferred dividends*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,594
    )
    
    
    
    
    
    
    (7,594
    )7,200,000
    
    
    $
    72
    
    
    $
    89,821
    
    
    $
    (558
    )
    
    $
    (33,600
    )
    
    $
    926
    
    
    $
    56,661




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|  |  | The comprehensive loss for the Successor three months ended September 30, 2003 and the Predecessor three months ended September 30, 2002 was $3.6 million
and $5.0 million, respectively. The comprehensive loss for the Predecessor nine months ended September 30, 2002 was $15.4 million.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|* |  | Represent dividends accrued for the period January 1, to June 30, 2003 (dividends accrued for the period July 1, to September 30, 2003 are reflected in interest expense).                                                                                                                  

See notes to condensed consolidated financial statements.

3



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LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months endedSeptember 30, 2003
    
    September 30, 2002(Unaudited in thousands)Successor
    

    PredecessorOperating activities:Net loss
    
    $
    (15,170
    )
    

    $
    (15,524
    )Add: loss from discontinued operations
    
    
    7,433
    
    

    
    6,845Loss  continuing operations
    
    
    (7,737
    )
    

    
    (8,679
    )Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:Depreciation and amortization
    
    
    22,765
    
    

    
    34,633Gain on extinguishment of debt
    
    
    
    
    

    
    (4,419
    )Amortization of unearned stock compensation
    
    
    42
    
    

    
    Preferred stock dividends
    
    
    4,027
    
    

    
    Minority interests
    
    
    118
    
    

    
    (17
    )Write-off and amortization of deferred financing costs
    
    
    2,588
    
    

    
    Other
    
    
    690
    
    

    
    (14
    )Changes in operating assets and liabilities:Accounts receivable, net of allowances
    
    
    (1,200
    )
    

    
    (1,716
    )Inventories
    
    
    (111
    )
    

    
    26Prepaid expenses, other assets and restricted cash
    
    
    8,970
    
    

    
    (6,097
    )Accounts payable
    
    
    (1,902
    )
    

    
    9,461Other accrued liabilities
    
    
    (7,116
    )
    

    
    10,817Advance deposits
    
    
    700
    
    

    
    319Net cash provided by operating activities
    
    
    21,834
    
    

    
    34,314Investing activities:Capital improvements
    
    
    (26,074
    )
    

    
    (16,652
    )Withdrawals (deposits) for capital expenditures
    
    
    6,974
    
    

    
    (1,199
    )Other
    
    
    (278
    )
    

    
    (767
    )Net cash used in investing activities
    
    
    (19,378
    )
    

    
    (18,618
    )Financing activities:Proceeds from issuance of long-term debt
    
    
    80,000
    
    

    
    Proceeds from working capital revolver
    
    
    2,000
    
    

    
    Principal payments on long-term debt
    
    
    (81,503
    )
    

    
    (1,117
    )Payments of deferred loan costs
    
    
    (1,836
    )
    

    
    (500
    )Other
    
    
    (1,272
    )
    

    
    Net cash used in financing activities
    
    
    (2,611
    )
    

    
    (1,617
    )Cash flows used in discontinued operations:Net cash used in discontinued operations
    
    
    (191
    )
    

    
    (193
    )Net (decrease) increase in cash and cash equivalents
    
    
    (346
    )
    

    
    13,886Cash and cash equivalents at beginning of period
    
    
    10,875
    
    

    
    14,00710,529
    
    

    
    27,893Less: cash of discontinued operations
    
    
    (481
    )
    

    
    (721
    )Cash and cash equivalents at end of period
    
    $
    10,048
    
    

    $
    27,172Supplemental cash flow information:Cash paid during the period for:Interest (net of amounts capitalized: 2003 - $898; 2002
- $365)
    
    $
    20,634
    
    

    $
    25,058Income taxes, net of refunds
    
    $
    218
    
    

    $
    125Supplemental disclosure of non-cash investing andfinancing activities:Preferred stock dividend accrued
    
    $
    11,621
    
    

    $
    


Upon emergence from Chapter 11, the Company adopted fresh start reporting. As a result, all assets and liabilities were restated
to reflect their fair values. The consolidated financial statements of the new reporting entity (the Successor) are not
comparable to the reporting entity prior to the Companys emergence from Chapter 11 (the Predecessor).

See notes to consolidated financial statements.

4



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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



|1. |  | Business Summary
|-- |  | ----------------

Lodgian, Inc. (Lodgian or the Company) is one of the largest
independent owners and operators of full-service hotels in the United States.
At September 30, 2003, Lodgian managed a portfolio of 97 hotels
(18,265 rooms
located in 30 states and Canada). The portfolio included 92 hotels which were
wholly-owned, four in which the Company had a controlling financial interest
and exercised control and one in which the Company had a minority equity
interest. All of the hotels are owned in operating subsidiaries or other legal
entities.

Lodgian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. Lodgian believes that
these segments have more consistent demand generators than other segments of
the lodging industry and have recently experienced less development of new
properties than other lodging segments, such as limited service, economy and
budget segments.

Of the Companys 97 hotel portfolio, 82 are Crowne Plaza, Holiday Inn and
Marriott brand hotels and ten are affiliated with six other nationally
recognized hospitality brands. The Companys strong brand affiliations bring
many benefits in terms of guest loyalty and market share premiums.



|2. |  | General
|-- |  | -------

The condensed consolidated financial statements include the accounts of
Lodgian, Inc., its wholly-owned subsidiaries and four joint ventures in which
Lodgian has a controlling financial interest (owns at least 50% of the voting
interest) and exercises control (collectively Lodgian or the Company).
Lodgian believes it has control of the joint ventures when the Company is the
general partner and has control of the joint ventures assets and operations.
The interests of the third parties to the joint venture agreements are
reflected in minority interests. One unconsolidated entity (the
Unconsolidated Entity) which owns one hotel is accounted for using the equity
method of accounting. The Companys investment in this entity is included in
other assets. All significant intercompany accounts and transactions have been
eliminated in consolidation.

The accounting policies followed for quarterly financial reporting are
disclosed in Note 1 of the Notes to Consolidated Financial Statements included
in the Companys Annual Report on Form 10-K (Form 10-K) for the year ended
December 31, 2002, within this Quarterly Report and within the Companys
Quarterly Reports on Form 10-Q for the periods ended March 31, 2003 and June
30, 2003.

As previously reported in the Companys Form 10-K for the year ended
December 31, 2002, the Company and substantially all of its subsidiaries which
owned hotel properties filed for voluntary reorganization under Chapter 11 of
the Bankruptcy Code on December 20, 2001, in the Southern District of New York.
The Bankruptcy Court confirmed the Companys First Amended Joint Plan of
Reorganization (the Joint Plan of Reorganization) on November 5, 2002, and on
November 25, 2002, the Company and entities owning 78 hotels officially emerged
from Chapter 11. Pursuant to the terms of the Joint Plan of Reorganization, an
additional eight wholly-owned hotels were returned to the lender in January
2003 in satisfaction of outstanding debt obligations and one wholly-owned hotel
was returned to the lessor of a capital lease.

Of the Companys 97 hotel portfolio, eighteen hotels, previously owned by
two subsidiaries (Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C.), were
not part of the Joint Plan of Reorganization. On April 24, 2003, the
Bankruptcy Court confirmed the plan of reorganization relating to these
eighteen hotels (the Impac Plan of Reorganization). These eighteen hotels
remained in Chapter 11 until May 22, 2003, the date on which the Company,
through eighteen newly-formed subsidiaries (one for each hotel), finalized an
$80 million financing with Lehman Brothers Holdings, Inc. (the Lehman
Financing). The Lehman Financing was primarily used to settle the remaining
amount due to the secured lender of these hotels (See Note 8 to these Condensed
Consolidated Financial Statements). The Impac Plan of

5



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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Reorganization also
provided for a pool of funds of approximately $0.3 million to be paid to the
general unsecured creditors of the eighteen hotels.

The effects of the Joint Plan of Reorganization were recorded in
accordance with the American Institute of Certified Public Accountants
Statement of Position (SOP) 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, effective November 22, 2002. SOP
90-7 required the application of Fresh Start Accounting. As a result, the
Consolidated Financial Statements subsequent to the Companys emergence from
Chapter 11 are those of a new reporting entity (the Successor) and are not
comparable with the financial statements of the Company prior to the
effective date of the Joint Plan of Reorganization (the Predecessor).

In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting primarily
of normal recurring adjustments, necessary to present fairly the financial
position of the Company as of September 30, 2003, the results of its operations
for the three and nine months ended September 30, 2003 (Successor) and 2002
(Predecessor) and its cash flows for the nine months ended September 30, 2003
(Successor) and 2002 (Predecessor). The results for interim periods are not
necessarily indicative of the results for the entire year. These financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Companys Form 10-K for the year
ended December 31, 2002.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

Certain prior period amounts have been reclassified to conform to the
current periods presentation.



|3. |  | Stock-based compensation
|-- |  | ------------------------

As previously disclosed in the Companys Form 10-K for the year ended
December 31, 2002, on November 25, 2002, the Company adopted a new Stock
Incentive Plan (the Stock Incentive Plan) which replaced the Option Plan
previously in place. In accordance with the Stock Incentive Plan, awards to
acquire up to 1,060,000 shares of common stock could be granted to officers or
other key employees or consultants of the Company as determined by a committee
appointed by the Board of Directors. Awards may consist of stock options,
stock appreciation rights, stock awards, performance share awards, section
162(m) awards or other awards determined by the committee. Stock options
granted pursuant to the Stock Incentive Plan cannot be granted at an exercise
price which is less than 100% of the fair market value per share on the date of
the grant. Vesting, exercisability, payment and other restrictions pertaining
to any awards made pursuant to the Stock Incentive Plan are determined by the
committee.

Pursuant to the Stock Incentive Plan, the committee made the following
awards during the third quarter 2003:



| |  |  | July 15, 2003  W. Thomas Parrington, the Companys
Chief Executive Officer, was awarded 200,000 shares of restricted
stock. These vest equally over three years commencing on July 15,
2004. Mr. Parrington was also granted incentive stock options to
acquire 100,000 shares of the Companys common stock at an
exercise price of $3.00 per share (the average of the high and low
price of the stock at the date of grant). The closing price of
the stock on the date of grant was also $3.00. The options also
vest equally over three years commencing on July 15, 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | September 5, 2003  Other awards were made to certain of
the Companys employees and to members of the audit committee.
The employees received incentive stock options to acquire 337,000
shares of the Companys common stock while each of the three
members of the audit committee received non-qualified options to
acquire 5,000 shares of the Companys common stock. The exercise
price of the awards granted on September 5, 2003 was $5.07 (the
average of the high and low price of the stock at the date of
grant).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6



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LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



| |  |  | The closing price of the stock on the date of grant was
$5.00. One-third of the options granted on September 5, 2003
vested at the date of grant, one-third will vest on September 5,
2004 and the remaining one-third will vest on September 5, 2005.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All options expire ten years from the date of grant.
| |  |  | ----------------------------------------------------

Presented below is a summary of the stock option plan activity for the
nine months ended September 30, 2003:

Weighted AverageOptions
    
    Exercise PriceBalance, December 31, 2002
    
    
    Granted (during the third quarter)
    
    
    452,000
    
    
    $
    4.61Exercised
    
    
    Forfeited
    
    
    
    
    
    
    Balance, September 30, 2003
    
    
    452,000
    
    
    $
    4.61


RestrictedstockBalance, December 31, 2002
    
    
    Granted (during the third quarter)
    
    
    200,000Exercised
    
    
    Forfeited
    
    
    Balance, September 30, 2003
    
    
    200,000


Options exercisable and the weighted average exercise price of these
options at September 30, 2003, were 117,333 and $5.07, respectively. As of
September 30, 2003, none of the restricted stock was vested.

The following table summarizes information for options outstanding and
exercisable at September 30, 2003:

Options outstanding
    
    
    
    
    
    Options exercisableWeighted average
    
    Weighted average
    
    
    
    
    
    Weighted averageRange of prices
    
    Number
    
    remaining life (in years)
    
    exercise prices
    
    Number
    
    exercise prices$3.00 to $3.50
    
    
    100,000
    
    
    
    9.8
    
    
    $
    3.00
    
    
    
    
    
    
    $
    3.00$3.51 to $5.07
    
    
    352,000
    
    
    
    9.9
    
    
    $
    5.07
    
    
    
    117,333
    
    
    $
    5.07452,000
    
    
    
    
    
    
    
    
    
    
    
    117,333


The income tax benefit, if any, associated with the exercise of stock
options is credited to additional paid-in capital.

The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees and related interpretations. Under APB No. 25, if 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 SFAS No. 123, Accounting for Stock-Based Compensation, compensation
cost is measured at the grant date based on the estimated value of the award
and is recognized over the service (or vesting) period.

7



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. SFAS No. 148 amends
SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for an entity that voluntarily changes to the
fair-value-based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS No. 123 to require prominent
disclosure about the effects on reported net income and earnings per share and
the entitys accounting policy decisions with respect to stock-based employee
compensation. Certain of the disclosure requirements are required for all
companies, regardless of whether the fair value method or the intrinsic value
method is used to account for stock-based employee compensation arrangements.
The Company continues to account for stock issued to employees, using the
intrinsic value method in accordance with the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees.
The amendments to SFAS No. 123 were effective for financial statements for
fiscal years ended after December 15, 2002 and for interim periods beginning
after December 15, 2002. The Company was required to adopt SFAS No. 148 on
November 22, 2002 upon its emergence from Chapter 11.

Had the compensation cost of the Companys Stock Option Plan been
recognized under SFAS No. 123, based on the fair market value at the grant
dates, the Companys pro forma net loss and net loss per share would have been
reflected as follows:

Three months ended
    
    Nine months endedSeptember 30, 2003
    
    
    September 30, 2002
    
    September 30, 2003
    
    
    September 30, 2002Successor
    
    
    Predecessor
    
    Successor
    
    
    PredecessorLoss  continuing operations:As reported
    
    $
    (3,039
    )
    
    
    $
    (2,920
    )
    
    $
    (7,737
    )
    
    
    $
    (8,679
    )Pro forma
    
    
    (3,501
    )
    
    
    
    (2,920
    )
    
    
    (8,199
    )
    
    
    
    (8,679
    )Loss from discontinued operations, net of taxes:As reported
    
    
    (607
    )
    
    
    
    (1,637
    )
    
    
    (7,433
    )
    
    
    
    (6,845
    )Pro forma
    
    
    (607
    )
    
    
    
    (1,637
    )
    
    
    (7,433
    )
    
    
    
    (6,845
    )Net loss:As reported
    
    
    (3,646
    )
    
    
    
    (4,557
    )
    
    
    (15,170
    )
    
    
    
    (15,524
    )Pro forma
    
    
    (4,108
    )
    
    
    
    (4,557
    )
    
    
    (15,632
    )
    
    
    
    (15,524
    )Net loss attributable to common stock:As reported
    
    
    (3,646
    )
    
    
    
    (4,557
    )
    
    
    (22,764
    )
    
    
    
    (15,524
    )Pro forma
    
    
    (4,108
    )
    
    
    
    (4,557
    )
    
    
    (23,226
    )
    
    
    
    (15,524
    )Loss from continuing operations attributable to common stock before discontinued operations:As reported
    
    
    (3,039
    )
    
    
    
    (2,920
    )
    
    
    (15,331
    )
    
    
    
    (8,679
    )Pro forma
    
    
    (3,501
    )
    
    
    
    (2,920
    )
    
    
    (15,793
    )
    
    
    
    (8,679
    )Basic and diluted earnings (loss) per common share:Loss  continuing operationsAs reported
    
    $
    (0.43
    )
    
    
    $
    (0.10
    )
    
    $
    (1.11
    )
    
    
    $
    (0.30
    )Pro forma
    
    
    (0.50
    )
    
    
    
    (0.10
    )
    
    
    (1.17
    )
    
    
    
    (0.30
    )Loss from discontinued operations, net of taxesAs reported
    
    
    (0.09
    )
    
    
    
    (0.06
    )
    
    
    (1.06
    )
    
    
    
    (0.24
    )Pro forma
    
    
    (0.09
    )
    
    
    
    (0.06
    )
    
    
    (1.06
    )
    
    
    
    (0.24
    )Net lossAs reported
    
    
    (0.52
    )
    
    
    
    (0.16
    )
    
    
    (2.17
    )
    
    
    
    (0.54
    )Pro forma
    
    
    (0.59
    )
    
    
    
    (0.16
    )
    
    
    (2.23
    )
    
    
    
    (0.54
    )Net loss attributable to common stock:As reported
    
    
    (0.52
    )
    
    
    
    (0.16
    )
    
    
    (3.25
    )
    
    
    
    (0.54
    )Pro forma
    
    
    (0.59
    )
    
    
    
    (0.16
    )
    
    
    (3.32
    )
    
    
    
    (0.54
    )Loss from continuing operations attributable to common stock before discontinued operations:As reported
    
    
    (0.43
    )
    
    
    
    (0.10
    )
    
    
    (2.19
    )
    
    
    
    (0.30
    )Pro forma
    
    
    (0.50
    )
    
    
    
    (0.10
    )
    
    
    (2.26
    )
    
    
    
    (0.30
    )


The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for those options granted in 2003:

8



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Three months ended
    
    Nine months endedSeptember 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002Successor
    

    Predecessor
    
    Successor
    

    PredecessorExpected life of option
    
    10 years
    

    
    
    
    
    10 years

    


    
    Risk free interest rate
    
    4.09%
    

    
    
    
    
    4.09%
    


    
    Expected volatility
    
    55.75%
    

    
    
    
    
    55.75%
    

    
    Expected dividend yield
    
    
    

    
    
    
    
    
    


    
    


The fair value of options granted during the third quarter 2003 is as
follows:

Weighted average fair value of options granted
    
    $
    3.21Total number of options granted (in thousands)
    
    
    452Total fair value of options granted (in thousands)
    
    $
    1,449




|4. |  | Discontinued operations
|-- |  | -----------------------

As previously reported, pursuant to the terms of the Joint Plan of
Reorganization, eight wholly-owned hotels were returned to the lender in
January 2003 in satisfaction of outstanding debt obligations and one
wholly-owned hotel was returned to the lessor of a capital lease. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
the assets, liabilities and results of operations of these nine hotels are
reported in Discontinued Operations as of and for the three and nine months
ended September 30, 2003 and 2002. Due primarily to the application of fresh
start accounting in November 2002, in which these and other assets were
adjusted to their respective fair values, there was no gain or loss on this
transaction.

The following combined condensed table summarizes the assets and
liabilities of these nine hotels as of December 31, 2002:

December 31, 2002(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    177Accounts receivable, net
    
    
    517Inventories
    
    
    570Prepaid expenses and other current assets
    
    
    432Total current assets
    
    
    1,696Property and equipment, net
    
    
    15,649Deposits for capital expenditures
    
    
    904Other assets
    
    
    20$
    18,269LIABILITIES
Liabilities not subject to compromise
Current liabilities:Accounts payable
    
    $
    330Other accrued liabilities
    
    
    1,267Advance deposits
    
    
    60Total current liabilities
    
    
    1,657Long-term debt subject to compromise
    
    
    15,922Total liabilities
    
    $
    17,579


In addition, in June 2003, the Company embarked on a plan to sell 14
hotels, 3 land parcels and an office building. Four additional hotels were
identified for sale during the third quarter of 2003. The strategy to sell
these assets is part of managements plans to:

9



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



| |  |  | pay down the Lehman Financing by at least $20 million to
minimize interest costs (see Note 8);
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | provide additional funding for the Companys capital
expenditure program to comply with franchisor requirements and
improve brand quality; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | dispose of certain hotels which are performing below the
standard set by management for the entire portfolio.
| | - |  | -------------------------------------------------------------------------------------------------------------

In connection with this strategy, where the carrying values of the assets
exceeded the estimated fair values, net of selling costs, the carrying values
were reduced and impairment charges were recorded. Fair value is determined
using quoted market prices, when available, or other accepted valuation
techniques. The impairment charges recorded during the nine months ended
September 30, 2003 related to 6 hotels and 2 land parcels and approximated $5.1
million ($1.7 million for the three months ended September 30, 2003). Where
the estimated selling prices, net of selling costs, exceeded the carrying
values, no adjustments were recorded. Management classifies an asset as held
for sale if it expects to dispose of it within one year. While the completion
of these dispositions is probable, the sale of these assets is subject to
market conditions and there can be no assurance that the Company will finalize
the sale of any or all of these assets. In accordance with SFAS No. 144, the
results of operations of all assets identified as held for sale (including the
related impairment charges) are reported in Discontinued Operations for the
three and nine months ended September 30, 2003 and 2002. The assets held for
sale and the liabilities related to these assets are separately disclosed on
the face of the Condensed Consolidated Balance Sheet as of September 30, 2003.

The following combined condensed table summarizes the assets and
liabilities relating to the properties identified as held for sale as of
September 30, 2003:

September 30, 2003(In thousands)ASSETSAccounts receivable, net of allowances
    
    $
    1,986Inventories
    
    
    1,354Prepaid expenses and other current assets
    
    
    394Property and equipment, net
    
    
    70,532Other assets
    
    
    4,117$
    78,383LIABILITIESAccounts payable
    
    $
    1,548Other accrued liabilities
    
    
    3,214Advance deposits
    
    
    524Current portion of long-term debt
    
    
    774Long-term debt
    
    
    54,510Total liabilities
    
    $
    60,570


The condensed combined results of operations included in Discontinued
Operations for the three and nine months ended September 30, 2003 and 2002 were
as follows:

10



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Three months ended
    
    Nine months endedSeptember 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002(Unaudited in thousands)Successor
    

    Predecessor
    
    Successor
    

    PredecessorRevenues:Rooms
    
    $
    14,012
    
    

    $
    17,923
    
    
    $
    35,170
    
    

    $
    49,216Food and beverage
    
    
    2,789
    
    

    
    4,144
    
    
    
    8,094
    
    

    
    12,500Other
    
    
    519
    
    

    
    777
    
    
    
    1,552
    
    

    
    2,41117,320
    
    

    
    22,844
    
    
    
    44,816
    
    

    
    64,127Operating expenses:Direct:Rooms
    
    
    3,872
    
    

    
    5,491
    
    
    
    10,388
    
    

    
    15,397Food and beverage
    
    
    2,264
    
    

    
    3,447
    
    
    
    6,411
    
    

    
    10,134Other
    
    
    379
    
    

    
    570
    
    
    
    1,126
    
    

    
    1,7356,515
    
    

    
    9,508
    
    
    
    17,925
    
    

    
    27,26610,805
    
    

    
    13,336
    
    
    
    26,891
    
    

    
    36,861General, administrative and other
    
    
    8,165
    
    

    
    10,442
    
    
    
    23,515
    
    

    
    30,547Depreciation and amortization
    
    
    274
    
    

    
    3,385
    
    
    
    3,160
    
    

    
    9,819Impairment of long-lived assets
    
    
    1,680
    
    

    
    
    
    
    
    5,128
    
    

    
    Other operating expenses
    
    
    10,119
    
    

    
    13,827
    
    
    
    31,803
    
    

    
    40,366686
    
    

    
    (491
    )
    
    
    (4,912
    )
    

    
    (3,505
    )Interest expense
    
    
    (1,293
    )
    

    
    (121
    )
    
    
    (2,521
    )
    

    
    (370
    )Loss before income taxes and reorganization items
    
    
    (607
    )
    

    
    (612
    )
    
    
    (7,433
    )
    

    
    (3,875
    )Reorganization items
    
    
    
    
    

    
    (1,025
    )
    
    
    
    
    

    
    (2,970
    )Loss before income taxes
    
    
    (607
    )
    

    
    (1,637
    )
    
    
    (7,433
    )
    

    
    (6,845
    )Provision for income taxes
    
    
    
    
    

    
    
    
    
    
    
    
    

    
    Net loss
    
    $
    (607
    )
    

    $
    (1,637
    )
    
    $
    (7,433
    )
    

    $
    (6,845
    )




|5. |  | Cash, restricted
|-- |  | ----------------

Restricted cash as of September 30, 2003 consists of amounts reserved for
letter of credit collateral, a deposit required by the Companys bankers and
cash reserved pursuant to certain loan agreements.



|6. |  | Loss per share
|-- |  | --------------

The following table sets forth the computation of basic and diluted loss
per share:

(Unaudited in thousands, except per share data)Three months ended
    
    Nine months endedSeptember 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002Successor
    

    Predecessor
    
    Successor
    

    PredecessorBasic and diluted loss per share:Numerator:Loss  continuing operations
    
    $
    (3,039
    )
    

    $
    (2,920
    )
    
    $
    (7,737
    )
    

    $
    (8,679
    )Loss from discontinued operations, net of taxes
    
    
    (607
    )
    

    
    (1,637
    )
    
    
    (7,433
    )
    

    
    (6,845
    )Net loss
    
    
    (3,646
    )
    

    
    (4,557
    )
    
    
    (15,170
    )
    

    
    (15,524
    )Preferred stock dividend
    
    
    
    
    

    
    
    
    
    
    (7,594
    )
    

    
    Net loss attributable to common stock
    
    
    (3,646
    )
    

    
    (4,557
    )
    
    
    (22,764
    )
    

    
    (15,524
    )Loss  continuing operations
    
    
    (3,039
    )
    

    
    (2,920
    )
    
    
    (7,737
    )
    

    
    (8,679
    )Preferred stock dividend
    
    
    
    
    

    
    
    
    
    
    (7,594
    )
    

    
    Loss from continuing operations attributable to common stock
before discontinued operations
    
    $
    (3,039
    )
    

    $
    (2,920
    )
    
    $
    (15,331
    )
    

    $
    (8,679
    )Denominator:Denominator for basic and diluted loss per share -
weighted-average shares
    
    
    7,000
    
    

    
    28,480
    
    
    
    7,000
    
    

    
    28,480Basic and diluted loss per common share:Loss  continuing operations
    
    $
    (0.43
    )
    

    $
    (0.10
    )
    
    $
    (1.11
    )
    

    $
    (0.30
    )Loss from discontinued operations, net of taxes
    
    
    (0.09
    )
    

    
    (0.06
    )
    
    
    (1.06
    )
    

    
    (0.24
    )Net loss
    
    
    (0.52
    )
    

    
    (0.16
    )
    
    
    (2.17
    )
    

    
    (0.54
    )Net loss attributable to common stock
    
    
    (0.52
    )
    

    
    (0.16
    )
    
    
    (3.25
    )
    

    
    (0.54
    )Loss from continuing operations attributable to common stock
before discontinued operations
    
    $
    (0.43
    )
    

    $
    (0.10
    )
    
    $
    (2.19
    )
    

    $
    (0.30
    )


The computation of diluted loss per share for the Successor periods ended
September 30, 2003, as calculated above, did not include the shares associated
with the assumed conversion of the restricted stock (200,000 shares), stock
options (options to acquire 452,000 shares of common stock), and A and B
warrants (rights to acquire 1,510,638 and 1,029,366 shares of common stock,
respectively) because their inclusion would have been antidilutive. The
computation of diluted loss per share for the Predecessor periods ended
September 30, 2002, as calculated above, did not include shares associated with
the assumed

11



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##### Table of Contents



conversion of the CRESTS (8,169,935 shares) or stock options
because their inclusion would also have been antidilutive.

LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

7. Other accrued liabilities

At September 30, 2003 and December 31, 2002, other accrued liabilities
consisted of the following:

September 30, 2003
    
    December 31, 2002(In thousands)Salaries and related costs
    
    $
    17,389
    
    
    $
    17,293Property and sales taxes
    
    
    14,648
    
    
    
    16,668Professional fees
    
    
    786
    
    
    
    807Provision for state income taxes
    
    
    2,409
    
    
    
    2,219Franchise fee accrual
    
    
    1,754
    
    
    
    1,388Accrued interest
    
    
    1,167
    
    
    
    1,524Accrual for allowed claims
    
    
    880
    
    
    
    1,749Other
    
    
    1,468
    
    
    
    1,97740,501
    
    
    
    43,625Less : accrued liabilities related to assets held for sale
    
    
    (3,214
    )
    
    
    $
    37,287
    
    
    $
    43,625




|8. |  | Long-term debt
|-- |  | --------------

Set forth below, by debt pool, is a summary of the Companys long-term
debt along with the applicable interest rates and the related carrying values
of the property, plant and equipment which collateralize the long-term debt.

September 30, 2003Number
    
    Property, plant
    
    Long-term
    
    Interestof Hotels
    
    and equipment, net
    
    obligations
    
    ratesExit financing:Merrill Lynch Mortgage Lending, Inc.  Senior
    
    
    
    
    
    
    
    
    
    $
    216,684
    
    
    LIBOR plus 2.36%Merrill Lynch Mortgage Lending, Inc.  Mezzanine
    
    
    
    
    
    
    
    
    
    
    83,524
    
    
    LIBOR plus 8.2546% (through November 30, 2003)Merrill Lynch Mortgage Lending, Inc.  Total
    
    
    56
    
    
    
    411,215
    
    
    
    300,208Computer Share Trust Company of Canada
    
    
    1
    
    
    
    13,617
    
    
    
    7,245
    
    
    7.88%Lehman financing:Lehman
Brothers Holdings, Inc.  May 22, 2003
    
    
    18
    
    
    
    74,808
    
    
    
    79,746
    
    
    Higher of LIBOR plus 5.25% or 7.25%Working capital loan:OCM Real Estate Opportunities Fund II  Revolver
    
    
    
    
    
    
    4,320
    
    
    
    2,000
    
    
    10.00%Other financing:Column Financial, Inc.  January 1, 1995
    
    
    9
    
    
    
    62,132
    
    
    
    27,824
    
    
    10.59%Lehman Brothers Holdings, Inc. June 30, 1997
    
    
    5
    
    
    
    38,504
    
    
    
    23,517
    
    
    $16,576 at 9.40%; $6,941 at 8.90%JP Morgan Chase Bank
    
    
    2
    
    
    
    9,174
    
    
    
    10,771
    
    
    7.25%DDL Kinser
    
    
    1
    
    
    
    3,228
    
    
    
    2,408
    
    
    8.25%First Union Bank
    
    
    1
    
    
    
    4,343
    
    
    
    3,371
    
    
    9.38%Column Financial, Inc.  June 6, 1995
    
    
    1
    
    
    
    5,577
    
    
    
    9,037
    
    
    9.45%Column Financial, Inc.  January 1, 1995
    
    
    1
    
    
    
    6,186
    
    
    
    3,238
    
    
    10.74%Robb Evans, Trustee
    
    
    1
    
    
    
    11,433
    
    
    
    7,105
    
    
    Prime plus 0.25%21
    
    
    
    140,577
    
    
    
    87,27196
    
    
    
    644,537
    
    
    
    476,470
    
    
    6.33%Long-term debt  other:Deferred credits
    
    
    
    
    
    
    
    
    
    
    5,481Deferred rent on a long-term ground lease
    
    
    
    
    
    
    
    
    
    
    2,465Unsecured notes
    
    
    
    
    
    
    
    
    
    
    770Other
    
    
    
    
    
    
    
    
    
    
    214
    
    
    
    
    
    
    
    8,930Property, plant and equipment  other
    
    
    
    
    
    
    5,887
    
    
    
    96
    
    
    
    650,424
    
    
    
    485,400Held for sale
    
    
    (18
    )
    
    
    (70,532
    )
    
    
    (55,284
    )78
    
    
    $
    579,892
    
    
    $
    430,116


12



---



##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Substantially all of the Companys property and equipment are pledged as
collateral for long-term obligations. Certain of the mortgage notes are
subject to a prepayment penalty if repaid prior to their maturity.

The maturities of these debt obligations as of September 30, 2003 are as
follows:

Long-termobligations
    Maturities(1)September 30, 2003
    
    Year 1
    
    Year 2
    
    Year 3
    
    Year 4
    
    Year 5
    
    ThereafterExit financing:Merrill Lynch Mortgage Lending, Inc.  Senior
    
    $
    216,684
    
    
    $
    3,068
    
    
    $
    213,616
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Merrill Lynch Mortgage Lending, Inc.  Mezzanine
    
    
    83,524
    
    
    
    1,182
    
    
    
    82,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Merrill Lynch Mortgage Lending, Inc.  Total
    
    
    300,208
    
    
    
    4,250
    
    
    
    295,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Computer Share Trust Company of Canada
    
    
    7,245
    
    
    
    208
    
    
    
    227
    
    
    
    245
    
    
    
    265
    
    
    
    6,300
    
    
    
    Lehman financing:Lehman
Brothers Holdings, Inc.  May 22, 2003
    
    
    79,746
    
    
    
    1,104
    
    
    
    78,642
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Working capital loan:OCM Real Estate Opportunities Fund II  Revolver
    
    
    2,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other financing:Column Financial, Inc.  January 1, 1995
    
    
    27,824
    
    
    
    2,184
    
    
    
    2,426
    
    
    
    2,696
    
    
    
    2,996
    
    
    
    3,329
    
    
    
    14,193Lehman Brothers Holdings, Inc.  June 30, 1997
    
    
    23,517
    
    
    
    468
    
    
    
    513
    
    
    
    562
    
    
    
    21,974JP Morgan Chase Bank
    
    
    10,771
    
    
    
    520
    
    
    
    560
    
    
    
    603
    
    
    
    652
    
    
    
    705
    
    
    
    7,731DDL Kinser
    
    
    2,408
    
    
    
    96
    
    
    
    2,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    First Union Bank
    
    
    3,371
    
    
    
    48
    
    
    
    53
    
    
    
    59
    
    
    
    3,211
    
    
    
    
    
    
    
    Column Financial, Inc.  June 6, 1995
    
    
    9,037
    
    
    
    389
    
    
    
    427
    
    
    
    469
    
    
    
    516
    
    
    
    566
    
    
    
    6,670Column Financial, Inc.  January 1, 1995
    
    
    3,238
    
    
    
    133
    
    
    
    149
    
    
    
    165
    
    
    
    184
    
    
    
    205
    
    
    
    2,402Robb Evans, Trustee
    
    
    7,105
    
    
    
    7,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,271
    
    
    
    10,943
    
    
    
    6,440
    
    
    
    4,554
    
    
    
    29,533
    
    
    
    4,805
    
    
    
    30,996476,470
    
    
    
    18,505
    
    
    
    381,267
    
    
    
    4,799
    
    
    
    29,798
    
    
    
    11,105
    
    
    
    30,996Long-term debt  other
    
    
    8,930
    
    
    
    392
    
    
    
    4,729
    
    
    
    302
    
    
    
    261
    
    
    
    227
    
    
    
    3,019485,400
    
    
    
    18,897
    
    
    
    385,996
    
    
    
    5,101
    
    
    
    30,059
    
    
    
    11,332
    
    
    
    34,015Held for sale
    
    
    (55,284
    )
    
    
    (774
    )
    
    
    (54,510
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    430,116
    
    
    $
    18,123
    
    
    $
    331,486
    
    
    $
    5,101
    
    
    $
    30,059
    
    
    $
    11,332
    
    
    $
    34,015(2)




---

|(1) |  | Years 1 to 5 are for periods commencing on October 1 and ending on September 30.                             
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|(2) |  | As more fully discussed below this table, optional extensions are available on 97%
of the debt due in year 2.

Exit financing:

On emergence from Chapter 11 on November 25, 2002, the Company received
exit financing of $309.0 million comprised of three separate components as
follows:



| |  |  | Senior debt of $224.0 million from Merrill Lynch Mortgage
Lending, Inc. (Merrill), accruing interest at the rate of LIBOR
plus 2.2442%, secured by, among other things, first mortgage liens
on the fee simple or leasehold interests in 55 of the Companys
hotels;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mezzanine debt of $78.7 million from Merrill, accruing
interest at the rate of LIBOR plus 9.00%, secured by the equity
interest in the subsidiaries of 56 hotels (the 55 which secure the
Senior Debt and one additional hotel); and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Debt provided through Computershare Trust Company of
Canada, a Canadian lender, of $10.0 million Canadian dollars
(equated to approximately $6.3 million U.S. dollars at inception)
maturing in December 2007, accruing interest at the rate of 7.879%
secured by a mortgage on the Windsor property.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In March 2003, as permitted by the terms of the Senior and Mezzanine debt
agreements, Merrill exercised the right to resize the Senior and Mezzanine
debt amounts, prior to the securitization of the mortgage loan. As a result,
the principal amount of the Senior Debt was decreased from $223.5 million
(initially $224.0 less $0.5 million of principal payments) to $218.1 million,
and the initial principal amount of the Mezzanine Debt was increased from $78.7
million to $84.1 million. Though the blended interest rate on the Merrill debt
remained at LIBOR plus 4% at the date of the resizing, the interest rate on the
Senior debt was modified to LIBOR plus 2.36% and the interest rate on the
Mezzanine debt was modified to LIBOR plus 8.2546%. The interest rate on the
Mezzanine debt will, however, increase to 8.7937% after November 30, 2003.

13



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Senior and Mezzanine debt matures in November 2004. There are,
however, three one-year options to renew which could extend the facility for an
additional three years. The first option to extend the maturity date of the
Senior and Mezzanine debt by up to one year (i.e. to November 2005) is
available as long as no events of default occur in respect of the payment of
principal, interest and other required payments. The second and third
extension terms are available only if no events of default (as defined by the
agreement) exist and are subject to minimum Debt Service Coverage Ratio and
Debt Yield requirements (as defined). Payments of principal and interest on
all three portions of the facility are due monthly; however, the principal
payments on the Senior and Mezzanine debts may be deferred during the first
twelve months of the agreement.

The Senior and Mezzanine debt agreements provide that when either the Debt
Yield (as defined) for the trailing 12-month period is below 12.75% during the
first year of the loan ending November 2003 (13.25% and 13.5% during the second
and third years, respectively) or the Debt Service Coverage Ratio (as defined)
is below 1.20, excess cash flows (after payment of operating expenses,
management fees, required reserves, principal and interest) produced by the 56
properties must be deposited in a special deposit account. These funds cannot
be transferred to the parent company, but can be used for capital expenditures
on these properties with lenders approval, or for principal and interest
payments. Funds placed into the special deposit account are released to the
borrowers when the Debt Yield and the Debt Service Coverage Ratio are sustained
above the minimum requirements for three consecutive months. At March 31,
2003, the Debt Yield for the 56 properties fell below the 12.75% threshold and,
therefore, the excess cash produced by the 56 properties was retained in the
special deposit account. As of September 30, 2003, $0.3 million was being
retained in the special deposit account (subsequently utilized for capital
expenditure). As of September 30, 2003, the Debt Yield remained below the
minimum requirements.

Lehman financing:

As previously discussed, on May 22, 2003, the Company completed an $80
million financing underwritten by Lehman Brothers Holdings, Inc. which was
primarily utilized to settle debts secured by the eighteen hotels previously
owned by Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C. (both Lodgian
subsidiaries). The Lehman Financing, provided to eighteen newly-formed
subsidiaries (one for each hotel), is a two-year term loan with an optional
one-year extension and bears interest at the higher of 7.25% or LIBOR plus
5.25%. The one-year extension is only available if, at the time of electing to
extend and at the initial maturity date, there are no events of default. If
the Company opts for the one-year extension, an extension fee of $3.0 million
is payable. Pursuant to the terms of the agreement, additional interest of
$4.4 million is also payable prior to the maturity date (May 22, 2005 or the
new maturity date, if the Company opts for the extension). If, however, the
Company makes one or more prepayments totaling at least $20 million in
aggregate on or before March 1, 2004, the additional interest payable will be
reduced to $3.6 million. Payments of principal and interest on the Lehman
Facility are due monthly. If an event of default occurs, default interest,
which equates to an additional 3.25%, is payable for the period of the default.

Working capital/related party loan:

On September 18, 2003, the Company drew down the full availability of
$2.0 million under the revolver issued by OCM Real Estate Opportunities Fund
II, L.P. (the OCM Fund). The loan is secured by two land parcels located in
California and New Jersey, bears interest at the rate of 10% per annum and
matures on May 1, 2004.

Oaktree Capital Management, LLC (Oaktree) is the beneficial owner of
1,664,752 shares of the Companys common stock including 1,578,611 shares owned
by the OCM Fund. Oaktree is the general partner of the OCM Fund; accordingly,
Oaktree may be deemed to beneficially own the shares owned by the OCM Fund.

Russel S. Bernard, a Principal of Oaktree, and Sean F. Armstrong, a
Managing Director of Oaktree, are also directors of Lodgian.

Other financing:

On November 25, 2002, the effective date of the Joint Plan of
Reorganization, loans approximating $83.5 million, secured by 20 hotel
properties, were substantially reinstated on their original

14Table of Contents

LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

terms, except for
the extension of certain maturities. The terms of one loan, in the amount of
$2.5 million and secured by one hotel, were amended to provide for a new
interest rate as well as a new maturity date.

The Company through its wholly owned subsidiaries owes approximately $10.9
million under Industrial Revenue Bonds (IRBs) issued on the Holiday Inn
Lawrence, Kansas and Holiday Inn Manhattan, Kansas properties. The IRBs
require a minimum debt service coverage ratio (DSCR) (as defined), calculated
as of the end of each calendar year. For the year ended December 31, 2002, the
cash flows of the two properties were insufficient to meet the minimum DSCR
requirements due in part to renovations that were being performed at the
properties during 2002. The trustee of the IRBs may give notice of default,
at which time the Company could remedy the default by depositing with the
trustee an amount currently estimated at less than $1 million. In the event a
default is declared and not cured, the properties could be subject to
foreclosure and the Company would be obligated pursuant to a partial guaranty
of not more than $1.0 million. Total revenues for these two hotels
approximated $2.1 million and $1.8 million for the three months ended September
30, 2003 and 2002, respectively, and $6.0 million and $5.3 million for the nine
months ended September 30, 2003 and 2002, respectively.

On September 30, 2003, first mortgage debt of approximately $7.1 million
of Macon Hotel Associates, L.L.C. (MHA) became due. The Company owns 60% of
MHA, and MHAs sole asset is the Crowne Plaza Hotel in Macon, Georgia. The
lender has agreed to extend the term of the debt to December 31, 2003, while
the Company explores alternative financing opportunities. However, there can
be no assurance that the Company will complete a refinancing on or before the
due date or that the lender will grant further extensions. If the Company is
not able to refinance the debt and the lender does not grant further
extensions, the property could be subject to foreclosure. Total revenues for
the Crowne Plaza Hotel in Macon, Georgia were approximately $1.4 million and
$1.3 million for the three months ended September 30, 2003 and 2002,
respectively, and $4.3 million and $4.5 million for the nine months ended
September 30, 2003 and 2002, respectively. The debt of approximately $7.1
million is included in the current portion of long-term debt in the
accompanying condensed consolidated balance sheet.

Loan/franchise agreements:

The Company is subject to certain property maintenance and quality
standard compliance requirements under its franchise agreements. The Company
periodically receives notifications from its franchisors of events of
non-compliance with such agreements. In the past, management has cured most
cases of non-compliance within the applicable cure periods and the events of
non-compliance did not result in events of default under the respective loan
agreements. However, in selected situations and based on economic
evaluations, management may elect to not comply with the franchisor
requirements. In such situations, the Company will either select an alternative
franchisor or operate the property independent of any franchisor (see Note 11).



|9. |  | 12.25% Cumulative preferred shares subject to mandatory redemption
|-- |  | ------------------------------------------------------------------

On July 1, 2003, pursuant to the provisions of SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, the Company reclassified its Mandatorily Redeemable 12.25% Cumulative
Preferred Stock (Preferred Stock) to the liability section of its Condensed
Consolidated Balance Sheet and began presenting the related dividends in
interest expense ($4.0 million for the three months ended September 30, 2003).
Prior to the adoption of SFAS No. 150, the Company had presented the Preferred
Stock between liabilities and equity in its Consolidated Balance Sheet
(mezzanine section) and had reported the Preferred Stock dividend as a
deduction from retained earnings. In accordance with SFAS No. 150, the prior
periods have not been restated.

The preferred stock consists of 5,000,000 shares with a par value of $0.01
(issued at $25.00 per share). The new preferred stock accumulates dividends at
the rate of 12.25%, is cumulative and is compounded annually. The first
dividend is payable on November 21, 2003 and is payable via the issuance of
additional shares of preferred stock (fractional shares will be paid in cash).
The number of shares to be issued, as dividends, on November 21, 2003
approximates 612,500 shares less the fractional shares (which will be paid in
cash). Changes in the fair value of Lodgians common stock would not affect
the settlement amounts. The board of directors will determine whether the
dividends due November 21, 2004 and 2005 will be paid in cash or in kind via
the issue of additional shares of preferred stock. The preferred

15



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

stock is
subject to redemption at any time, at the Companys option (including a premium
during the first five years) and to mandatory redemption on November 21, 2012.
If the preferred stock is redeemed during the first five years, the initial
premium payable is 5%. This premium is reduced by 1% for each succeeding year
through 2007. This premium percentage would be applied against the preferred
stock plus any dividends accrued but not paid. If the Company were to redeem
the preferred stock on September 30, 2003, the amount payable would be $145.0
million (including the premium payable).



|10. |  | Income taxes
|--- |  | ------------

The Company recorded income tax provisions of $0.1 million and $0.2
million for the three and nine months ended September 30, 2003, respectively.
The provisions for the Predecessor three and nine months ended September 30,
2002 were also $0.1 million and $0.2 million, respectively. Both related
primarily to provisions for state income taxes.



|11. |  | Commitments and Contingencies
|--- |  | -----------------------------

Franchisor agreements:

As of November 11, 2003, the Company had received termination notices from
franchisors with respect to two properties (this does not include two hotels
for which the Company has met all of the requirements to cure but has not
received the cure letter from the franchisor). Though not in default, the
Company was not in strict compliance with the terms of four other franchise
agreements. In addition, default notices were received from a franchisor with
respect to five hotels. For the default to be rescinded by the franchisor,
these five hotels must continuously achieve certain minimum quality scores at
each review (carried out every six months) over a two-year period. The Company
met the requirements for the first two of these reviews. Notices from the
franchisors primarily resulted from physical conditions being below brand
standards. The Company is working with the franchisors to cure the default
conditions and has a capital improvement program to address the capital
improvements required by the franchisors, the re-branding of several hotels and
general renovation projects intended to ultimately improve the operations of
the hotels. Subject to availability of funds, the Company expects to spend
approximately $74.7 million in aggregate on all 97 hotels, during the two years
ending December 2004. As of September 30, 2003, the Company had deposited
approximately $16.1 million in escrow for such improvements.

While it is the Companys belief that it will cure all defaults under the
franchise agreements before the applicable termination dates, there can be no
assurance that it will be able to do so or be able to obtain additional time in
which to cure the defaults. 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 specification of the licensors. In
the event of a franchise termination, management may seek to license the hotel
with another nationally-recognized brand. 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, since the
Company would either select an alternative franchisor or operate the hotel
independent of a franchisor.

Flag changes:

As part of the Impac Plan of Reorganization, the Company elected to reject
the license agreement relating to its hotel in Cincinnati, Ohio and ceased
operating this hotel as a Holiday Inn on May 23, 2003; the hotel is currently
being operated as an independent hotel. In addition, the Company made the
following franchise changes during 2003:



| |  |  | The previously independent hotel in Pensacola, Florida was converted to a Holiday Inn Express on April 4, 2003;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | The previously independent hotel in Dothan, Alabama was converted to a Holiday Inn Express on May 23, 2003;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | The former Holiday Inn  Dothan in Alabama was converted to a Quality Inn on May 23, 2003;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | The former independent hotel in Louisville, Kentucky was converted to a Clarion Hotel on June 2, 2003.
| | - |  | ------------------------------------------------------------------------------------------------------

16



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Letters of credit:

As of September 30, 2003, the Company had issued three irrevocable letters
of credit totaling $4.9 million as guarantees to Zurich American Insurance
Company, Donlen Fleet Management Services and U.S. Food Services. The Zurich
letter of credit has since been reduced by $0.8 million and the U.S Food
Services letter of credit has since been cancelled. As of November 11, 2003,
the remaining two letters of credit totaled $3.6 million. These letters of
credit will expire in November 2004 but may require renewal beyond that date.
All letters of credit are backed by the Companys cash (classified as
restricted cash in the accompanying Condensed Consolidated Balance Sheet).

Self-insurance:

The Company is self insured up to certain limits (deductibles) with
respect to employee medical, employee dental, property insurance, general
liability insurance, personal injury claims, workers compensation and auto
liability. The Company establishes liabilities for these self-insured
obligations annually, based on actuarial valuations and the Companys history
of claims. Should unanticipated events cause these claims to escalate beyond
normal expectations, the Companys financial condition and results of
operations could be adversely affected. As of September 30, 2003, the Company
had approximately $9.6 million accrued for such liabilities.

Litigation:

The Company was a party in litigation with Hospitality Restoration and
Builders, Inc. (HRB), a general contractor hired to perform work on six of
the Companys hotels. The litigation involved hotels in Texas (filed in the
District Court of Harris County in October 1999), Illinois (in the United
States District Court, Northern District of Illinois, Eastern Division in
February 2000) and New York (filed in the Supreme Court, New York County in
July 1999). In general, HRB claimed that the Company breached contracts to
renovate the hotels by not paying for work performed. The Company contended
that it was over-billed by HRB and that a significant portion of the completed
work was defective. In July 2001, the parties agreed to settle the litigation
pending in Texas and Illinois. In exchange for mutual dismissals and full
releases, the Company paid HRB $750,000. With respect to the matter pending in
the state of New York, HRB claimed that it was owed $10.7 million. The Company
asserted a counterclaim of $7 million. In February 2003, the Company and HRB
agreed to settle the litigation pending in the state of New York. In exchange
for mutual dismissals and full releases, the Company paid HRB $625,000. The
Company provided fully for this liability in its Consolidated Financial
Statements for the year ended December 31, 2002 (was reflected in general,
administrative and other expenses in the Statement of Operations).

The Company is party to other legal proceedings arising in the ordinary
course of business, the impact of which would not, either individually or in
the aggregate, in managements opinion, have a material adverse effect on its
financial position or results of operations. Certain of these claims are
limited to the amounts available under the Companys disputed claims reserve.



|12. |  | New Accounting Pronouncements
|--- |  | -----------------------------

In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN
45) which elaborates on the disclosures to be made by a guarantor in its
financial statements. It also requires a guarantor to recognize a liability
for the fair value of the obligation undertaken in issuing the guarantee at the
inception of a guarantee. The disclosure requirements of FIN 45 were effective
for the Company as of December 31, 2002. The recognition provisions of FIN 45
will be applied on a prospective basis to guarantees issued after December 31,
2002. The requirements of FIN 45 did not have a material impact on the
Companys financial position and results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 addresses consolidation by a
business of variable interest entities in which it is the primary beneficiary.
FIN 46 is effective immediately for certain disclosure requirements for
variable interest entities created after January 31, 2003. In October 2003,
the FASB deferred the implementation date of FIN 46, for variable interest
entities which existed prior to February 1, 2003, until the first period

17



---



##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

ending after December 15, 2003. At September 30, 2003, the Company had
no variable interest entities and therefore FIN 46 is not expected to impact
the Companys financial position and results of operations.

On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities which amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
149 requires that contracts with comparable characteristics be accounted for
similarly. In particular, SFAS No. 149 clarifies the circumstances under which
a contract with an initial net investment meets the characteristics of a
derivative as discussed in SFAS No. 133. In addition, SFAS No. 149 clarifies
when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 amends certain other
existing pronouncements, resulting in more consistent reporting of contracts
that are derivatives in their entirety or that contain embedded derivatives
that warrant separate accounting. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company adopted SFAS No. 149 on July 1,
2003. The adoption did not have a material impact on its financial position
and results of operations.

On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
which aims to eliminate diversity in practice by requiring that certain types
of freestanding instruments be reported as liabilities by their issuers
including mandatorily redeemable instruments issued in the form of shares which
unconditionally obligate the issuer to redeem the shares for cash or by
transferring other assets. These instruments were previously presented in
various ways, as part of liabilities, as part of equity, or between the
liabilities and equity sections (sometimes referred to as mezzanine
reporting). The provisions of SFAS No. 150, which also include a number of new
disclosure requirements, are effective for instruments entered into or modified
after May 31, 2003. For pre-existing instruments, SFAS No. 150 was effective
as of the beginning of the first interim period which commenced after June 15,
2003 (July 1, 2003 for the Company). As disclosed in Note 9, to these
Condensed Consolidated Financial Statements (Note 9), the Company adopted
SFAS No. 150 in the third quarter of 2003. The adoption impacted the treatment
of the Companys Mandatorily Redeemable 12.25% Cumulative Preferred Stock
(Preferred Stock), previously presented between total liabilities and
stockholders equity. As a result of the adoption of SFAS No. 150, the
Companys Preferred Stock has been included as part of long-term debt in the
accompanying Condensed Consolidated Financial Statements and the Preferred
Stock dividends ($4.0 million for the three months ended September 30, 2003),
was included in interest expense. The preferred stock dividends for the period
January 1, 2003 to June 30, 2003 ($7.6 million) continues to be shown as a
deduction from retained earnings (see Note 9 for disclosures required under
SFAS No. 150). On October 29, 2003, the FASB decided to defer the effective
date of SFAS No. 150 related to non-controlling interests. As a result, until
the FASB establishes further guidance, Lodgian will not have to measure its
mandatorily redeemable minority interests at fair value.



|13. |  | Related party transactions
|--- |  | --------------------------

Richard Cartoon, the Companys Executive Vice President and Chief
Financial Officer between October 4, 2001 and October 13, 2003, is a principal
in a business that the Company retained in October 2001 to provide Richard
Cartoons services as Chief Financial Officer and other restructuring support
and services. In addition to amounts paid for Richard Cartoons services, the
Company was billed $56,000 and $178,000, including expenses, for other support
and services provided by associates of Richard Cartoon, LLC for the three and
nine months ended September 30, 2003, respectively. Richard Cartoon, LLC may
continue to provide restructuring support and services in the short-term.

See Note 8 regarding the $2.0 million revolver issued by the OCM Fund.



|14. |  | Subsequent event
|--- |  | ----------------

In October 2003, management committed to a plan to sell one additional
hotel. Though there can be no assurance, management plans to dispose of this
hotel within one year, if the market permits. This hotel is included in the
accompanying Condensed Consolidated Financial Statements as an asset held for
use. The net carrying value of the property, plant and equipment of this hotel
both as of September 30,

18



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2003 and December 31, 2002 was $1.5 million; related
long-term debt approximated $1.7 million both as of September 30, 2003 and
December 31, 2002. Total revenues were $0.8 million and $0.6 million for the
three months ended September 30, 2003 and 2002, respectively, and $2.1 million
and $1.7 million for the nine months ended September 30, 2003 and 2002,
respectively.

On November 12, 2003, the Company closed on the sale of its North Miami
hotel. The hotel was sold for $3.3 million and is included in the accompanying
Condensed Consolidated Financial Statements as an asset held for sale.
Revenues for this hotel were $0.4 million and $0.3 million for the three months
ended September 30, 2003 and 2002, respectively, and $1.2 million and $1.1
million for the nine months ended September 30, 2003 and 2002,
respectively. The carrying value of the property, plant and equipment for this
hotel as of September 30, 2003 was $2.3 million.

19



---



##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Business Summary

Lodgian, Inc. (Lodgian or the Company) is one of the largest
independent owners and operators of full-service hotels in the United States.
At September 30, 2003, Lodgian managed a portfolio of 97 hotels
(18,265 rooms
located in 30 states and Canada). The portfolio included 92 hotels which were
wholly-owned, four in which the Company had a controlling financial interest
and exercised control and one in which the Company had a minority equity
interest. All of the hotels are owned in operating subsidiaries or other legal
entities.

Lodgian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. Lodgian believes that
these segments have more consistent demand generators than other segments of
the lodging industry and have recently experienced less development of new
properties than other lodging segments, such as limited service, economy and
budget segments.

Of the Companys 97 hotel portfolio, 82 are Crowne Plaza, Holiday Inn and
Marriott brand hotels and ten are affiliated with six other nationally
recognized hospitality brands. The Companys strong brand affiliations bring
many benefits in terms of guest loyalty and market share premiums.

Chapter 11 proceedings

As previously discussed in the Notes to the unaudited Condensed
Consolidated Financial Statements included elsewhere in this Form 10-Q, the
Company and substantially all of its subsidiaries which owned hotel properties
filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code on
December 20, 2001, in the Southern District of New York. The Bankruptcy Court
confirmed the Companys First Amended Joint Plan of Reorganization (the Joint
Plan of Reorganization) on November 5, 2002 and on November 25, 2002, the
Company and entities owning 78 hotels officially emerged from Chapter 11.
Pursuant to the terms of the Joint Plan of Reorganization, eight wholly-owned
hotels were returned to the lender in January 2003 in satisfaction of
outstanding debt obligations and one wholly-owned hotel was returned to the
lessor of a capital lease.

Of the Companys 97 hotel portfolio, eighteen hotels, previously owned by
two subsidiaries (Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C.), were
not part of the Joint Plan of Reorganization. On April 24, 2003, the
Bankruptcy Court confirmed the plan of reorganization relating to these
eighteen hotels (the Impac Plan of Reorganization). These eighteen hotels
remained in Chapter 11 until May 22, 2003, the date on which the Company,
through eighteen newly-formed subsidiaries (one for each hotel), finalized an
$80 million financing with Lehman Brothers Holdings, Inc. (the Lehman
Financing). The Lehman Financing was primarily used to settle the remaining
amount due to the secured lender of these hotels. The Impac Plan of
Reorganization also provided for a pool of funds of approximately $0.3 million
to be paid to the general unsecured creditors of the eighteen hotels.

The effects of the Joint Plan of Reorganization were recorded in
accordance with the American Institute of Certified Public Accountants
Statement of Position (SOP) 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, effective November 22, 2002. SOP
90-7 required the application of Fresh Start Accounting. As a result, the
Consolidated Financial Statements subsequent to the Companys emergence from
Chapter 11 are those of a new reporting entity (the Successor) and are not
comparable with the financial statements of the Company prior to the effective
date of the Joint Plan of Reorganization (the Predecessor).

Discontinued operations

Pursuant to the terms of the Joint Plan of Reorganization, eight
wholly-owned hotels were returned to the lender in January 2003 in satisfaction
of outstanding debt obligations and one wholly-owned hotel was returned to the
lessor of a capital lease. The assets, liabilities and results of operations
of these

20



---



##### Table of Contents



nine hotels are reported in Discontinued Operations as of and for the
three and nine months ended September 30, 2003 and 2002. Due primarily to the
application of fresh start accounting in November 2002, in which these and
other assets were adjusted to their respective fair values, there was no gain
or loss on this transaction.

In addition, in June 2003, the Company embarked on a plan to sell 14
hotels, 3 land parcels and an office building. Five additional hotels were
identified for sale (four during the third quarter of 2003 and one in October
2003). The strategy to sell these assets is part of managements plans to:



| |  |  | pay down the Lehman Financing by at least $20 million
to minimize interest costs (see Note 8 to the Condensed
Consolidated Financial Statements presented elsewhere in this
report);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide additional funding for the Companys capital
expenditure program to comply with franchisor requirements and
improve brand quality; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | dispose of certain hotels which are performing below
the standard set by management for the entire portfolio.
| | - |  | -------------------------------------------------------------------------------------------------------------

In connection with this strategy, where the carrying values of the assets
exceeded the estimated fair values, net of selling costs, the carrying values
were reduced and impairment charges were recorded. Fair value is determined
using quoted market prices, when available, or other accepted valuation
techniques. The impairment charges recorded during the nine months ended
September 30, 2003 related to 6 hotels and 2 land parcels and approximated $5.1
million ($1.7 million for the three months ended September 30, 2003). Where
the estimated selling prices, net of selling costs, exceeded the carrying
values, no adjustments were recorded. Management classifies an asset as held
for sale if it expects to dispose of it within one year. While the completion
of these dispositions is probable, the sale of these assets is subject to
market conditions and there can be no assurance that the Company will finalize
the sale of any or all of these assets. In accordance with SFAS No. 144, the
results of operations of all assets identified as held for sale (including the
related impairment charges) are reported in Discontinued Operations for the
three and nine months ended September 30, 2003 and 2002. The assets held for
sale and the liabilities related to these assets are separately disclosed in
the Condensed Consolidated Balance Sheet as of September 30, 2003, included in
Item 1. Financial Statements.

As previously discussed, in October 2003, management committed to a plan
to sell one additional hotel. Though there can be no assurance, management
plans to dispose of this hotel within the next year, if the market permits.
This hotel is included in the Condensed Consolidated Financial Statements,
presented elsewhere in this report, as an asset held for use. The net carrying
value of the property, plant and equipment of this hotel both as of September
30, 2003 and December 31, 2002 was $1.5 million; related long-term debt
approximated $1.7 million both as of September 30, 2003 and December 31, 2002.
Total revenues were $0.8 million and $0.6 million for the three months ended
September 30, 2003 and 2002, respectively, and $2.1 million and $1.7 million
for the nine months ended September 30, 2003 and 2002, respectively.

On November 12, 2003, the Company closed on the sale of its North Miami
hotel. The hotel was sold for $3.3 million and is included in the Condensed
Consolidated Financial Statements, included elsewhere in this Form 10-Q, as an
asset held for sale. Revenues for this hotel were $0.4 million and $0.3
million for the three months ended September 30, 2003 and 2002, respectively,
and $1.2 million and $1.1 million for the nine months ended September 30, 2003
and 2002, respectively. The carrying value of the property, plant and
equipment for this hotel as of September 30, 2003 was $2.3 million.

Forward-looking statements/risk factors

The following discussion should be read in conjunction with the Companys
Condensed Consolidated Financial Statements and related notes thereto included
elsewhere herein.

The discussion below and elsewhere in this Form 10-Q includes statements
that are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act. These include
managements expectations, statements that describe anticipated revenues,
capital expenditures, other financial items, the Companys business plans and
objectives, the expected impact of competition, government regulation,
litigation and other factors on the Companys

21Table of Contentsfuture financial condition and results of operations. The words may,
should, expect, believe, anticipate, project, estimate, plan, and
similar expressions are intended to identify forward-looking statements. Such
risks and uncertainties, any one of which may cause actual results to differ
materially from those described in the forward-looking statements, include or
relate to, among other things:
    
    Risks associated with the Companys ability to
maintain its existing franchise affiliations which could affect
the Companys revenue generating capabilities;
    
    The impact of potential litigation and/or
governmental inquiries and investigations involving the Company;
    
    The effect of competition and the economy on the
Companys ability to maintain margins on existing operations,
including uncertainties relating to competition;
    
    The Companys ability to generate sufficient cash
flows from operations to meet its obligations;
    
    The effectiveness of changes in management and the
ability of the Company to retain qualified individuals to serve
in senior management positions;
    
    Risks associated with reductions in hotel values
which are dependent upon the successful operation of the hotels;
    
    Risks associated with increases in the cost of debt;
    
    Risks associated with the holders of the Companys
common stock exercising significant control over the Company and
selling large blocks of shares;
    
    Risks associated with the Companys ability to meet
the continuing listing requirements of the American Stock
Exchange;
    
    Risks associated with self-insured claims escalating
beyond expectations;
    
    Risks associated with the Companys ability to comply
with the terms of its loan agreements;
    
    Risks associated with the Companys short operating
history since the effective date of its Joint Plan of
Reorganization;
    
    Risks associated with environmental, state and federal regulations;
    
    Risks associated with normal collective bargaining contract negotiations;
    
    Risks associated with the Companys high level of
encumbered assets which could affect its ability to access
additional working capital; and
    
    Risks as a result of the short time that the public
market for the Companys new securities has existed.Many of these factors are not within the Companys control and readers are
cautioned not to put undue reliance on these forward looking statements.General OverviewManagement believes that the results of operations in the hotel industry
are best explained by three key performance measures: occupancy, average daily
rate (ADR) and revenue per available room (RevPAR) levels. These measures
are influenced by a variety of factors including national, regional and local
economic conditions, the degree of competition with other hotels in the area
and changes in travel patterns. The demand for accommodations is also affected
by normally recurring seasonal patterns since most of the Companys hotels
experience lower occupancy levels in the fall and winter months (November
through February) which may result in lower revenues, lower net income and less
cash flow during these months. RevPAR is derived by dividing room revenues by
the number of available room nights for a given period or, alternatively, by
multiplying the occupancy by the ADR.Presented in the tables below are hotel data, by category (first table) and by
geographic region (second table) for the three and nine months ended September
30, 2003 and 2002 (shown for those hotels owned as of September 30, 2003):22Table of ContentsCapital expenditure
    
    Three months ended
    
    
    Nine months endedNine months endedSeptember 30, 2003
    
    September 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002Upper Upscale
    
    
    
    (in thousands $)
    
    Successor
    

    Predecessor
    
    Successor
    

    PredecessorNumber of properties
    
    - continuing
    
    $
    12,545
    
    
    
    4
    
    

    
    4
    
    
    
    4
    
    

    
    4Number of rooms
    
    
    
    
    
    
    
    
    825
    
    

    
    825
    
    
    
    825
    
    

    
    825Occupancy
    
    
    
    
    
    
    
    
    62.9
    %
    

    
    69.8
    %
    
    
    60.7
    %
    

    
    67.4
    %Average daily rate
    
    
    
    
    
    
    
    $
    90.69
    
    

    $
    93.58
    
    
    $
    90.74
    
    

    $
    94.01RevPAR
    
    
    
    
    
    
    
    $
    57.01
    
    

    $
    65.32
    
    
    $
    55.09
    
    

    $
    63.32UpscaleNumber of properties
    
    - continuing
    
    
    1,792
    
    
    
    18
    
    

    
    18
    
    
    
    18
    
    

    
    18Number of rooms
    
    
    
    
    
    
    
    
    3,156
    
    

    
    3,156
    
    
    
    3,156
    
    

    
    3,156Occupancy
    
    
    
    
    
    
    
    
    66.7
    %
    

    
    67.6
    %
    
    
    67.1
    %
    

    
    68.4
    %Average daily rate
    
    
    
    
    
    
    
    $
    80.54
    
    

    $
    80.42
    
    
    $
    83.16
    
    

    $
    83.77RevPAR
    
    
    
    
    
    
    
    $
    53.75
    
    

    $
    54.39
    
    
    $
    55.79
    
    

    $
    57.29Midscale with Food & BeverageNumber of properties
    
    - continuing
    
    
    7,756
    
    
    
    44
    
    

    
    43
    
    
    
    44
    
    

    
    43- discontinued
    
    
    818
    
    
    
    15
    
    

    
    16
    
    
    
    15
    
    

    
    16Number of rooms
    
    
    
    
    
    
    
    
    11,805
    
    

    
    11,655
    
    
    
    11,805
    
    

    
    11,655Occupancy
    
    
    
    
    
    
    
    
    64.7
    %
    

    
    63.8
    %
    
    
    58.8
    %
    

    
    60.3
    %Average daily rate
    
    
    
    
    
    
    
    $
    72.93
    
    

    $
    72.94
    
    
    $
    71.26
    
    

    $
    71.31RevPAR
    
    
    
    
    
    
    
    $
    47.19
    
    

    $
    46.53
    
    
    $
    41.91
    
    

    $
    43.03Midscale without Food & BeverageNumber of properties
    
    - continuing
    
    
    2,149
    
    
    
    9
    
    

    
    8
    
    
    
    9
    
    

    
    8- discontinued
    
    
    33
    
    
    
    1
    
    

    
    
    
    
    
    1
    
    

    
    Number of rooms
    
    
    
    
    
    
    
    
    1,282
    
    

    
    1,047
    
    
    
    1,282
    
    

    
    1,047Occupancy
    
    
    
    
    
    
    
    
    58.1
    %
    

    
    57.6
    %
    
    
    54.2
    %
    

    
    58.4
    %Average daily rate
    
    
    
    
    
    
    
    $
    57.04
    
    

    $
    54.50
    
    
    $
    57.70
    
    

    $
    56.21RevPAR
    
    
    
    
    
    
    
    $
    33.12
    
    

    $
    31.41
    
    
    $
    31.25
    
    

    $
    32.81Independent HotelsNumber of properties
    
    - continuing
    
    
    1,577
    
    
    
    3
    
    

    
    5
    
    
    
    3
    
    

    
    5- discontinued
    
    
    1,463
    
    
    
    2
    
    

    
    2
    
    
    
    2
    
    

    
    2Number of rooms
    
    
    
    
    
    
    
    
    957
    
    

    
    1,342
    
    
    
    957
    
    

    
    1,342Occupancy
    
    
    
    
    
    
    
    
    37.0
    %
    

    
    51.5
    %
    
    
    40.0
    %
    

    
    46.2
    %Average daily rate
    
    
    
    
    
    
    
    $
    66.83
    
    

    $
    66.65
    
    
    $
    71.80
    
    

    $
    74.08RevPAR
    
    
    
    
    
    
    
    $
    24.73
    
    

    $
    31.13
    
    
    $
    28.69
    
    

    $
    34.22All HotelsNumber
of properties
    
    - continuing
    
    
    25,819
    
    
    
    78
    
    

    
    78
    
    
    
    78
    
    

    
    78- discontinued
    
    
    2,314
    
    
    
    18
    
    

    
    18
    
    
    
    18
    
    

    
    18Number of rooms
    
    
    
    
    
    
    
    
    18,025
    
    

    
    18,025
    
    
    
    18,025
    
    

    
    18,025Occupancy
    
    
    
    
    
    
    
    
    63.0
    %
    

    
    63.1
    %
    
    
    59.0
    %
    

    
    60.9
    %Average daily rate
    
    
    
    
    
    
    
    $
    73.92
    
    

    $
    74.07
    
    
    $
    73.68
    
    

    $
    74.23RevPAR
    
    
    
    
    
    
    
    $
    46.59
    
    

    $
    46.74
    
    
    $
    43.49
    
    

    $
    45.20

The categories in the table above are based on the Smith Travel Research Chain Scales and are defined as:
Upper Upscale: Hilton and MarriottUpscale: Courtyard by Marriott, Crowne Plaza, Radisson and Residence InnMidscale with Food & Beverage: Clarion, Doubletree Club, Four Points,
Holiday Inn, Holiday Inn Select,
     Holiday Inn SunSpree Resort and Quality InnMidscale without Food & Beverage: Fairfield Inn and Holiday Inn Express23Table of ContentsCapital expenditure
    
    Three months ended
    
    Nine months endedNine months endedSeptember 30, 2003
    
    September 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002Northeast Region
    
    
    
    (in thousands $)
    
    Successor
    

    Predecessor
    
    Successor
    

    PredecessorNumber of properties
    
    - continuing
    
    $
    5,763
    
    
    
    29
    
    

    
    29
    
    
    
    29
    
    

    
    29- discontinued
    
    
    192
    
    
    
    7
    
    

    
    7
    
    
    
    7
    
    

    
    7Number of rooms
    
    
    
    
    
    
    
    
    6,771
    
    

    
    6,771
    
    
    
    6,771
    
    

    
    6,771Occupancy
    
    
    
    
    
    
    
    
    70.9
    %
    

    
    71.8
    %
    
    
    62.4
    %
    

    
    64.2
    %Average daily rate
    
    
    
    
    
    
    
    $
    82.75
    
    

    $
    80.60
    
    
    $
    80.30
    
    

    $
    78.78RevPAR
    
    
    
    
    
    
    
    $
    58.70
    
    

    $
    57.85
    
    
    $
    50.08
    
    

    $
    50.60Southeast RegionNumber of properties
    
    - continuing
    
    
    5,536
    
    
    
    26
    
    

    
    26
    
    
    
    26
    
    

    
    26- discontinued
    
    
    1,737
    
    
    
    8
    
    

    
    8
    
    
    
    8
    
    

    
    8Number of rooms
    
    
    
    
    
    
    
    
    5,794
    
    

    
    5,794
    
    
    
    5,794
    
    

    
    5,794Occupancy
    
    
    
    
    
    
    
    
    58.8
    %
    

    
    57.5
    %
    
    
    58.0
    %
    

    
    58.5
    %Average daily rate
    
    
    
    
    
    
    
    $
    66.68
    
    

    $
    67.00
    
    
    $
    67.39
    
    

    $
    68.81RevPAR
    
    
    
    
    
    
    
    $
    39.20
    
    

    $
    38.53
    
    
    $
    39.08
    
    

    $
    40.22Midwest RegionNumber of properties
    
    - continuing
    
    
    10,340
    
    
    
    16
    
    

    
    16
    
    
    
    16
    
    

    
    16- discontinued
    
    
    385
    
    
    
    3
    
    

    
    3
    
    
    
    3
    
    

    
    3Number of rooms
    
    
    
    
    
    
    
    
    4,141
    
    

    
    4,141
    
    
    
    4,141
    
    

    
    4,141Occupancy
    
    
    
    
    
    
    
    
    56.3
    %
    

    
    56.9
    %
    
    
    53.6
    %
    

    
    57.1
    %Average daily rate
    
    
    
    
    
    
    
    $
    67.82
    
    

    $
    71.23
    
    
    $
    68.90
    
    

    $
    71.37RevPAR
    
    
    
    
    
    
    
    $
    38.15
    
    

    $
    40.51
    
    
    $
    36.96
    
    

    $
    40.76West RegionNumber of properties
    
    - continuing
    
    
    4,180
    
    
    
    7
    
    

    
    7
    
    
    
    7
    
    

    
    7Number of rooms
    
    
    
    
    
    
    
    
    1,319
    
    

    
    1,319
    
    
    
    1,319
    
    

    
    1,319Occupancy
    
    
    
    
    
    
    
    
    62.4
    %
    

    
    62.8
    %
    
    
    63.2
    %
    

    
    66.5
    %Average daily rate
    
    
    
    
    
    
    
    $
    69.66
    
    

    $
    72.23
    
    
    $
    78.25
    
    

    $
    80.28RevPAR
    
    
    
    
    
    
    
    $
    43.47
    
    

    $
    45.33
    
    
    $
    49.45
    
    

    $
    53.36All HotelsNumber of properties
    
    - continuing
    
    
    25,819
    
    
    
    78
    
    

    
    78
    
    
    
    78
    
    

    
    78- discontinued
    
    
    2,314
    
    
    
    18
    
    

    
    18
    
    
    
    18
    
    

    
    18Number of rooms
    
    
    
    
    
    
    
    
    18,025
    
    

    
    18,025
    
    
    
    18,025
    
    

    
    18,025Occupancy
    
    
    
    
    
    
    
    
    63.0
    %
    

    
    63.1
    %
    
    
    59.0
    %
    

    
    60.9
    %Average daily rate
    
    
    
    
    
    
    
    $
    73.92
    
    

    $
    74.07
    
    
    $
    73.68
    
    

    $
    74.23RevPAR
    
    
    
    
    
    
    
    $
    46.59
    
    

    $
    46.74
    
    
    $
    43.49
    
    

    $
    45.20

The regions in the table above are defined as:

Northeast: Canada, Connecticut, Massachusetts, Maryland, New Hampshire,
New York, Ohio, Pennsylvania,
     Vermont, West VirginiaSoutheast: Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina,
TennesseeMidwest: Arkansas, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota,
Missouri, Oklahoma, TexasWest: Arizona, California, Colorado, New MexicoIn addition to categorizing its hotels by categories and by regions, management
also classifies its hotels as stabilized and non-stabilized. Management
defines stabilized hotels as those hotels included in the Companys portfolio
on September 30, 2003 which:
    
    were not held for sale (as of September 30, 2003);
    
    were not undergoing major renovation during 2002 or
2003 (major renovation is defined as a renovation which in the
aggregate exceeded $5,000 per room); or
    
    were not subject to flag changes during 2002 or 2003.Room data for the stabilized hotels were as follows:Capital expenditure
    
    Three months ended
    
    Nine months endedNine months endedSeptember 30, 2003
    
    September 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002(in thousands $)
    
    Successor
    

    Predecessor
    
    Successor
    

    PredecessorNumber of properties
    
    $
    5,156
    
    
    
    59
    
    

    
    59
    
    
    
    59
    
    

    
    59Number of rooms
    
    
    
    
    
    
    10,723
    
    

    
    10,723
    
    
    
    10,723
    
    

    
    10,723Occupancy
    
    
    
    
    
    
    68.2
    %
    

    
    68.6
    %
    
    
    64.8
    %
    

    
    66.4
    %Average daily rate
    
    
    
    
    
    $
    75.95
    
    

    $
    76.76
    
    
    $
    75.91
    
    

    $
    76.94RevPAR
    
    
    
    
    
    $
    51.81
    
    

    $
    52.67
    
    
    $
    49.15
    
    

    $
    51.07

24Table of ContentsRevenues. Revenues are comprised of room, food and beverage and other
revenues. Room revenues are derived from guest room rentals, whereas food and
beverage revenues primarily include sales from hotel restaurants, room service,
hotel catering and meeting room rentals. Other revenues include charges for
guests long-distance telephone service, laundry and parking. Approximately
75% of total revenues are derived from guest room rentals. Transient demand
generally accounts for approximately 70% of guest room rentals, group demand
makes up approximately 23% while contract demand accounts for the remaining 7%.Operating Expenses. Operating expenses are comprised of direct expenses;
general, administrative and other expenses; and depreciation and amortization.
Direct expenses, including rooms, food and beverage and other operations,
reflect expenses directly related to hotel operations. These expenses are
variable with available rooms and occupancy, but contain fixed components.
General, administrative and other expenses primarily represent property level
expenses related to general operations such as marketing, utilities, repairs
and maintenance and other property administrative costs. General,
administrative and other expenses also include corporate overhead (such as
accounting services, legal and professional fees, information technology and
executive management) which are generally fixed. Also included in general,
administrative and other expenses for the three and nine months ended September
30, 2003 are expenses relating to post-emergence Chapter 11 activities.Results of OperationsThe discussion of results of operations, income taxes, liquidity and
capital resources that follows is derived from the Companys unaudited
Condensed Consolidated Financial Statements set forth in Item I. Financial
Statements included in this Form 10-Q (the Consolidated Financial
Statements) and should be read in conjunction with such financial statements
and notes thereto.At September 30, 2003, the Company managed a portfolio of 97 hotels. Of
the 97 hotels, 92 were wholly-owned, four were owned in joint venture
partnerships in which the Company had a controlling financial interest and
exercised control and one was owned in a joint venture partnership in which the
Company had a minority equity interest.At September 30, 2002, the Company managed a portfolio of 106 hotels. Of
the 106 hotels, 101 were wholly-owned, four were owned in joint venture
partnerships in which the Company had a 50% or greater financial interest and
one was owned in a joint venture partnership in which the Company had a
minority equity interest.Except for the hotel in which the Company had a minority equity interest
(which is accounted for using the equity method of accounting), the assets,
liabilities and results of operations of all the hotels are included in the
Condensed Consolidated Financial Statements, included I Item 1. Financial
Statements.Reported in Continuing Operations for the three and nine months ended
September 30, 2003, are 78 of the 97 hotels; 18 hotels are included in
Discontinued Operations along with 3 land parcels and one office building; one
hotel is not consolidated.Reported in Continuing Operations for the three and nine months ended
September 30, 2002, are 78 of the 106 hotels; 27 hotels are included in
Discontinued Operations along with 3 land parcels and one office building; one
hotel is not consolidated. The reduction in hotels from 106 to 97 is a result
of the return of eight hotels to the lender and one hotel to the lessor of a
capital lease in January 2003.25Table of ContentsThree Months Ended September 30, 2003 (Third Quarter 2003) Compared to the
Three Months Ended September 30, 2002 (Third Quarter 2002) and Nine Months
Ended September 30, 2003 (2003 Period) Compared to the Nine Months Ended
September 30, 2002 (2002 Period)Continuing Operations -RevenuesThird Quarter 2003 compared to Third Quarter 2002Revenues for the 78 hotels reported in Continuing Operations were $82.6
million for the Third Quarter 2003, a 2.2% decrease from revenues of $84.5
million for the Third Quarter 2002. RevPAR for these hotels was $48.51 and
$49.36 for the Third Quarter 2003 and the Third Quarter 2002, respectively, a
decline of 1.7%. This decrease was due to declines in both occupancy (declined
by 0.9%) and ADR (declined by 0.8%). Though there was some rebound in the
economy in the Third Quarter 2003, full recovery to previous travel patterns
was still not realized. Also, the Companys revenues suffered from the large
scale renovations which were being performed at some of its hotels,
particularly three of the four hotels in the upper upscale category.
Stabilized RevPar for the Third Quarter 2003 was $51.81 compared with
Stabilized RevPar for the Third Quarter 2002 of $52.67, a decline of 1.6%.
Stabilized RevPar represents RevPar for the group of hotels which were not
under renovation in 2002 or 2003, were not subject to flag changes in 2002 or
2003 and were not held for sale at September 30, 2003.2003 Period compared to 2002 PeriodThe factors described above also affected revenues for the 78 hotels
reported in Continuing Operations for the 2003 Period. Revenues for these
hotels for the 2003 Period were $239.6 million, a 4.7% decrease from revenues
of $251.3 million for the 2002 Period. RevPAR for these hotels was $46.23 and
$48.27 for the 2003 Period and the 2002 Period, respectively, a decline of
4.3%. This decrease was due to declines in both occupancy (declined by 3.1%)
and ADR (declined by 1.2%). Stabilized RevPar (defined above) for the 2003
Period was $49.15 compared with Stabilized RevPar for the 2002 Period of
$51.07, a decline of 3.8%.Direct Operating ExpensesThird Quarter 2003 compared to Third Quarter 2002Direct operating expenses for the 78 hotels reported in Continuing
Operations were $32.1 million (38.9% of direct revenues) for the Third Quarter
2003 and $32.5 million (38.5% of direct revenues) for the Third Quarter 2002.
The 1.2% decrease was primarily driven by the reduction in variable expenses
related to the reduction in revenues. Direct operating expenses as a
percentage of revenues were higher in the Third Quarter 2003 than they were in
the Third Quarter 2002 as result of lower margins in the rooms and telephone
departments where expenses could not be reduced proportionately with revenues,
due to fixed expenses or the need to maintain a minimum level of service. In
the Third Quarter 2003, rooms expenses represented 28.3% of room revenues
compared with 27.4% in the Third Quarter 2002. Telephone expenses represented
91.9% of telephone revenues in the Third Quarter 2003 whereas in the Third
Quarter 2002, they represented 74.5%.2003 Period compared to 2002 PeriodAlso primarily driven by the reduction in revenues, direct operating
expenses for the 2003 Period for the 78 hotels reported in Continuing
Operations decreased by $3.4 million (3.5%), from $96.1 million (38.2% of
direct revenues) in the 2002 Period to $92.7 million (38.7% of direct revenues)
in the 2003 Period. As in the Third Quarter 2003, direct operating expenses as
a percentage of revenues were higher in the 2003 Period than they were in the
2002 Period as result of lower margins in the rooms and telephone departments
where expenses could not be reduced proportionately with revenues, due to fixed
expenses or the need to maintain a minimum level of service. In the 2003
Period, rooms expenses represented 28.2% of room revenues compared with 27.0%
in the 2002 Period. Telephone expenses represented 86.7% of telephone revenues
in the 2003 Period whereas in the 2002 Period, they represented 70.9%.26Table of ContentsGeneral, administrative and other expensesThird Quarter 2003 compared to Third Quarter 2002General, administrative and other expenses were $34.2 million for the
Third Quarter 2003 and $32.5 million for the Third Quarter 2002. Contributing
to this increase of $1.7 million were insurance ($0.5 million), utilities ($0.4
million), and repairs and maintenance ($0.3 million). Post-emergence expenses
of $0.3 million related to the Chapter 11 filing for the 78 hotels that emerged
from Chapter 11 in November 2002 and the nine properties that were disposed of
in early January 2003 also contributed to the increase in general,
administrative and other expenses. Post-emergence expenses include legal and
professional fees related to the claims reconciliation process as well as fees
payable to the United States Trustee of the Department of Justice, which are
required as part of the reorganization process. These expenses were reported
as reorganization items for the Third Quarter 2002.2003 Period compared to 2002 PeriodGeneral, administrative and other expenses were $104.7 million for the
2003 Period, an increase of $6.2 million over the 2002 Period ($98.5 million).
Insurance, utilities, ground rent, property and other taxes and severance
payments accounted for increases of $1.9 million, $1.4 million, $0.4 million,
$0.1 million and $0.8 million, respectively. In addition, post-emergence
expenses of $3.6 million contributed to the increase in general, administrative
and other expenses. These increases were partially offset by reduced property
level general and administrative expenses, franchise fees and equipment rentals
which decreased $1.3 million in aggregate, primarily as a result of the
decline in revenues. The remaining decrease is primarily due to a decrease in
corporate overhead which are related to efforts made to reduce legal and
professional fees, rental of office space and other corporate overhead.Depreciation and amortization expenseAs a result of the write-down of fixed assets recorded on the
implementation of fresh start reporting on November 22, 2002, depreciation for
both the Third Quarter 2003 and the 2003 Period were lower than the equivalent
periods in 2002.Third
Quarter 2003 compared to Third Quarter 2002 Depreciation and
amortization expense was $7.7 million in the Third Quarter 2003 and $12.1
million in the Third Quarter 2002.2003 Period compared to 2002 Period Depreciation and amortization expense was
$22.8 million in the 2003 Period and $34.6 million in the 2002 Period.Preferred stock dividendsPreferred dividends represent the dividends due on November 21, 2003 on
the Companys Mandatorily Redeemable 12.25% Cumulative Preferred Stock
(Preferred Stock). The Preferred Stock was issued upon the Companys
emergence from Chapter 11. Pursuant to SFAS No. 150, the dividends accrued
from the date of adoption (July 1, 2003 for the Company) are reported in
interest expense while the dividends accrued for the pre-adoption period
(January 1, 2003 to June 30, 2003) are reflected as deductions from retained
earnings. Dividends accrued for the Third Quarter 2003 were $4.0 million;
dividends accrued for the period January 1, 2003 to June 30, 2003 were $7.6
million.Interest expense (excluding preferred stock dividends)The table below shows the composition of interest expense (continuing and
discontinued operations):27Table of ContentsThree months ended
    
    Nine months endedSeptember 30, 2003
    
    
    September 30, 2002
    
    September 30, 2003
    
    
    September 30, 2002(Unaudited in thousands)Successor
    
    
    Predecessor
    
    Successor
    
    
    PredecessorContinuing operations:Interest expense, reported
    
    $
    7,692
    
    
    
    $
    8,386
    
    
    $
    20,962
    
    
    
    $
    24,214Less amortization of loan fees
    
    
    (1,217
    )
    
    
    
    
    
    
    
    (2,588
    )
    
    
    
    6,475
    
    
    
    
    8,386
    
    
    
    18,374
    
    
    
    
    24,214Discontinued operations:Interest expense, reported
    
    
    1,293
    
    
    
    
    121
    
    
    
    2,521
    
    
    
    
    370Less amortization of loan fees
    
    
    (394
    )
    
    
    
    
    
    
    
    (617
    )
    
    
    
    899
    
    
    
    
    121
    
    
    
    1,904
    
    
    
    
    370Total interest expense, net of capitalized interest,
without amortization of loan fees
    
    $
    7,374
    
    
    
    $
    8,507
    
    
    $
    20,278
    
    
    
    $
    24,584

Third Quarter 2003 compared to Third Quarter 2002 Interest expense
(continuing and discontinued operations) was $7.4 million in the Third Quarter
2003 compared to $8.5 million for the Third Quarter 2002. Amortization of
financing fees was nil for the Third Quarter 2002 since there were no deferred
loan fees in the Third Quarter 2002. The reduction in interest expense was
primarily attributable to a reduction in the cost of debt offset by interest
costs in relation to the Lehman Financing. Average LIBOR was 1.125% and 1.79%
for the Third Quarter 2003 and Third Quarter 2002, respectively, and the
interest spread on the Companys variable rate debt was approximately 2% less
than it was during 2002. The reduction in interest expense due to reductions
in interest rates was offset by an increase of approximately $1.8 million of
interest expense related to the Lehman Financing which replaced debt on which
the Company paid no interest between December 20, 2001 and May 22, 2003. With
Bankruptcy Court approval, the Company had ceased paying interest on certain of
its debts while it was in Chapter 11. Increases in capitalized interest costs
($0.3 million) also contributed to the reduction in interest expense. The
increase in capitalized interest costs is a result of higher renovation
activity.2003 Period compared to 2002 Period Interest expense (continuing and
discontinued operations) was $20.3 million in the 2003 Period and $24.6 million
in the 2002 Period. Amortization of financing fees was $2.6 million in the
2003 Period (nil for the 2002 Period). The reduction in interest expense was
primarily attributable to a reduction in the cost of debt offset by interest
costs in relation to the Lehman Financing. Average LIBOR was 1.42% and 2.05%
for the 2003 Period and the 2002 Period, respectively. Also, the interest
spread on the Companys variable rate debt was approximately 2% less than it
was during the 2002 Period. In addition, capitalized interest costs for the
2003 Period increased $0.5 million over the 2002 Period. The reduction in
interest expense due to reductions in interest rates and increases in
capitalized interest costs were offset by an increase of approximately $2.2
million of interest expense related to the Lehman Financing which replaced debt
on which the Company paid no interest between December 20, 2001 and May 22,
2003. With Bankruptcy Court approval, the Company ceased paying interest on
certain of its debts while it was in Chapter 11.Interest income and otherInterest income and other for the 2002 Period consisted primarily of gain
on extinguishment of debt of $4.4 million. This gain related to a discharge of
indebtedness (principal plus accrued interest) in respect of Macon Hotel
Associates (a subsidiary of the Company) as a result of a Satisfaction and
Release
Agreement between Macon Hotel Associates and one of its lenders. The
remaining portion of interest income and other for the 2002 Period consists of
interest income of $0.5 million which was higher in the 2002 Period than the
interest for the 2003 Period as a result of interest on excess cash accumulated
while the Company was in Chapter 11. Interest income for the 2003 Period was
$0.2 million.Reorganization itemsFor the 2003 Period, reorganization items included only those Chapter 11
legal and professional costs directly attributable to the Impac Debtors, prior
to their emergence from Chapter 11 on May 22, 2003, as well as extension fees
paid to the secured lender of the Impac Debtors pursuant to the settlement
agreement. For the Third Quarter 2002 and the 2002 Period, the Company
recorded all costs incurred as a result of the Chapter 11 filing (mainly legal
and professional fees) as reorganization items.28Table of ContentsThird Quarter 2003 compared to Third Quarter 2002 Reorganization items
were $3.4 million for the Third Quarter 2002 (nil for the Third quarter 2003
since all entities emerged from Chapter 11 prior to the Third quarter 2003).2003 Period compared to 2002 Period Reorganization items were $2.0 million
for the 2003 Period compared to $11.2 million for the 2002 Period.Minority interestsMinority interests relate to the minority share of income or loss of
certain joint venture partnerships and are related to the operating results of
the respective hotels.Third Quarter 2003 compared to Third Quarter 2002 The portion of losses
attributable to the minority partners was $99,000 and $1.3 million for the
Third Quarter 2003 and the Third Quarter 2002, respectively.2003 Period compared to 2002 Period The portion of income attributable to the
minority partners was $118,000 for the 2003 Period and the portion of losses
attributable to the minority partners for the 2002 Period was $17,000.Discontinued OperationsAs discussed above, reported in Discontinued Operations for the three and
nine months ended September 30, 2003, are 18 hotels, 3 land parcels and one
office building and reported in Discontinued Operations for the three and nine
months ended September 30, 2002, are 27 hotels along with 3 land parcels and
one office building. The reduction in the hotels reported in this category,
from 27 to 18, is a result of the return of eight hotels to the lender and one
hotel to the lessor of a capital lease in January 2003. The loss from
Discontinued Operations for the Third Quarter 2003 was $0.6 million and the
loss for the Third Quarter 2002 was $1.6 million. For the 2003 Period and 2002
Period, the loss was $7.4 million and $6.8 million, respectively. The
Condensed Combined Statement of Operations for the properties classified in
Discontinued Operations is presented below along with a discussion of the
changes between the periods.Three months ended

    
    Nine months endedSeptember 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002(Unaudited in thousands)Successor
    

    Predecessor
    
    Successor
    

    PredecessorRevenues:Rooms
    
    
    
    
    
    $
    14,012
    
    

    $
    17,923
    
    
    $
    35,170
    
    

    $
    49,216Food and beverage
    
    
    
    
    
    
    2,789
    
    

    
    4,144
    
    
    
    8,094
    
    

    
    12,500Other
    
    
    
    
    
    
    519
    
    

    
    777
    
    
    
    1,552
    
    

    
    2,411(1
    )
    
    
    17,320
    
    

    
    22,844
    
    
    
    44,816
    
    

    
    64,127Operating expenses:Direct:Rooms
    
    
    
    
    
    
    3,872
    
    

    
    5,491
    
    
    
    10,388
    
    

    
    15,397Food and beverage
    
    
    
    
    
    
    2,264
    
    

    
    3,447
    
    
    
    6,411
    
    

    
    10,134Other
    
    
    
    
    
    
    379
    
    

    
    570
    
    
    
    1,126
    
    

    
    1,735(2
    )
    
    
    6,515
    
    

    
    9,508
    
    
    
    17,925
    
    

    
    27,26610,805
    
    

    
    13,336
    
    
    
    26,891
    
    

    
    36,861General, administrative and other
    
    
    (3
    )
    
    
    8,165
    
    

    
    10,442
    
    
    
    23,515
    
    

    
    30,547Depreciation and amortization
    
    
    (4
    )
    
    
    274
    
    

    
    3,385
    
    
    
    3,160
    
    

    
    9,819Impairment of long-lived assets
    
    
    (5
    )
    
    
    1,680
    
    

    
    
    
    
    
    5,128
    
    

    
    Other operating expenses
    
    
    
    
    
    
    10,119
    
    

    
    13,827
    
    
    
    31,803
    
    

    
    40,366686
    
    

    
    (491
    )
    
    
    (4,912
    )
    

    
    (3,505
    )Interest expense
    
    
    (6
    )
    
    
    (1,293
    )
    

    
    (121
    )
    
    
    (2,521
    )
    

    
    (370
    )Loss before income taxes and reorganization items
    
    
    
    
    
    
    (607
    )
    

    
    (612
    )
    
    
    (7,433
    )
    

    
    (3,875
    )Reorganization items
    
    
    (7
    )
    
    
    
    
    

    
    (1,025
    )
    
    
    
    
    

    
    (2,970
    )Loss before income taxes
    
    
    
    
    
    
    (607
    )
    

    
    (1,637
    )
    
    
    (7,433
    )
    

    
    (6,845
    )Provision for income taxes
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    

    
    Net loss
    
    
    
    
    
    $
    (607
    )
    

    $
    (1,637
    )
    
    $
    (7,433
    )
    

    $
    (6,845
    )

(1)
    
    The reduction in revenues was due primarily to the return of 8
properties to the lenders and one property to the lessor of a capital
lease in January 2003. Total revenues for these 9 properties were
$6.0 million for the Third Quarter 2002 and $17.5 million for the 2002
Period (revenues for these properties were immaterial during 2003).
The remaining group of 18 properties benefited29Table of Contentsfrom the slight rebound
in the industry in the Third Quarter 2003 and recorded a 3.0% increase
in revenues for the quarter but a 3.9% reduction in revenues for the
2003 Period. This reduction in revenues was due to the same factors
discussed above with respect to revenues from Continuing Operations.(2)
    
    The reduction in direct operating expenses was primarily related
to the reduction in revenues but was also impacted by higher margins
in the rooms and food and beverage departments.(3)
    
    General, administrative and other expenses for the Third Quarter
2003 were $2.3 million lower than the Third Quarter 2002. The
elimination of the 9 properties from the portfolio caused a reduction
of $2.9 million which was offset by higher property level expenses
(franchise fees, utilities, insurance and advertising and promotion
contributed an aggregate $0.5 million to the increase). General,
administrative and other expenses for the 2003 Period were $7.0
million lower than the 2002 Period. The elimination of the 9
properties from the portfolio caused a reduction of $8.5 million which
was offset by higher property level expenses (franchise fees,
utilities, insurance and advertising and promotion contributed an
aggregate $1.2 million to the increase).(4)
    
    Depreciation and amortization for the Third Quarter 2003
decreased $3.1 million compared to the Third Quarter 2002. For the
2003 Period, depreciation and amortization decreased $6.7 million
compared with the 2002 Period. Of these reductions, the elimination of
the 9 properties from the portfolio accounted for $1.1 million and
$2.7 million, respectively. The remaining reductions were due to the
reduction in the carrying values of fixed assets which occurred upon
the implementation of fresh start accounting on November 22, 2002.(5)
    
    The impairment of long-lived assets ($1.7 million and $5.1
million recorded during the Third Quarter 2003 and the 2003 Period,
respectively) was recorded to reduce the carrying values of six
hotels and two land parcels to their estimated selling prices less
estimated costs to sell. In accordance with SFAS No. 144, where the
estimated selling prices exceeded the carrying values, no gains were
recorded.(6)
    
    Interest expense for the Third Quarter 2003 increased $1.2
million compared to the Third Quarter 2002. For the 2003 Period,
interest expense increased by $2.2 million compared with the 2002
Period (refer to the discussion in continuing operations above).(7)
    
    Reorganization expenses were $1.0 million and $3.0 million for
the Third Quarter 2002 and the 2002 Period. For the Third Quarter 2002
and the 2002 Period, the Company recorded all costs incurred as a
result of the Chapter 11 filing (mainly legal and professional fees)
as reorganization items.Earnings before interest, taxes, depreciation and amortization (EBITDA)In accordance with generally accepted accounting principles (GAAP),
property, plant and equipment are depreciated over their estimated useful lives
and deferred loan and franchise fees are amortized over the lives of the
applicable loan and franchise period, respectively. Depreciation and
amortization (which are non-cash items) represent significant expenses for the
Company as a result of the
high proportion of the Companys assets which are represented by
long-lived assets (property, plant and equipment represent approximately 78.3%
of total assets while deferred financing and franchise fees represent
approximately 2.3% of total assets). Management, therefore, believes that
EBITDA provides pertinent information to investors as an additional indicator
of the Companys performance, its capacity to incur and service debt, and its
capacity to fund capital expenditures and expansion. EBITDA is also a widely
regarded industry measure of lodging performance used in the assessment of
hotel property values. EBITDA is a non-GAAP measure and should not be used as
a substitute for measures such as net income (loss), cash flows from operating
activities, or other measures computed in accordance with GAAP.The following table presents EBITDA (a non-GAAP measurement) for the three
months ended September 30, 2003 and 2002 and the nine months ended September
30, 2003 and 2002 and provides a reconciliation with net loss (a GAAP measure).30Table of Contents(Unaudited in thousands)Three months ended
    
    Nine months endedSeptember 30, 2003
    

    September 30, 2002
    
    September 30, 2003
    

    September 30, 2002Successor
    

    Predecessor
    
    Successor
    

    PredecessorContinuing:Loss  continuing operations
    
    $
    (3,039
    )
    

    $
    (2,920
    )
    
    $
    (7,737
    )
    

    $
    (8,679
    )Depreciation and amortization
    
    
    7,707
    
    

    
    12,084
    
    
    
    22,765
    
    

    
    34,633Interest income and other
    
    
    (113
    )
    

    
    (176
    )
    
    
    (321
    )
    

    
    (4,865
    )Interest expense
    
    
    7,692
    
    

    
    8,386
    
    
    
    20,962
    
    

    
    24,214Preferred stock dividends
    
    
    4,027
    
    

    
    
    
    
    
    4,027
    
    

    
    Minority interests
    
    
    (99
    )
    

    
    (1,348
    )
    
    
    118
    
    

    
    (17
    )Provision for income taxes  continuing operations
    
    
    76
    
    

    
    76
    
    
    
    227
    
    

    
    227EBITDA
    
    $
    16,251
    
    

    $
    16,102
    
    
    $
    40,041
    
    

    $
    45,513All (continuing & discontinued):Net loss
    
    $
    (3,646
    )
    

    $
    (4,557
    )
    
    $
    (15,170
    )
    

    $
    (15,524
    )Depreciation, amortization and impairment of long-lived assets
    
    
    9,661
    
    

    
    15,469
    
    
    
    31,053
    
    

    
    44,452Interest income and other
    
    
    (113
    )
    

    
    (176
    )
    
    
    (321
    )
    

    
    (4,865
    )Interest expense
    
    
    6,399
    
    

    
    8,386
    
    
    
    20,962
    
    

    
    24,214Preferred stock dividends
    
    
    4,027
    
    

    
    
    
    
    
    4,027
    
    

    
    Minority interests
    
    
    (99
    )
    

    
    (1,348
    )
    
    
    118
    
    

    
    (17
    )Provision for income taxes  continuing operations
    
    
    76
    
    

    
    76
    
    
    
    227
    
    

    
    227EBITDA
    
    $
    16,305
    
    

    $
    17,850
    
    
    $
    40,896
    
    

    $
    48,487

EBITDA, as presented above, is after the deduction of expenses relating
to the Chapter 11 proceedings (incurred during and after the proceedings). For
the Third Quarter 2003 and 2002, these expenses were, respectively, $0.3
million (reported in general, administrative and other) and $3.4 million
(reported in reorganization items). For the 2003 Period and the 2002 Period,
these expenses approximated $5.6 million and $11.2 million, respectively. Of
the $5.6 million for the 2003 Period, $2.0 million was incurred during the
Chapter 11 proceedings (reported in reorganization items) and $3.6 million was
incurred after the Chapter 11 proceedings (included in general, administrative
and other).Liquidity and Capital ResourcesAs more fully discussed above, the Bankruptcy Court confirmed the
Companys Joint Plan of Reorganization on November 5, 2002 and on November 25,
2002, the Company and entities owning 78 hotels officially emerged from Chapter
11.Pursuant to the terms of the Joint Plan of Reorganization, eight
wholly-owned hotels were returned to the lender in January 2003 in satisfaction
of outstanding debt obligations and one wholly-owned
hotel was returned to the lessor of a capital lease. As a result of the
surrender of these nine hotels, long-term debt approximating $15.9 million was
extinguished. The results of operations for these nine hotels have been
included in Discontinued Operations in the Condensed Consolidated Statements
of Operations.Eighteen hotels, previously owned by two subsidiaries (Impac Hotels II,
L.L.C. and Impac Hotels III, L.L.C.), were not part of the Joint Plan of
Reorganization. On April 24, 2003, the Bankruptcy Court confirmed the Impac
Plan of Reorganization which related to these eighteen hotels. These eighteen
hotels remained in Chapter 11 until May 22, 2003, the date on which the
Company, through eighteen newly-formed subsidiaries (one for each hotel),
finalized an $80 million financing with Lehman Brothers Holdings, Inc. (the
Lehman Financing). The Lehman Financing was primarily used to settle the
remaining amount due to the secured lender of these hotels. The Impac Plan of
Reorganization also provided for a pool of funds (approximately $0.3 million)
to be paid to the general unsecured creditors of the eighteen hotels.Debt, contractual obligations and licenses:Set forth below, by debt pool, is a summary of the Companys long-term
debt along with the applicable interest rates and the related carrying values
of the property, plant and equipment which collateralize the long-term debt.31Table of ContentsSeptember 30, 2003Number
    
    Property, plant
    
    Long-term
    
    Interestof Hotels
    
    and equipment, net
    
    obligations
    
    RatesExit financing:Merrill Lynch Mortgage Lending, Inc.  Senior
    
    
    
    
    
    
    
    
    
    $
    216,684
    
    
    LIBOR plus 2.36%Merrill Lynch Mortgage Lending, Inc.  Mezzanine
    
    
    
    
    
    
    
    
    
    
    83,524
    
    
    LIBOR plus 8.2546%(through
November 30, 2003)Merrill Lynch Mortgage Lending, Inc.  Total
    
    
    56
    
    
    
    411,215
    
    
    
    300,208Computer Share Trust Company of Canada
    
    
    1
    
    
    
    13,617
    
    
    
    7,245
    
    
    7.88%Lehman financing:Lehman
Brothers Holdings, Inc.  May 22, 2003
    
    
    18
    
    
    
    74,808
    
    
    
    79,746
    
    
    Higher of LIBOR plus 5.25% or 7.25%Working capital loan:OCM Real Estate Opportunities Fund II  Revolver
    
    
    
    
    
    
    4,320
    
    
    
    2,000
    
    
    10.00%Other financing:Column Financial, Inc.  January 1, 1995
    
    
    9
    
    
    
    62,132
    
    
    
    27,824
    
    
    10.59%Lehman
Brothers Holdings, Inc.  June 30, 1997
    
    
    5
    
    
    
    38,504
    
    
    
    23,517
    
    
    $16,576 at 9.40%; $6,941 at 8.90%JP Morgan Chase Bank
    
    
    2
    
    
    
    9,174
    
    
    
    10,771
    
    
    7.25%DDL Kinser
    
    
    1
    
    
    
    3,228
    
    
    
    2,408
    
    
    8.25%First Union Bank
    
    
    1
    
    
    
    4,343
    
    
    
    3,371
    
    
    9.38%Column Financial, Inc.  June 6, 1995
    
    
    1
    
    
    
    5,577
    
    
    
    9,037
    
    
    9.45%Column Financial, Inc.  January 1, 1995
    
    
    1
    
    
    
    6,186
    
    
    
    3,238
    
    
    10.74%Robb Evans, Trustee
    
    
    1
    
    
    
    11,433
    
    
    
    7,105
    
    
    Prime plus 0.25%21
    
    
    
    140,577
    
    
    
    87,27196
    
    
    
    644,537
    
    
    
    476,470
    
    
    6.33%Long-term debt  other:Deferred credits
    
    
    
    
    
    
    
    
    
    
    5,481Deferred rent on a long-term ground lease
    
    
    
    
    
    
    
    
    
    
    2,465Unsecured notes
    
    
    
    
    
    
    
    
    
    
    770Other
    
    
    
    
    
    
    
    
    
    
    214
    
    
    
    
    
    
    
    8,930Property, plant and equipment  other
    
    
    
    
    
    
    5,887
    
    
    
    96
    
    
    
    650,424
    
    
    
    485,400Held for sale
    
    
    (18
    )
    
    
    (70,532
    )
    
    
    (55,284
    )78
    
    
    $
    579,892
    
    
    $
    430,116

Substantially all of the Companys property and equipment are pledged as
collateral for long-term obligations. Certain of the mortgage notes are
subject to a prepayment penalty if repaid prior to their maturity.The table below provides an indication of the effect that these
obligations will have on short-term and long-term liquidity:Long-term
    
    Maturities (1)obligationsSeptember 30, 2003
    
    Year 1
    
    Year 2
    
    Year 3
    
    Year 4
    
    Year 5
    
    ThereafterExit financing:Merrill Lynch Mortgage Lending, Inc.  Senior
    
    $
    216,684
    
    
    $
    3,068
    
    
    $
    213,616
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Merrill Lynch Mortgage Lending, Inc.  Mezzanine
    
    
    83,524
    
    
    
    1,182
    
    
    
    82,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Merrill Lynch Mortgage Lending, Inc.  Total
    
    
    300,208
    
    
    
    4,250
    
    
    
    295,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Computer Share Trust Company of Canada
    
    
    7,245
    
    
    
    208
    
    
    
    227
    
    
    
    245
    
    
    
    265
    
    
    
    6,300
    
    
    
    Lehman financing:Lehman
Brothers Holdings, Inc.  May 22, 2003
    
    
    79,746
    
    
    
    1,104
    
    
    
    78,642
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Working capital loan:OCM Real Estate Opportunities Fund II  Revolver
    
    
    2,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other financing:Column Financial, Inc.  January 1, 1995
    
    
    27,824
    
    
    
    2,184
    
    
    
    2,426
    
    
    
    2,696
    
    
    
    2,996
    
    
    
    3,329
    
    
    
    14,193Lehman
Brothers Holdings, Inc.  June 30, 1997
    
    
    23,517
    
    
    
    468
    
    
    
    513
    
    
    
    562
    
    
    
    21,974JP Morgan Chase Bank
    
    
    10,771
    
    
    
    520
    
    
    
    560
    
    
    
    603
    
    
    
    652
    
    
    
    705
    
    
    
    7,731DDL Kinser
    
    
    2,408
    
    
    
    96
    
    
    
    2,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    First Union Bank
    
    
    3,371
    
    
    
    48
    
    
    
    53
    
    
    
    59
    
    
    
    3,211
    
    
    
    
    
    
    
    Column Financial, Inc.  June 6, 1995
    
    
    9,037
    
    
    
    389
    
    
    
    427
    
    
    
    469
    
    
    
    516
    
    
    
    566
    
    
    
    6,670Column Financial, Inc.  January 1, 1995
    
    
    3,238
    
    
    
    133
    
    
    
    149
    
    
    
    165
    
    
    
    184
    
    
    
    205
    
    
    
    2,402Robb Evans, Trustee
    
    
    7,105
    
    
    
    7,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,271
    
    
    
    10,943
    
    
    
    6,440
    
    
    
    4,554
    
    
    
    29,533
    
    
    
    4,805
    
    
    
    30,996476,470
    
    
    
    18,505
    
    
    
    381,267
    
    
    
    4,799
    
    
    
    29,798
    
    
    
    11,105
    
    
    
    30,996Long-term debt  other
    
    
    8,930
    
    
    
    392
    
    
    
    4,729
    
    
    
    302
    
    
    
    261
    
    
    
    227
    
    
    
    3,019485,400
    
    
    
    18,897
    
    
    
    385,996
    
    
    
    5,101
    
    
    
    30,059
    
    
    
    11,332
    
    
    
    34,015Held for sale
    
    
    (55,284
    )
    
    
    (774
    )
    
    
    (54,510
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    430,116
    
    
    $
    18,123
    
    
    $
    331,486
    
    
    $
    5,101
    
    
    $
    30,059
    
    
    $
    11,332
    
    
    $
    34,015(2
    )

(1)
    
    Years 1 to 5 are for periods commencing on October 1 and ending on September 30.(2)
    
    As more fully discussed below this table, optional extensions are available on 97%
of the debt due in year 2.32Table of ContentsExit financing:On emergence from Chapter 11 on November 25, 2002, the Company received
exit financing of $309.0 million comprised of three separate components as
follows:
    
    Senior debt of $224.0 million from Merrill Lynch
Mortgage Lending, Inc. (Merrill), accruing interest at the
rate of LIBOR plus 2.2442%, secured by, among other things,
first mortgage liens on the fee simple or leasehold interests in
55 of the Companys hotels;
    
    Mezzanine debt of $78.7 million from Merrill,
accruing interest at the rate of LIBOR plus 9.00%, secured by
the equity interest in the subsidiaries of 56 hotels (the 55
which secure the Senior Debt and one additional hotel); and
    
    Debt provided through Computershare Trust Company of
Canada, a Canadian lender, of $10.0 million Canadian dollars
(equated to approximately $6.3 million U.S. dollars at
inception) maturing in December 2007, accruing interest at the
rate of 7.879% secured by a mortgage on the Windsor property.In March 2003, as permitted by the terms of the Senior and Mezzanine debt
agreements, Merrill exercised the right to resize the Senior and Mezzanine
debt amounts, prior to the securitization of the mortgage loan. As a result,
the principal amount of the Senior Debt was decreased from $223.5 million
(initially $224.0 less $0.5 million of principal payments) to $218.1 million,
and the initial principal amount of the Mezzanine Debt was increased from $78.7
million to $84.1 million. Though the blended interest rate on the Merrill debt
remained at LIBOR plus 4% at the date of the resizing, the interest rate on the
Senior debt was modified to LIBOR plus 2.36% and the interest rate on the
Mezzanine debt was modified to LIBOR plus 8.2546%. The interest rate on the
Mezzanine debt will, however, increase to 8.7937% after November 30, 2003.The Senior and Mezzanine debt mature in November 2004. There are,
however, three one-year options to renew which could extend the facility for an
additional three years. The first option to extend the maturity date of the
Senior and Mezzanine debt by up to one year (i.e. to November 2005) is
available as long as no events of default occur in respect of the payment of
principal, interest and other required payments. The second and third
extension terms are available only if no events of default (as defined by the
agreement) exist and are subject to minimum Debt Service Coverage Ratio and
Debt Yield requirements (as defined). Payments of principal and interest on
all three portions of the facility are due monthly; however, the principal
payments on the Senior and Mezzanine debt may be deferred during the first
twelve months of the agreement.The Senior and Mezzanine debt agreements provide that when either the Debt
Yield (as defined) for the trailing 12-month period is below 12.75% during the
first year of the loan ending November 2003 (13.25% and 13.5% during the second
and third years, respectively) or the Debt Service Coverage Ratio (as defined)
is below 1.20, excess cash flows (after payment of operating expenses,
management fees, required reserves, principal and interest) produced by the 56
properties must be deposited in a special deposit account. These funds cannot
be transferred to the parent company, but can be used for capital expenditures
on these properties with lenders approval, or for principal and interest
payments. Funds placed into the special deposit account are released to the
borrowers when the Debt Yield and the Debt Service Coverage Ratio are sustained
above the minimum requirements for three consecutive months. At March 31,
2003, the Debt Yield for the 56 properties fell below the 12.75% threshold and,
therefore, the excess cash produced by the 56 properties was retained in the
special deposit account. As of September 30, 2003, $0.3 million was being
retained in the special deposit account (subsequently utilized for capital
expenditure). As of September 30, 2003, the Debt Yield remained below the
minimum requirements.Lehman financing:As previously discussed, on May 22, 2003, the Company completed an $80
million financing underwritten by Lehman Brothers Holdings, Inc. which was
primarily utilized to settle debts secured by the eighteen hotels previously
owned by Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C. (both Lodgian
subsidiaries). The Lehman Financing, provided to eighteen newly-formed
subsidiaries (one for each hotel), is a two-year term loan with an optional
one-year extension and bears interest at the higher of 7.25% or LIBOR plus
5.25%. The one-year extension is only available if, at the time of electing to
extend and at the initial maturity date, there are no events of default. If
the Company opts for the one-year extension, an extension fee of $3.0 million
is payable. Pursuant to the terms of the agreement, additional interest of
$4.4 million is also payable prior to the maturity date (May 22, 2005 or the
new maturity date, if the Company33Table of Contentsopts for the extension). If, however, the
Company makes one or more prepayments totaling at least $20 million in
aggregate on or before March 1, 2004, the additional interest payable will be
reduced to $3.6 million. Payments of principal and interest on the Lehman
Facility are due monthly. If an event of default occurs, default interest,
which equates to an additional 3.25%, is payable for the period of the default.Working capital/related party loan:On September 18, 2003, the Company drew down the full availability of $2.0
million under the revolver issued by OCM Real Estate Opportunities Fund II,
L.P. (the OCM Fund). The loan is secured by two land parcels located in
California and New Jersey, bears interest at the rate of 10% per annum and
matures on May 1, 2004.Oaktree Capital Management, LLC (Oaktree) is the beneficial owner of
1,664,752 shares of the Companys common stock including 1,578,611 shares owned
by the OCM Fund. Oaktree is the general
partner of the OCM Fund; accordingly, Oaktree may be deemed to
beneficially own the shares owned by the OCM Fund.Russel S. Bernard, a Principal of Oaktree, and Sean F. Armstrong, a
Managing Director of Oaktree, are also directors of Lodgian.Other financing:On November 25, 2002, the effective date of the Joint Plan of
Reorganization, loans approximating $83.5 million, secured by 20 hotel
properties, were substantially reinstated on their original terms, except for
the extension of certain maturities. The terms of one loan, in the amount of
$2.5 million and secured by one hotel, were amended to provide for a new
interest rate as well as a new maturity date.The Company through its wholly owned subsidiaries owes approximately $10.9
million under Industrial Revenue Bonds (IRBs) issued on the Holiday Inn
Lawrence, Kansas and Holiday Inn Manhattan, Kansas properties. The IRBs
require a minimum debt service coverage ratio (DSCR) (as defined), calculated
as of the end of each calendar year. For the year ended December 31, 2002, the
cash flows of the two properties were insufficient to meet the minimum DSCR
requirements due in part to renovations that were being performed at the
properties during 2002. The trustee of the IRBs may give notice of default,
at which time the Company could remedy the default by depositing with the
trustee an amount currently estimated at less than $1 million. In the event a
default is declared and not cured, the properties could be subject to
foreclosure and the Company would be obligated pursuant to a partial guaranty
of not more than $1.0 million. Total revenues for these two hotels
approximated $2.1 million and $1.8 million for the three months ended September
30, 2003 and 2002, respectively, and $6.0 million and $5.3 million for the nine
months ended September 30, 2003 and 2002, respectively.On September 30, 2003, first mortgage debt of approximately $7.1 million
of Macon Hotel Associates, L.L.C. (MHA) became due. The Company owns 60% of
MHA, and MHAs sole asset is the Crowne Plaza Hotel in Macon, Georgia. The
lender has agreed to extend the term of the debt to December 31, 2003, while
the Company explores alternative financing opportunities. However, there can
be no assurance that the Company will complete a refinancing on or before the
due date or that the lender will grant further extensions. If the Company is
not able to refinance the debt and the lender does not grant further
extensions, the property could be subject to foreclosure. Total revenues for
the Crowne Plaza Hotel in Macon, Georgia were approximately $1.4 million and
$1.3 million for the three months ended September 30, 2003 and 2002,
respectively, and $4.3 million and $4.5 million for the nine months ended
September 30, 2003 and 2002, respectively. The debt of approximately $7.1
million is included in the current portion of long-term debt in the Condensed
Consolidated Balance Sheet, included elsewhere in this Form 10-Q.12.25% Cumulative preferred shares subject to mandatory redemptionOn July 1, 2003, pursuant to the provisions of SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, the Company reclassified its Mandatorily Redeemable 12.25% Cumulative
Preferred Stock (Preferred Stock) to the liability section of its Condensed
Consolidated Balance Sheet and began presenting the related dividends in
interest expense ($4.0 million for the three months ended September 30, 2003).
Prior to the adoption of SFAS No. 150, the Company had presented the Preferred
Stock between liabilities and equity in its Consolidated Balance Sheet
(mezzanine section) and had reported the Preferred Stock dividend as a
deduction from retained earnings. In accordance with SFAS No. 150, the prior
periods have not been restated.34Table of ContentsThe preferred stock consists of 5,000,000 shares with a par value of $0.01
(issued at $25.00 per share). The new preferred stock accumulates dividends at
the rate of 12.25%, is cumulative and is compounded annually. The first
dividend is payable on November 21, 2003 and is payable via the issuance of
additional shares of preferred stock (fractional shares will be paid in cash).
The number of shares to be issued, as dividends, on November 21, 2003
approximates 612,500 shares less the fractional shares (which will be paid in
cash). Changes in the fair value of Lodgians common stock would not affect
the settlement amounts. The board of directors will determine whether the
dividends due November 21, 2004 and 2005 will be paid in cash or in kind via
the issuance of additional shares of preferred stock. The preferred stock is
subject to redemption at any time, at the Companys option (including a premium
during the first five years) and to mandatory redemption on November 21, 2012.
If the preferred stock is redeemed during the first five years, the initial
premium payable is 5%. This premium is reduced by 1% each succeeding year
through 2007. This premium percentage would be applied against the preferred
stock
plus any dividends accrued but not paid. If the Company were to redeem
the preferred stock on September 30, 2003, the amount payable would be $145.0
million (including the premium payable).Letters of credit:As of September 30, 2003, the Company had issued three irrevocable letters
of credit totaling $4.9 million as guarantees to Zurich American Insurance
Company, Donlen Fleet Management Services and U.S. Food Services. The Zurich
letter of credit has since been reduced by $0.8 million and the U.S Food
Services letter of credit has since been cancelled. As of November 11, 2003,
the remaining two letters of credit totaled $3.6 million. These letters of
credit will expire in November 2004 but may require renewal beyond that date.
All letters of credit are backed by the Companys cash (classified as
restricted cash in the Condensed Consolidated Balance Sheet, included elsewhere
in this Form 10-Q).Self-insurance:The Company is self insured up to certain limits (deductibles) with
respect to employee medical, employee dental, property insurance, general
liability insurance, personal injury claims, workers compensation and auto
liability. The Company establishes liabilities for these self-insured
obligations annually, based on actuarial valuations and the Companys history
of claims. Should unanticipated events cause these claims to escalate beyond
normal expectations, the Companys financial condition and results of
operations could be adversely affected. As of September 30, 2003, the Company
had approximately $9.6 million accrued for such liabilities.Licenses:The Companys franchise, occupancy and liquor licenses are material to its
business operations.Franchise licenses  The Company is subject to certain property
maintenance and quality standard compliance requirements under its franchise
agreements. The Company periodically receives notifications from its
franchisors of events of non-compliance with such agreements. In the past,
management has cured most cases of non-compliance within the applicable cure
periods and the events of non-compliance did not result in events of default
under the respective loan agreements. However, in selected situations and based
on economic evaluations, management may elect to not comply with the franchisor
requirements. In such situations, the Company will either select an alternative
franchisor or operate the property independent of any franchisor. Franchise
licenses are generally granted for periods of between 10 to 20 years and are
renewable at the expiration dates, subject to the achievement of certain
quality and guest satisfaction standards. As of November 11, 2003, the Company
had received termination notices from franchisors with respect to two
properties (this does not include two hotels for which the Company has met all
of the requirements to cure but has not received the cure letter from the
franchisor). Though not in default, the Company was not in strict compliance
with the terms of four other franchise agreements. In addition, default notices
were received from a franchisor with respect to five hotels. For the default
to be rescinded by the franchisor, these five hotels must continuously achieve
certain minimum quality scores at each inspection (carried out every six
months) over a two-year period. The Company met the requirements for the first
two of these inspections. Notices from the franchisors primarily resulted from
physical conditions being below brand standards. The Company is working with
the franchisors to cure the default conditions and has a capital improvement
program to address the capital improvements required by the franchisors, the
re-branding of several hotels and general renovation projects intended to
ultimately improve the operations of the hotels. Subject to availability of
funds, the Company expects to spend approximately35Table of Contents$74.7 million in aggregate on
all 97 hotels, during the two years ending December 2004. As of September 30,
2003, the Company had deposited approximately $16.1 million in escrow for such
improvements.While it is the Companys belief that it will cure all defaults under the
franchise agreements before the applicable termination dates, there can be no
assurance that it will be able to do so or be able to obtain additional time in
which to cure the defaults. 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 specification of the licensors. In
the event of a franchise termination, management may seek to license the hotel
with another nationally-recognized brand. 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, since the
Company would either select an alternative franchisor or operate the hotel
independent of a franchisor.As part of the Impac Plan of Reorganization, the Company elected to reject
its license agreement relating to its hotel in Cincinnati, Ohio and ceased
operating this hotel as a Holiday Inn on May 23, 2003; the hotel is currently
being operated as an independent hotel. In addition, the Company made the
following franchise changes during 2003:
    
    The previously independent hotel in Pensacola,
Florida was converted to a Holiday Inn Express on April 4, 2003;
    
    The previously independent hotel in Dothan, Alabama
was converted to a Holiday Inn Express on May 23, 2003;
    
    The former Holiday Inn  Dothan in Alabama was
converted to a Quality Inn on May 23, 2003; and
    
    The former independent hotel in Louisville, Kentucky
was converted to a Clarion Hotel on June 2, 2003.Occupancy licenses  these are obtained prior to the opening of a hotel
and may require renewal if there has been a major renovation. The loss of the
occupancy license for an individual hotel could have a material adverse effect
on the Companys financial condition and results of operations if this relates
to one of the larger hotels.Liquor licenses  these licenses are required for the hotels to be able
to serve alcoholic beverages and are generally renewable annually. The loss of
a liquor license for an individual hotel would not have a material adverse
effect on the Companys financial condition and results of operations.Liquidity:Operating activities:Operating activities (continuing operations only) generated $21.8 million
for the 2003 Period compared to $34.3 million for the 2002 Period. This
reduction is related to the elimination of significant current liabilities
including accounts payable as a result of the settlement of liabilities
subsequent to the Companys emergence from Chapter 11.Investing activities:Investing activities (continuing operations) accounted for cash outlay of
approximately $19.4 million for the 2003 Period compared with $18.6 million for
the 2002 Period. Due primarily to large scale renovations performed at the
Companys hotels during 2003, expenditure on capital improvements totaled $26.1
million, $9.5 million higher than the $16.7 million spent in the 2002 Period.
The capital expenditure outlay in the 2003 Period was partially funded by
withdrawals of $7.0 million from lender-controlled capital expenditure escrows,
while in the 2002 Period, these escrow balances were increased by $1.2 million.
Other investing activities consisted primarily of other deposits and payments
of franchise application fees net of refunds ($0.3 million and $0.8 million for
the 2003 Period and the 2002 Period, respectively).Financing activities:Cash flows used in financing activities were $2.6 million for the 2003
Period and $1.6 million for the 2002 Period. Financing activities for the 2003
Period consisted primarily of proceeds of long-term obligations of $80.0
million relating to the Lehman Financing, proceeds from the working capital
revolver ($2.0 million), offset by repayment of long-term obligations of $81.5
million (primarily relating to the debt36Table of Contentsrepayment to the secured lender of the
eighteen hotels which emerged from Chapter 11 on May 22, 2003). The other
financing activities for the 2003 Period also relates to the Lehman Financing.
For the 2002 Period, financing activities consisted of payments of long-term
debt of $1.1 million and payments of deferred loan fees of $0.5 million.Working capital:Lodgian utilizes its cash flows for operating expenses, capital
expenditures and debt service. Currently, the Companys principal sources of
liquidity consist of existing cash balances, the working capital revolver and
cash flow from operations. Cash flow from operations could, however, suffer
from a reduction in demand for lodging as well as large scale renovations being
performed at the Companys hotels. To the extent that significant amounts of
the Companys receivables are due from airline companies, a downturn in the
airline industry could materially impact liquidity. At September 30, 2003,
airline receivables represented approximately 19.0% of receivables, net of
allowances. A downturn in the
airline industry could also affect the demand for travel which could also
impact revenues. The Company has identified 19 hotels for sale (18 as of
September 30, 2003), 3 land parcels and an office building. Though there can
be no assurances and the timing of these sales depends on market conditions,
management plans to dispose of these assets within the next year and expects
that the aggregate sale of these assets will provide additional cash to pay
down the Lehman and Merrill debts and to fund a portion of its capital
expenditures.The Companys ability to make scheduled principal payments, to pay
interest, or to refinance its indebtedness depends on its future performance
and financial results, which, to a certain extent, are subject to general
conditions in or affecting the hotel and vacation industry and to the general
economic, political, financial, competitive, legislative and regulatory
environment. These factors, including the severity and duration of the
macroeconomic downturns, are beyond the Companys control.The Company intends to continue to use its cash for ongoing operations,
debt service and capital expenditures and, therefore, does not anticipate
paying dividends on the new common stock in the near future. As previously
discussed, the dividends on the preferred stock due November 21, 2003 will be
paid via the issuance of additional shares of preferred stock (with fractional
shares being paid in cash). For the Third Quarter 2003 and the 2003 Period,
the Company accrued $4.0 million and $11.6 million, respectively, of the total
preferred stock dividends due November 21, 2003. Also, until the claims
distribution process is complete and the remaining entities exit Chapter 11,
the Company will continue to make payments in respect of cash claims,
bankruptcy court fees and professional fees relating to the distribution of
shares.At September 30, 2003, after classifying assets held for sale as current
assets and liabilities related to the assets held for sale as current
liabilities, the Company had a working capital surplus (current assets less
current liabilities) of $0.8 million compared with a working capital deficit of
$9.1 million at December 31, 2002.Though there was some rebound in the hotel industry during the Third
quarter of 2003, the sluggish economy continues to negatively impact hotel
demand.It is difficult to predict just how long it will take for the industry to
fully rebound. Hotel renovation continues to be a focus both as a means of
increasing the Companys competitive advantage in the market and also to comply
with franchisor requirements. At the same time, management continues to seek
ways to operate the Companys business at the optimum level of costs.There can be no assurance that the Company will have sufficient liquidity
to be able to meet its capital expenditure or other requirements, and the
Company could lose the right to operate certain hotels under nationally
recognized brand names. Furthermore, the termination of one or more franchise
agreements could trigger a default under certain loan agreements as well as
obligations to pay liquidated damages under the franchise agreements.However, management believes that the combination of its current cash
position, cash flows from operations, capital expenditure escrows, funds
available under the working capital revolver and asset sales will be sufficient
to meet its liquidity needs in the short-term. The Companys ability to meet
its long-term obligations and to make payments of preferred dividends in future
years is dependent on the recovery of the economy, improved operating results
and the Companys ability to obtain financing. In the short-term, the37Table of ContentsCompany
continues to monitor its costs and has already reduced certain corporate
overhead including costs for office space (management negotiated reduced costs
for office space at the corporate office, effective July 1, 2003). Any
projections of future financial needs and sources of working capital are,
however, subject to uncertainty. See Results of Operations and
Forward-Looking Statements for further discussion of conditions that could
adversely affect managements estimates of future financial needs and sources
of working capital.Corporate governance and senior executive management changesOn May 23, 2003, David E. Hawthorne, the Companys former President and
Chief Executive Officer, resigned. In accordance with his employment
agreement, Mr. Hawthorne was paid severance of $0.8 million (included in
general, administrative and other in the Condensed Consolidated Statement of
Operations, included elsewhere in this report).Concurrently with Mr. Hawthornes resignation, the board of directors
named W. Thomas Parrington as the Companys Interim President and Chief
Executive Officer. On July 15, 2003, Mr. Parrington was appointed President
and Chief Executive Officer. Mr. Parrington has been involved in the
hospitality industry for over 30 years. He was President and Chief Executive
Officer of Interstate Hotels Company (Interstate) until he retired in
December 1998. Interstate was a publicly traded company until it merged with
Wyndam Hotels in June 1998. During his 17-year tenure with Interstate, Mr.
Parrington also served as Chief Financial Officer and Chief Operating Officer.
Upon leaving Interstate, Mr. Parrington focused on real estate investments
(primarily hotels) and consultancy as well as the management of his personal
investments. The Board of Directors has granted Mr. Parrington incentive stock
options to acquire 100,000 shares of the Companys common stock and 200,000
shares of restricted stock. Both the options and the restricted stock will
vest in three equal portions over 3 years beginning July 15, 2004.Mr. Parrington was appointed to the Lodgian Board of Directors on the
Companys emergence from Chapter 11 on November 25, 2002. While on the Board,
Mr. Parrington served as a member of the executive committee and the
compensation committee, and was the Chairman of the audit committee. Upon his
appointment as Chief Executive Officer, he resigned from the audit and
compensation committees and continues to serve as director and member of the
executive committee.The Board of Directors has named Stephen Grathwohl as the new Chairman of
the audit committee, effective June 5, 2003. Mr. Grathwohl has been a director
since the Companys emergence from Chapter 11 on November 25, 2002. He is a
member of the executive committee of the Board of Directors and has been a
Principal at Burr Street Equities, LLC (a boutique real estate advisory
company) since 1997. Mr. Grathwohl is also director of Shorebank, a commercial
bank chartered by the State of Illinois, headquartered in Chicago, Illinois,
Shorebank Development Corporation, a Chicago real estate development and
management company, and Shorebank Advisory Services, an international financial
research and consulting company.On October 13, 2003, Richard Cartoon, the former Chief Financial Officer,
left the Company to return to his private consulting practice. Concurrently
with Mr. Cartoons resignation, Manuel Artime was named Executive Vice
President and Chief Financial Officer. Mr. Artime previously served as the
Companys Chief Accounting Officer, a position he held since March 1, 2002.
His tenure with the Company commenced on December 27, 2001 as Vice President
and Controller. On his appointment in October 2003, Mr. Artime received
incentive stock options to purchase 21,500 shares of the Companys common
stock, one-third of which vested on the date of the award, one-third of which
will vest on October 13, 2004 and the remaining one-third will vest on October
13, 2005. On September 5, 2003, Mr. Artime was also awarded incentive stock
options to purchase 8,500 shares of the Companys common stock.InflationThe Company cannot determine the precise impact of inflation. However,
the Company believes that the rate of inflation has not had a material effect
on its revenues or expenses in recent years. It is difficult to predict
whether inflation will have a material effect on the Companys results in the
long-term.38Table of ContentsChanges in Accounting StandardsIn November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN
45) which elaborates on the disclosures to be made by a guarantor in its
financial statements. It also requires a guarantor to recognize a liability
for the fair value of the obligation undertaken in issuing the guarantee at the
inception of a guarantee. The disclosure requirements of FIN 45 were effective
for the Company as of December 31, 2002. The recognition provisions of FIN 45
will be applied on a prospective basis to guarantees issued after December 31,
2002. The requirements of FIN 45 did not have a material impact on the
Companys financial position and results of operations.In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 addresses consolidation by a
business of variable interest entities in which it is the primary beneficiary.
FIN 46 is effective immediately for certain disclosure requirements for
variable interest entities created after January 31, 2003. In October 2003,
the FASB deferred the implementation date of FIN 46, for variable interest
entities which existed prior to February 1, 2003, until the first period ending
after December 15, 2003. At September 30, 2003, the Company had no variable
interest entities and therefore FIN 46 is not expected to impact the Companys
financial position and results of operations.On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities which amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
149 requires that contracts with comparable characteristics be accounted for
similarly. In particular, SFAS No. 149 clarifies the circumstances under which
a contract with an initial net investment meets the characteristics of a
derivative as discussed in SFAS No. 133. In addition, SFAS No. 149 clarifies
when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 amends certain other
existing pronouncements, resulting in more consistent reporting of contracts
that are derivatives in their entirety or that contain embedded derivatives
that warrant separate accounting. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company adopted SFAS No. 149 on July 1,
2003. The adoption did not have a material impact on its financial position
and results of operations.On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
which aims to eliminate diversity in practice by requiring that certain types
of freestanding instruments be reported as liabilities by their issuers
including mandatorily redeemable instruments issued in the form of shares which
unconditionally obligate the issuer to redeem the shares for cash or by
transferring other assets. These instruments were previously presented in
various ways, as part of liabilities, as part of equity, or between the
liabilities and equity sections (sometimes referred to as mezzanine
reporting). The provisions of SFAS No. 150, which also include a number of new
disclosure requirements, are effective for instruments entered into or modified
after May 31, 2003. For pre-existing instruments, SFAS No. 150 was effective
as of the beginning of the first interim period which commenced after June 15,
2003 (July 1, 2003 for the Company). As disclosed in Note 9, of the Condensed
Consolidated Financial Statements, included elsewhere in this Form 10-Q (Note
9), the Company adopted SFAS No. 150 in the Third quarter of 2003. The
adoption impacted the treatment of the Companys Mandatorily Redeemable 12.25%
Cumulative Preferred Stock (Preferred Stock), previously presented between
total liabilities and stockholders equity. As a result of the adoption of
SFAS No. 150, the Companys Preferred Stock has been included as part of
long-term debt in the Condensed Consolidated Financial Statements, included
elsewhere in this Form 10-Q, and the Preferred Stock dividends ($4.0 million
for the three months ended September 30, 2003), was included in interest
expense. The preferred stock dividends for the period January 1, 2003 to June
30, 2003 ($7.6 million) continues to be shown as a deduction from retained
earnings. On October 29, 2003, the FASB decided to defer the effective date of
SFAS No. 150 related to non-controlling interests. As a result, until the FASB
establishes further guidance, Lodgian will not have to measure its mandatorily
redeemable minority interests at fair value.Critical Accounting PoliciesThe Companys financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). The accounting policies followed for quarterly39Table of Contentsreporting are the same
as those disclosed in Note 1 of the Notes to Consolidated Financial Statements
included in the Companys Form 10-K for the year ended December 31, 2002. The
preparation of the financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from these estimates. The Company believes the following to be its critical
accounting policies:Capitalization and depreciable lives of assetsCapital improvements are capitalized when they extend the useful lives of
the related asset. Management estimates the depreciable lives of the Companys
fixed assets. All items considered to be
repair and maintenance items are expensed as incurred. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets (buildings and improvements 10-40 years; furnishings and equipment 3-10
years). Property under capital leases is amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
lease term.Revenue recognitionRevenues are recognized when the services are rendered. Revenues are
comprised of rooms, food and beverage and other revenues. Room revenues are
derived from guest room rentals, whereas food and beverage revenues primarily
include sales from hotel restaurants, room service, hotel catering and meeting
room rentals. Other revenues include charges for guests long-distance
telephone service, laundry and parking.Asset impairment evaluationUnder GAAP, real estate assets are stated at the lower of depreciated cost
or fair value, if deemed impaired. As required by GAAP, the Company
periodically evaluates its real estate assets to determine if there has been
any impairment in carrying value and records impairment losses if there are
indicators of impairment and the undiscounted cash flows estimated to be
generated by those assets are less than the assets carrying amounts. In
connection with the Companys emergence from Chapter 11, and the application of
fresh start reporting, the Company recorded a net write-down of $222.1 million.Self insured obligationsThe Company is self insured up to certain limits (deductibles) with
respect to employee medical, employee dental, property insurance, general
liability insurance, personal injury claims, workers compensation and auto
liability. The Company establishes liabilities for these self-insured
obligations annually, based on actuarial valuations and the Companys history
of claims. Should unanticipated events cause these claims to escalate beyond
normal expectations, the Companys financial condition and results of
operations could be adversely affected. As of September 30, 2003, the Company
had approximately $9.6 million accrued for such liabilities.Income taxesThe Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) 109 Accounting for Income Taxes, which requires
the use of the liability method of accounting for deferred income taxes. As a
result of the Companys history of losses, the Company has provided a full
valuation allowance against its deferred tax asset as it is more likely than
not that the deferred tax asset will not be realized.The list of critical accounting policies above is not intended to be a
comprehensive list of all of the Companys accounting policies. In many cases,
the treatment of a particular transaction is specifically determined by
generally accepted accounting principles with no need for managements judgment
in selecting from alternatives which would provide different results.40Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe Company is exposed to interest rate risks on its variable rate debt.
At September 30, 2003 and December 31, 2002, the Company had outstanding
variable rate debt of approximately $387.1 million and $310.2, respectively.In order to manage its exposure to fluctuations in interest rates with the
U.S. portion of the exit financing ($300.2 million and $302.7 million at
September 30, 2003 and December 31, 2002, respectively), the Company entered
into two interest rate cap agreements, which allowed it to obtain exit
financing at floating rates and effectively cap them at LIBOR of 6.4375% plus
the spread (See the Liquidity and Capital Resources section). When LIBOR
exceeds 6.4375%, the contracts require settlement of net interest receivable at
specified intervals, which generally coincide with the dates on which interest
is payable on the
underlying debt. When LIBOR is below 6.4375%, there is no settlement from
the interest rate caps. The Company is exposed to interest rate risks on the
exit financing debt for increases in LIBOR up to 6.4375%. The one-month LIBOR
as of September 30, 2003 was 1.12%. The notional principal amount of the
interest rate caps outstanding was $302.2 million and $302.8 million at
September 30, 2003 and at December 31, 2002, respectively.On May 22, 2003, the Company finalized an $80 million financing with
Lehman Brothers Holdings, Inc. (the Lehman Financing). The Lehman Financing
is a two-year term loan with an optional one-year extension and bears interest
at the higher of 7.25% or LIBOR plus 5.25%. In order to manage its exposure to
fluctuations in interest rates with the Lehman Financing, the Company entered
into an interest rate cap agreement, which allowed it to obtain this financing
at a partial floating rate and effectively caps the interest rate at LIBOR of
5.00% plus 5.25%. When LIBOR exceeds 5%, the contracts require settlement of
net interest receivable at specified intervals, which generally coincide with
the dates on which interest is payable on the underlying debt. When LIBOR is
below 5.00%, there is no settlement from the interest rate cap. The Company is
exposed to interest rate risks on the Lehman Financing for LIBOR of between 2%
and 5%. The notional principal amount of the interest rate cap outstanding was
$78.7 million at September 30, 2003.With respect to the fair market value of the three interest rate caps,
(the two related to the exit financing and the one related to the Lehman
Financing), the Company believes that its interest rate risk at September 30,
2003 and December 31, 2002 was minimal. The impact on annual results of
operations of a hypothetical one-point interest rate reduction on the interest
rate caps as of September 30, 2003 would be a reduction in net income of
approximately $26,500. These derivative financial instruments are viewed as
risk management tools and are entered into for hedging purposes only. The
Company does not use derivative financial instruments for trading or
speculative purposes. However, the Company has not elected the hedging
requirements of SFAS No. 133.The fair value of the three interest rate caps as of September 30, 2003
and the two interest rate caps at December 31, 2002 were approximately $28,300
and $0.1 million, respectively. The fair values of the interest rate caps were
recognized on the balance sheet in other assets. Adjustments to the carrying
values of the interest rate caps are reflected in interest expense.The nature of Lodgians fixed rate obligations does not expose the Company
to fluctuations in interest payments. The impact on the fair value of
Lodgians fixed rate obligations of a hypothetical one-point interest rate
increase on the outstanding fixed-rate debt as of September 30, 2003 and
December 31, 2002 would be approximately $2.6 million and $3.1 million,
respectively.
ITEM 4. CONTROLS AND PROCEDURESa)
    
    Based on an evaluation of the Companys disclosure controls
and procedures carried out as of September 30, 2003, the Companys
Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures were effective
since they would cause material information required to be disclosed
by the Company in the reports it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed,
summarized and reported within the time periods specified in the
Commissions rules and forms.41Table of Contentsb)
    
    During the quarter ended September 30, 2003, there were no
changes in the Companys internal controls over financial reporting
which materially affected, or are likely to materially affect, the
Companys internal control over financial reporting.42Table of Contents
PART II  OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGSAs previously indicated in the Companys Form 10-K for the year ended
December 31, 2002, the Company and substantially all of its subsidiaries which
owned hotel properties filed for voluntary reorganization under Chapter 11 of
the Bankruptcy Code on December 20, 2001 in the Southern District of New York.
The Bankruptcy Court confirmed the Companys First Amended Joint Plan of
Reorganization (the Joint Plan of Reorganization) on November 5, 2002, and on
November 25, 2002, the Company and entities owning 78 hotels officially emerged
from Chapter 11. Pursuant to the terms of the Joint Plan of Reorganization,
eight wholly-owned hotels were returned to the lender in January 2003 in
satisfaction of outstanding debt obligations and one wholly-owned hotel was
returned to the lessor of a capital lease.Of the Companys 97 hotel portfolio, eighteen hotels, previously owned by
two subsidiaries (Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C.), were
not part of the Joint Plan of Reorganization. On April 24, 2003, the
Bankruptcy Court confirmed the plan of reorganization relating to these
eighteen hotels (the Impac Plan of Reorganization). These eighteen hotels
remained in Chapter 11 until May 22, 2003, the date on which the Company,
through eighteen newly-formed subsidiaries (one for each hotel), finalized an
$80 million financing with Lehman Brothers Holdings, Inc. (the Lehman
Financing). The Lehman Financing was used, primarily, to settle the remaining
amount due to the secured lender of these hotels. The Impac Plan of
Reorganization also provided for a pool of funds of approximately $0.3 million
to be paid to the general unsecured creditors of the eighteen hotels.The Company was a party in litigation with Hospitality Restoration and
Builders, Inc. (HRB), a general contractor hired to perform work on six of
the Companys hotels. The litigation involved hotels in Texas (filed in the
District Court of Harris County in October 1999), Illinois (in the United
States District Court, Northern District of Illinois, Eastern Division in
February 2000) and New York (filed in the Supreme Court, New York County in
July 1999). In general, HRB claimed that the Company breached contracts to
renovate the hotels by not paying for work performed. The Company contended
that it was over-billed by HRB and that a significant portion of the completed
work was defective. In July 2001, the parties agreed to settle the litigation
pending in Texas and Illinois. In exchange for mutual dismissals and full
releases, the Company paid HRB $750,000. With respect to the matter pending in
the state of New York, HRB claimed that it was owed $10.7 million. The Company
asserted a counterclaim of $7 million. In February 2003, the Company and HRB
agreed to settle the litigation pending in the state of New York. In exchange
for mutual dismissals and full releases, the Company paid HRB $625,000. The
Company provided fully for this liability in its Consolidated Financial
Statements for the year ended December 31, 2002.The Company is party to other legal proceedings arising in the ordinary
course of business, the impact of which would not, either individually or in
the aggregate, in managements opinion, have a material adverse effect on its
financial position or results of operations. Certain of these claims are
limited to the amounts available under the Companys disputed claims reserve.
ITEM 2. CHANGES IN SECURITIESThe Company intends to use its cash for ongoing operations, debt service
and capital expenditures and does not anticipate paying dividends on the new
common stock in the near future. The dividends on the preferred stock due
November 21, 2003 will be paid via the issuance of additional shares of
preferred stock (fractional shares will be paid in cash). The number of shares
to be issued on November 21, 2003 approximates 612,500 less the fractional
shares (which will be paid in cash).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K(a)
    
    ExhibitsA list of the exhibits required to be filed as part of this Report on Form
10-Q, is set forth in the Exhibit Index which immediately precedes such
exhibits, and is incorporated herein by reference.43Table of Contents(b)
    
    Reports on Form 8-KNo Form 8-Ks were filed during the quarter ended September 30, 2003.44Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.LODGIAN,
INC.Date: November 14, 2003
    
    By:
    
    /s/ W. THOMAS PARRINGTON
W. THOMAS PARRINGTON
President and Chief Executive OfficerDate: November 14, 2003
    
    By:
    
    /s/ MANUEL ARTIME
MANUEL ARTIME
Executive Vice President and Chief Financial Officer

45Table of ContentsINDEX TO EXHIBITSEXHIBITNO.
    
    
    
    DESCRIPTION31.1
    
    
    
    Sarbanes-Oxley Section 302 certification by the CEO31.2
    
    
    
    Sarbanes-Oxley Section 302 certification by the CFO32
    
    
    
    Sarbanes-Oxley Section 906 certification by the CEO and CFO
46