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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Period ended June 30, 2004 OR  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3445 Peachtree Road, N.E., Suite 700,Atlanta, GA
    
    30326(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
(404) 364-9400 (Former name, former address and former fiscal year, if changed since last report):Not applicable Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ 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 þ 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 þ 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 August 9, 2004Common
    
    24,543,505




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LODGIAN, INC. AND SUBSIDIARIES INDEX PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:
    
    
    2Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 (unaudited)
    
    
    2Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2004 and June 30, 2003 and for the Six Months Ended June 30, 2004 and June 30, 2003 (unaudited)
    
    
    3Condensed
Consolidated Statement of Stockholders Equity for the Six Months Ended June 30, 2004 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and June 30, 2003 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    34Item 2.
    
    Changes in Securities
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    35Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    36Signatures
    
    
    
    
    37
 1




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PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2004
    
    December 31, 2003(Unaudited in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    170,198
    
    
    $
    10,897Cash, restricted
    
    
    9,612
    
    
    
    7,084Accounts receivable (net of allowances: 2004 - $737; 2003 - $689)
    
    
    11,104
    
    
    
    8,169Inventories
    
    
    5,951
    
    
    
    5,609Prepaid expenses and other current assets
    
    
    19,879
    
    
    
    17,068Assets held for sale
    
    
    39,636
    
    
    
    68,567Total current assets
    
    
    256,380
    
    
    
    117,394Property and equipment, net
    
    
    561,744
    
    
    
    563,818Deposits for capital expenditures
    
    
    36,234
    
    
    
    15,782Other assets, net
    
    
    7,689
    
    
    
    12,180$
    862,047
    
    
    $
    709,174LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,250
    
    
    $
    7,131Other accrued liabilities
    
    
    32,420
    
    
    
    31,432Advance deposits
    
    
    2,634
    
    
    
    1,882Current portion of long-term debt
    
    
    14,403
    
    
    
    16,56312.25% Cumulative preferred shares subject to mandatory redemption
    
    
    110,893
    
    
    
    Liabilities related to assets held for sale
    
    
    37,335
    
    
    
    57,948Total current liabilities
    
    
    206,935
    
    
    
    114,956Long-term debt:12.25% Cumulative preferred shares subject to mandatory redemption
    
    
    
    
    
    
    142,177Long-term debt  other
    
    
    408,921
    
    
    
    409,115Total long-term debt
    
    
    408,921
    
    
    
    551,292Total liabilities
    
    
    615,856
    
    
    
    666,248Minority interests
    
    
    2,538
    
    
    
    2,320Commitments and contingenciesStockholders equity:Common stock, $.01 par value, 60,000,000 shares authorized;
24,559,690 and 2,333,591 issued and outstanding at June 30, 2004
and December 31, 2003, respectively
    
    
    246
    
    
    
    23Additional paid-in capital
    
    
    307,211
    
    
    
    89,874Unearned stock compensation
    
    
    (408
    )
    
    
    (508
    )Accumulated deficit
    
    
    (64,440
    )
    
    
    (50,107
    )Accumulated other comprehensive income
    
    
    1,044
    
    
    
    1,324Total stockholders equity
    
    
    243,653
    
    
    
    40,606$
    862,047
    
    
    $
    709,174
 See notes to condensed consolidated financial statements.




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LODGIAN, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Unaudited in thousands, except
    
    (Unaudited in thousands, exceptper share data)
    
    per share data)Revenues:Rooms
    
    $
    64,325
    
    
    $
    61,010
    
    
    $
    121,888
    
    
    $
    114,924Food and beverage
    
    
    19,436
    
    
    
    18,977
    
    
    
    35,924
    
    
    
    35,584Other
    
    
    2,816
    
    
    
    2,838
    
    
    
    5,570
    
    
    
    5,69686,577
    
    
    
    82,825
    
    
    
    163,382
    
    
    
    156,204Operating expenses:Direct:Rooms
    
    
    16,960
    
    
    
    16,730
    
    
    
    32,978
    
    
    
    32,093Food and beverage
    
    
    12,713
    
    
    
    12,365
    
    
    
    24,247
    
    
    
    24,099Other
    
    
    2,077
    
    
    
    1,842
    
    
    
    4,049
    
    
    
    3,78031,750
    
    
    
    30,937
    
    
    
    61,274
    
    
    
    59,97254,827
    
    
    
    51,888
    
    
    
    102,108
    
    
    
    96,232Other operating expenses:Other hotel operating costs
    
    
    23,822
    
    
    
    22,797
    
    
    
    47,894
    
    
    
    45,272Property and other taxes, insurance and leases
    
    
    5,376
    
    
    
    6,923
    
    
    
    11,127
    
    
    
    13,584Corporate and other
    
    
    4,782
    
    
    
    6,075
    
    
    
    9,195
    
    
    
    12,045Depreciation and amortization
    
    
    6,870
    
    
    
    7,573
    
    
    
    13,675
    
    
    
    14,995Impairment of long-lived assets
    
    
    
    
    
    
    1,378
    
    
    
    
    
    
    
    1,378Other operating expenses
    
    
    40,850
    
    
    
    44,746
    
    
    
    81,891
    
    
    
    87,27413,977
    
    
    
    7,142
    
    
    
    20,217
    
    
    
    8,958Other income (expenses):Interest income and other
    
    
    66
    
    
    
    124
    
    
    
    109
    
    
    
    207Interest expense and other financing costs:Preferred stock dividend
    
    
    (4,233
    )
    
    
    
    
    
    
    (8,518
    )
    
    
    Other interest expense
    
    
    (19,920
    )
    
    
    (6,919
    )
    
    
    (28,079
    )
    
    
    (13,198
    )Loss on preferred stock redemption
    
    
    (1,592
    )
    
    
    
    
    
    
    (1,592
    )
    
    
    Loss before income taxes, reorganization items and minority interests
    
    
    (11,702
    )
    
    
    347
    
    
    
    (17,863
    )
    
    
    (4,033
    )Reorganization items
    
    
    
    
    
    
    (808
    )
    
    
    
    
    
    
    (2,045
    )Loss before income taxes and minority interest
    
    
    (11,702
    )
    
    
    (461
    )
    
    
    (17,863
    )
    
    
    (6,078
    )Minority interests
    
    
    (71
    )
    
    
    (69
    )
    
    
    (218
    )
    
    
    (217
    )Loss before income taxes  continuing operations
    
    
    (11,773
    )
    
    
    (530
    )
    
    
    (18,081
    )
    
    
    (6,295
    )Provision for income taxes  continuing operations
    
    
    (75
    )
    
    
    (75
    )
    
    
    (151
    )
    
    
    (151
    )Loss  continuing operations
    
    
    (11,848
    )
    
    
    (605
    )
    
    
    (18,232
    )
    
    
    (6,446
    )Discontinued operations:Income (loss) from discontinued operations before income taxes
    
    
    4,601
    
    
    
    (1,836
    )
    
    
    3,899
    
    
    
    (5,079
    )Income tax provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    
    4,601
    
    
    
    (1,836
    )
    
    
    3,899
    
    
    
    (5,079
    )Net loss
    
    
    (7,247
    )
    
    
    (2,441
    )
    
    
    (14,333
    )
    
    
    (11,525
    )Preferred stock dividend
    
    
    
    
    
    
    (3,818
    )
    
    
    
    
    
    
    (7,594
    )Net loss attributable to common stock
    
    $
    (7,247
    )
    
    $
    (6,259
    )
    
    $
    (14,333
    )
    
    $
    (19,119
    )Basic and diluted loss per common share:Net loss attributable to common stock
    
    $
    (2.04
    )
    
    $
    (2.68
    )
    
    $
    (4.87
    )
    
    $
    (8.20
    )
 See notes to condensed consolidated financial statements. 3




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LODGIAN, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY COMMON STOCK
    
    
    
    
    
    
    
    
    
    
    
    
    
    ACCUMULATEDADDITIONAL
    
    UNEARNED
    
    
    
    
    
    OTHER
    
    TOTALPAID-IN
    
    STOCK
    
    ACCUMULATED
    
    COMPREHENSIVE
    
    STOCKHOLDERSSHARES
    
    AMOUNT
    
    CAPITAL
    
    COMPENSATION
    
    DEFICIT
    
    LOSS (net of tax)
    
    EQUITY(In thousands, except share data)Balance December 31, 2003
    
    
    2,333,591
    
    
    $
    23
    
    
    $
    89,874
    
    
    $
    (508
    )
    
    $
    (50,107
    )
    
    $
    1,324
    
    
    $
    40,606Partial shares cancelled on reverse stock split
    
    
    (971
    )
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Issuance of new common shares
    
    
    18,285,714
    
    
    
    183
    
    
    
    175,997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,180Amortization of unearned stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100Exercise of stock options
    
    
    241
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Exchange of preferred shares for common shares
    
    
    3,941,115
    
    
    
    40
    
    
    
    41,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,381Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,333
    )
    
    
    
    
    
    
    (14,333
    )Currency translation
adjustments (related taxes estimated at nil)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (280
    )
    
    
    (280
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,613
    )Balance June 30, 2004
    
    
    24,559,690
    
    
    $
    246
    
    
    $
    307,211
    
    
    $
    (408
    )
    
    $
    (64,440
    )
    
    $
    1,044
    
    
    $
    243,653
 The comprehensive loss for the three months
ended June 30, 2004 was $7.9 million and the comprehensive
loss for the three months ended June 30, 2003 was $1.9 million.
The comprehensive loss for the six months ended June 30, 2003 was $10.6 million. See notes to condensed consolidated financial statements. 4




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LODGIAN, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months endedJune 30, 2004
    
    June 30, 2003(Unaudited in thousands)Operating activities:Net loss
    
    $
    (14,333
    )
    
    $
    (11,525
    )Less:
(Income) loss from discontinued operations
    
    
    (3,899
    )
    
    
    5,079Loss  continuing operations
    
    
    (18,232
    )
    
    
    (6,446
    )Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:Depreciation and amortization
    
    
    13,675
    
    
    
    15,008Impairment of long-lived assets
    
    
    
    
    
    
    1,377Amortization of unearned stock compensation
    
    
    100
    
    
    
    Preferred stock dividends
    
    
    8,518
    
    
    
    Loss on redemption of preferred stock
    
    
    1,592
    
    
    
    Minority interests
    
    
    218
    
    
    
    217Write-off and amortization of deferred financing costs
    
    
    9,099
    
    
    
    1,363Other
    
    
    938
    
    
    
    1,238Changes in operating assets and liabilities:Accounts receivable, net of allowances
    
    
    (2,935
    )
    
    
    (2,512
    )Inventories
    
    
    (342
    )
    
    
    (33
    )Prepaid expenses, other assets and restricted cash
    
    
    (4,877
    )
    
    
    7,794Accounts payable
    
    
    2,305
    
    
    
    (2,223
    )Other accrued liabilities
    
    
    2,913
    
    
    
    2,377Advance deposits
    
    
    752
    
    
    
    795Net cash provided by operating activities from continuing operations
    
    
    13,724
    
    
    
    18,955Net cash used in operating activities from discontinued operations
    
    
    (2,673
    )
    
    
    (5,793
    )Net cash provided by operating activities
    
    
    11,051
    
    
    
    13,162Investing activities:Capital improvements
    
    
    (12,881
    )
    
    
    (19,454
    )Net proceeds from disposition of discontinued operations
    
    
    33,890
    
    
    
    Withdrawals for capital expenditures
    
    
    (20,452
    )
    
    
    6,975Other
    
    
    (60
    )
    
    
    (853
    )Net cash provided by (used in) investing activities
    
    
    497
    
    
    
    (13,332
    )Financing activities:Proceeds from issuance of long term debt
    
    
    370,000
    
    
    
    80,000Proceeds from exercise of stock options and issuance of common stock
    
    
    176,183
    
    
    
    Shares redeemed from reverse stock split
    
    
    (5
    )
    
    
    Principal payments on long-term debt
    
    
    (393,071
    )
    
    
    (78,791
    )Payments of deferred financing costs
    
    
    (5,354
    )
    
    
    (4,438
    )Net cash used in financing activities
    
    
    147,753
    
    
    
    (3,229
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    Net increase in cash and cash equivalents
    
    
    159,301
    
    
    
    (3,399
    )Cash and cash equivalents at beginning of period
    
    
    10,897
    
    
    
    10,875$
    170,198
    
    
    $
    7,476Supplemental cash flow information:Cash paid during the period for:Interest, net of the amounts capitalized shown below
    
    $
    22,018
    
    
    $
    13,491Interest capitalized
    
    
    190
    
    
    
    493Income taxes, net of refunds
    
    
    586
    
    
    
    40Supplemental disclosure of non-cash investing and
financing activities:Net non-cash debt increase (decrease)
    
    
    (228
    )
    
    
    (15,808
    )Issuance of promissory notes as consideration for taxation liabilities
    
    
    2,369
    
    
    
    852
 See notes to consolidated financial statements. 5




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LODGIAN, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Throughout this Form 10-Q, we will use the terms Lodgian, we, our, and
us, to refer to Lodgian, Inc. and unless the context otherwise requires or
expressly states, our subsidiaries). 1. Business Summary We are one of the largest independent owners and operators of full-service
hotels in the United States in terms of our number of guest rooms and gross
annual revenues, as reported by Hotel & Motel Management Magazine in September
2003. We are considered an independent owner and operator because we do not
operate our hotels under our own name. We operate substantially all of our
hotels under nationally recognized brands, such as Crowne Plaza, Holiday
Inn, Marriott, and Hilton. As of August 9, 2004, we operated 87 hotels
with an aggregate of 16,366 rooms, located in 30 states and Canada. Of the 87
hotels, 78 hotels, with an aggregate of 14,348 rooms, are part of our
continuing operations, while nine hotels, with an aggregate of 2,018 rooms, are
held for sale. Our portfolio of 87 hotels consists of:  
    
    82 hotels that we wholly own and operate through subsidiaries;  
    
    four hotels that we operate in joint ventures in which we have a 50%
or greater voting equity interest and exercise control; and  
    
    one hotel that we operate in a joint venture in which we have a 30%
non-controlling equity interest. We consolidate all of these hotels in our financial statements, other than
the one hotel in which we hold a non-controlling equity interest and which we
account for under the equity method. Our hotels are primarily full-service properties that offer food and
beverage services, meeting space and banquet facilities and compete in the
midscale and upscale market segments of the lodging industry. As of August 9,
2004, we operated all but three of our hotels under franchises obtained from
nationally recognized hospitality franchisors. We operate 59 of our hotels
under franchises obtained from InterContinental Hotels Group as franchisor of
the Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn Express
brands. We operate 15 of our hotels under franchises from Marriott
International as franchisor of the Marriott, Courtyard by Marriott, Fairfield
Inn by Marriott and Residence Inn by Marriott brands. We operate another 10
hotels under other nationally recognized brands. We believe that these strong
national brands afford us many benefits such as guest loyalty and market share
premiums. 2. General Our condensed consolidated financial statements include the accounts of
Lodgian, Inc., its wholly-owned subsidiaries and four joint ventures in which
Lodgian, Inc. has a controlling financial interest (owns a 50% or greater
voting equity interest and exercises control). We believe we have control of
the joint ventures when we manage and have control of the joint ventures
assets and operations. We report the third party partners share of the net
income or loss of these joint ventures and their share of the joint ventures
equity as minority interest. We include in other assets our investment in the
hotel in which we hold a minority interest and which we account for under the
equity method. We report our share of the income or loss of this minority-owned
hotel as part of interest income and other. All significant intercompany
accounts and transactions have been eliminated in consolidation. The accounting policies which we follow for quarterly financial reporting
are the same as those which we disclosed in Note 1 of the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K (Form 10-K)
for the year ended December 31, 2003. 6




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) During 2003, we developed a portfolio improvement strategy which was
consistent with our goals of operating a portfolio of profitable,
well-maintained and appealing hotels at superior locations in strong markets.
In accordance with this strategy and our efforts to reduce debt and interest
costs, we identified 19 hotels, one office building and three land parcels for
sale. Between November 1, 2003 and August 9, 2004, we sold the office building
and ten of the 19 hotels. As of August 9, 2004, our portfolio consisted of 87
hotels, 78 of which represent our continuing portfolio (including one hotel in
which we have a non-controlling equity interest which we do not consolidate). In our opinion, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting primarily of normal
recurring adjustments, necessary to present fairly our financial position as of
June 30, 2004, the results of our operations for the three and six months ended
June 30, 2004 and June 30, 2003 and our cash flows for the six months ended
June 30, 2004 and June 30, 2003. Our results for interim periods are not
necessarily indicative of our results for the entire year. You should read
these financial statements in conjunction with our consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the
year ended December 31, 2003. As we prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America (GAAP), we
reclassify certain prior period amounts to conform to the current periods
presentation. We also make estimates and assumptions which affect:  
    
    the reported amounts of assets and liabilities;  
    
    the reported amounts of revenues and expenses during the reporting period; and  
    
    the disclosures of contingent assets and liabilities at the date of our financial statements. Our actual results could differ from our estimates. Reverse Stock Split On April 27, 2004, our Board of Directors authorized a reverse stock split
of our common stock in a ratio of one-for-three (1:3). The reverse split
affected all of our issued and outstanding common shares, warrants, stock
options, and restricted stock. The record date for the reverse split was April
29, 2004 and our new common stock began trading under the split adjustment on
April 30, 2004. Fractional shares which resulted from the reverse stock split were paid in
cash. Each holder of a fractional share of common stock after the effective
date of the reverse split was paid cash equal to the product of (i) the average
of the closing prices of the common stock for the last ten trading days prior
to April 30, 2004, multiplied by (ii) the fraction of a share of common stock
held by such holder. All amounts for common stock, warrants, stock options and restricted
stock, and all earnings per share computations have been retroactively adjusted
to reflect the change in our capital structure. 3. Stock-based Compensation As disclosed in Note 2 above, on April 27, 2004, our Board of Directors
authorized a reverse stock split of our common stock in a ratio of
one-for-three (1:3). All stock option disclosures below have been retroactively
adjusted to reflect the reverse stock split. As we previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2003, on November 25, 2002, we adopted a new Stock Incentive
Plan which replaced the stock option plan previously in place. In accordance
with the Stock Incentive Plan, and prior to the consummation of the public
offering, we were permitted to grant awards to acquire up to 353,333 shares of
common stock to our directors, officers, or other key employees or consultants
as determined by a committee appointed by our 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. We cannot grant stock options pursuant to the Stock Incentive Plan
at an 7




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##### 



LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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. At our 2004 annual meeting, stockholders
approved an amendment and restatement of the Stock Incentive Plan to, among
other things, increase the number of shares of common stock available for
issuance thereunder by 29,667 immediately and, in the event we consummated a
firm commitment, underwritten public offering of our common stock, by an
additional amount to be determined pursuant to a formula. With the
consummation of our public offering of common stock on June 25, 2004, the total
number of shares available for issuance under our Stock Incentive Plan
increased to 2,950,832 shares. On April 9, 2004, the Company issued our CEO, Thomas Parrington, 1,382
restricted stock units in accordance with his employment agreement. The
restricted stock units vest on April 9, 2005 when they will be convertible into
an equal number of shares of common stock. We present below a summary of our stock option plan and the restricted
stock units activity under the plan for the six months ended June 30, 2004: Weighted AverageOptions
    
    Exercise PriceBalance, December 31, 2003
    
    
    157,529
    
    
    $
    13.92Granted
    
    
    383,500
    
    
    
    10.52Exercised
    
    
    (241
    )
    
    
    15.21Forfeited
    
    
    (4,771
    )
    
    
    15.21Balance, June 30, 2004
    
    
    536,017
    
    
    $
    11.47
 RestrictedStock UnitsBalance, December 31, 2003
    
    
    66,666Issued
    
    
    1,382Forfeited
    
    
    Balance, June 30, 2004
    
    
    68,048
    (1)
   (1)
    
    At June 30, 2004, none of the restricted stock had vested. In the following table, we summarize information for options outstanding
and exercisable at June 30, 2004: Options outstanding
    
    Options exercisableWeighted average
    
    Weighted average
    
    
    
    
    
    Weighted averageRange of prices
    
    Number
    
    remaining life (in years)
    
    exercise prices
    
    Number
    
    exercise prices$9.00 to $10.50
    
    
    33,333
    
    
    
    9.0
    
    
    $
    9.00
    
    
    
    
    
    
    $
    9.00$10.51 to $15.00
    
    
    383,500
    
    
    
    10.0
    
    
    $
    10.52
    
    
    
    
    
    
    $
    10.52$15.01 to $15.50
    
    
    112,018
    
    
    
    9.2
    
    
    $
    15.21
    
    
    
    37,424
    
    
    $
    15.21$15.51 to $16.00
    
    
    7,166
    
    
    
    9.3
    
    
    $
    15.66
    
    
    
    2,389
    
    
    $
    15.66536,017
    
    
    
    9.7
    
    
    $
    11.47
    
    

    
    39,813
    
    
    $
    15.24
 We account 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 8




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##### 



LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) our employee stock options is equal to the market price of the underlying
stock on the date of grant, no compensation expense is recognized. Under
Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for
Stock-Based Compensation (as amended by SFAS No. 148), 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. The income tax benefit, if
any, associated with the exercise of stock options is credited to additional
paid-in capital. Had the compensation cost of our stock option plan been recognized under
SFAS No. 123, based on the fair market value at the grant dates, our pro forma
net loss and net loss per share would have been as follows: Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2003(1)
    
    June 30, 2004
    
    June 30, 2003 (1)Loss  continuing operationsAs reported
    
    $
    (11,848
    )
    
    $
    (605
    )
    
    $
    (18,232
    )
    
    $
    (6,446
    )Pro forma
    
    
    (11,973
    )
    
    
    (605
    )
    
    
    (18,481
    )
    
    
    (6,446
    )Income (loss) from discontinued operationsAs reported
    
    
    4,601
    
    
    
    (1,836
    )
    
    
    3,899
    
    
    
    (5,079
    )Pro forma
    
    
    4,601
    
    
    
    (1,836
    )
    
    
    3,899
    
    
    
    (5,079
    )Net loss:As reported
    
    
    (7,247
    )
    
    
    (2,441
    )
    
    
    (14,333
    )
    
    
    (11,525
    )Pro forma
    
    
    (7,372
    )
    
    
    (2,441
    )
    
    
    (14,582
    )
    
    
    (11,525
    )Net loss attributable to common stockAs reported
    
    
    (7,247
    )
    
    
    (6,259
    )
    
    
    (14,333
    )
    
    
    (19,119
    )Pro forma
    
    
    (7,372
    )
    
    
    (6,259
    )
    
    
    (14,582
    )
    
    
    (19,119
    )Loss from continuing operations attributable to common
stock before discontinued operationsAs reported
    
    
    (11,848
    )
    
    
    (4,423
    )
    
    
    (18,232
    )
    
    
    (14,040
    )Pro forma
    
    
    (11,973
    )
    
    
    (4,423
    )
    
    
    (18,481
    )
    
    
    (14,040
    )Basic and diluted loss per common share:Loss  continuing operationsAs reported
    
    $
    (3.33
    )
    
    $
    (0.26
    )
    
    $
    (6.19
    )
    
    $
    (2.76
    )Pro forma
    
    
    (3.37
    )
    
    
    (0.26
    )
    
    
    (6.28
    )
    
    
    (2.76
    )Income (loss) from discontinued operationsAs reported
    
    
    1.29
    
    
    
    (0.79
    )
    
    
    1.32
    
    
    
    (2.18
    )Pro forma
    
    
    1.29
    
    
    
    (0.79
    )
    
    
    1.32
    
    
    
    (2.18
    )Net lossAs reported
    
    
    (2.04
    )
    
    
    (1.05
    )
    
    
    (4.87
    )
    
    
    (4.94
    )Pro forma
    
    
    (2.07
    )
    
    
    (1.05
    )
    
    
    (4.95
    )
    
    
    (4.94
    )Net loss attributable to common stockAs reported
    
    
    (2.04
    )
    
    
    (2.68
    )
    
    
    (4.87
    )
    
    
    (8.20
    )Pro forma
    
    
    (2.07
    )
    
    
    (2.68
    )
    
    
    (4.95
    )
    
    
    (8.20
    )Loss from continuing operations attributable to common
stock before discontinued operationsAs reported
    
    
    (3.33
    )
    
    
    (1.90
    )
    
    
    (6.19
    )
    
    
    (6.02
    )Pro forma
    
    
    (3.37
    )
    
    
    (1.90
    )
    
    
    (6.28
    )
    
    
    (6.02
    )
  (1)
    
    There were no options outstanding between January 1, 2003 and June 30,
2003. 4. Discontinued Operations As discussed above, during 2003, we identified 19 hotels, one office
building and three land parcels for sale as part of our portfolio improvement
strategy and our efforts to reduce debt and interest costs. Between April 1,
2004 and June 30, 2004, we sold three hotels for an aggregate sales price of
$20.7 million. From the sale of these assets, we paid down debt of
approximately $18.1 million. In
accordance with SFAS No. 144, we have included the hotel assets sold during
2003 and 2004 as well as the hotel assets held for sale at June 30, 2004 (including
any related impairment charges) in Discontinued Operations in the Consolidated
Statements of Operations. The assets held for sale at June 30, 2004 and
December 31, 2003 and the liabilities related to these assets are separately
disclosed in the Condensed Consolidated Balance Sheets. Where the carrying
values of the assets held for sale exceeded the estimated fair values, net of
selling costs, we reduced the 9




---



##### 



LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) carrying values and recorded impairment charges. We determine fair values
using quoted market prices, when available, or other accepted valuation
techniques. During the three and six months ended June 30, 2004, we recorded
impairment charges of $0.5 million and $2.6 million, respectively, on assets
held for sale. Where the estimated selling prices, net of selling costs, of
assets held for sale exceeded the carrying values, we did not increase the
carrying values of the assets. Among other criteria, we classify an asset as
held for sale if we expect to dispose of it within one year. At June 30, 2004, ten hotels and three land parcels were held for sale. At
December 31, 2003, 18 hotels and three land parcels were held for sale. The
following condensed combined table summarizes the assets and liabilities
relating to the properties identified as held for sale as of June 30, 2004 and
December 31, 2003: June 30, 2004
    
    December 31, 2003(Unaudited in thousands)ASSETSAccounts receivable, net of allowances
    
    $
    1,451
    
    
    $
    1,252Inventories
    
    
    879
    
    
    
    1,377Prepaid expenses and other current assets
    
    
    1,036
    
    
    
    1,039Property and equipment, net
    
    
    35,173
    
    
    
    61,624Other assets
    
    
    1,097
    
    
    
    3,275$
    39,636
    
    
    $
    68,567LIABILITIESAccounts payable
    
    $
    1,167
    
    
    $
    1,234Other accrued liabilities
    
    
    1,460
    
    
    
    3,120Advance deposits
    
    
    358
    
    
    
    390Current portion of long-term debt
    
    
    344
    
    
    
    771Long-term debt
    
    
    34,006
    
    
    
    52,433Total liabilities
    
    $
    37,335
    
    
    $
    57,948
 The condensed combined results of operations of the properties classified
as Discontinued Operations for the three and six months ended June 30, 2004
were as follows: 10




---



##### 



Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Unaudited in thousands)
    
    (Unaudited in thousands)Revenues:Rooms
    
    $
    8,491
    
    
    $
    12,709
    
    
    $
    16,435
    
    
    $
    21,843Food and beverage
    
    
    2,439
    
    
    
    3,176
    
    
    
    4,757
    
    
    
    5,535Other
    
    
    358
    
    
    
    893
    
    
    
    836
    
    
    
    1,68611,288
    
    
    
    16,778
    
    
    
    22,028
    
    
    
    29,064Operating expenses:Direct:Rooms
    
    
    2,339
    
    
    
    3,714
    
    
    
    5,035
    
    
    
    6,910Food and beverage
    
    
    1,751
    
    
    
    2,360
    
    
    
    3,585
    
    
    
    4,388Other
    
    
    253
    
    
    
    586
    
    
    
    638
    
    
    
    1,1844,343
    
    
    
    6,660
    
    
    
    9,258
    
    
    
    12,4826,945
    
    
    
    10,118
    
    
    
    12,770
    
    
    
    16,582Other operating expenses:Other hotel operating costs
    
    
    3,460
    
    
    
    5,721
    
    
    
    8,514
    
    
    
    11,474Property and other taxes, insurance and leases
    
    
    74
    
    
    
    1,871
    
    
    
    1,083
    
    
    
    3,868Depreciation and amortization
    
    
    18
    
    
    
    1,502
    
    
    
    151
    
    
    
    2,949Impairment of long-lived assets
    
    
    451
    
    
    
    2,070
    
    
    
    2,604
    
    
    
    2,070Other operating expenses
    
    
    4,003
    
    
    
    11,164
    
    
    
    12,352
    
    
    
    20,3612,942
    
    
    
    (1,046
    )
    
    
    418
    
    
    
    (3,779
    )Interest expense and other financing costs
    
    
    (2,583
    )
    
    
    (791
    )
    
    
    (3,768
    )
    
    
    (1,301
    )Gain on asset dispositions
    
    
    4,242
    
    
    
    1
    
    
    
    7,249
    
    
    
    1Income (loss) before income taxes
    
    
    4,601
    
    
    
    (1,836
    )
    
    
    3,899
    
    
    
    (5,079
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    4,601
    
    
    $
    (1,836
    )
    
    $
    3,899
    
    
    $
    (5,079
    )
 5. Cash, Restricted Our restricted cash as of June 30, 2004 consists of amounts reserved for
letter of credit collateral, a deposit required by our 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: Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Unaudited in thousands, except
    
    (Unaudited in thousands, exceptper share data)
    
    per share data)Basic and diluted loss per share:Numerator:Loss  continuing operations
    
    $
    (11,848
    )
    
    $
    (605
    )
    
    $
    (18,232
    )
    
    $
    (6,446
    )Income (loss) from discontinued operations
    
    
    4,601
    
    
    
    (1,836
    )
    
    
    3,899
    
    
    
    (5,079
    )Net loss
    
    
    (7,247
    )
    
    
    (2,441
    )
    
    
    (14,333
    )
    
    
    (11,525
    )Preferred stock dividend
    
    
    
    
    
    
    (3,818
    )
    
    
    
    
    
    
    (7,594
    )Net loss attributable to common stock
    
    
    (7,247
    )
    
    
    (6,259
    )
    
    
    (14,333
    )
    
    
    (19,119
    )Loss  continuing operations
    
    
    (11,848
    )
    
    
    (605
    )
    
    
    (18,232
    )
    
    
    (6,446
    )Preferred stock dividend
    
    
    
    
    
    
    (3,818
    )
    
    
    
    
    
    
    (7,594
    )Loss from continuing operations attributable to
common stock
before discontinued operations
    
    $
    (11,848
    )
    
    $
    (4,423
    )
    
    $
    (18,232
    )
    
    $
    (14,040
    )Denominator:Denominator for basic and diluted loss per share -
weighted-average shares
    
    
    3,554
    
    
    
    2,333
    
    
    
    2,944
    
    
    
    2,333Basic and diluted loss per common share:Loss  continuing operations
    
    $
    (3.33
    )
    
    $
    (0.26
    )
    
    $
    (6.19
    )
    
    $
    (2.76
    )Income (loss) from discontinued operations
    
    
    1.29
    
    
    
    (0.79
    )
    
    
    1.32
    
    
    
    (2.18
    )Net loss
    
    
    (2.04
    )
    
    
    (1.05
    )
    
    
    (4.87
    )
    
    
    (4.94
    )Net loss attributable to common stock
    
    
    (2.04
    )
    
    
    (2.68
    )
    
    
    (4.87
    )
    
    
    (8.20
    )Loss from continuing operations attributable to
common stock
before discontinued operations
    
    $
    (3.33
    )
    
    $
    (1.90
    )
    
    $
    (6.19
    )
    
    $
    (6.02
    )
 11




---



##### 



LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) We did not include the shares associated with the assumed conversion of
the restricted stock units (68,048 shares) or the exercise of stock options
(options to acquire 536,017 shares of common stock) and A and B warrants
(rights to acquire 503,546 and 343,122 shares of common stock, respectively) in
the computation of diluted loss per share for the three and six months ended
June 30, 2004 because their inclusion would have been antidilutive. We did not
include the shares associated with the exercise of the A and B warrants (rights
to acquire 503,546 and 343,122 shares of common stock, respectively) in the
computation of diluted loss per share for the three and six months ended June
30, 2003 because their inclusion would have been antidilutive. 7. Other Accrued Liabilities At June 30, 2004 and December 31, 2003, other accrued liabilities
consisted of the following: June 30, 2004
    
    December 31, 2003(Unaudited in thousands)Salaries and related costs
    
    $
    18,178
    
    
    $
    16,211Property and sales taxes
    
    
    11,253
    
    
    
    9,427Professional fees
    
    
    531
    
    
    
    570Provision for state income taxes
    
    
    213
    
    
    
    2,361Franchise fee accrual
    
    
    1,631
    
    
    
    1,115Accrued interest
    
    
    46
    
    
    
    526Accrual for allowed claims
    
    
    31
    
    
    
    186Other
    
    
    537
    
    
    
    1,036$
    32,420
    
    
    $
    31,432
 8. Debt Substantially all of our property and equipment are pledged as collateral
for long-term obligations with the exception of three hotels that are now
unencumbered as a result of our Refinancing Debt and the three land parcels.
Certain of our mortgage notes are subject to a prepayment or yield maintenance
penalty if we repay them prior to their maturity. Set forth below, by debt
pool, is a summary of our debt at June 30, 2004 along with the applicable
interest rates and the related carrying values of the property, plant and
equipment which collateralize these debts: 12




---



##### 



LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) June 30, 2004(Unaudited in thousands)Number
    
    Property, plant
    
    Long-term
    
    Interestof Hotels
    
    and equipment, net
    
    obligations
    
    rates(1)
    
    (1)Refinancing DebtMerrill Lynch Mortgage Lending, Inc.  Floating
    
    
    29
    
    
    $
    125,254
    
    
    $
    110,000
    
    
    LIBOR plus 3.40%Merrill Lynch Mortgage Lending, Inc.  Fixed
    
    
    35
    
    
    
    316,148
    
    
    
    260,000
    
    
    
    6.58
    %Merrill Lynch Mortgage Lending, Inc.  Total
    
    
    64
    
    
    
    441,402
    
    
    
    370,000Computershare Trust Company of Canada
    
    
    1
    
    
    
    13,975
    
    
    
    7,137
    
    
    
    7.88
    %Other financingColumn Financial, Inc.
    
    
    9
    
    
    
    61,334
    
    
    
    26,209
    
    
    
    10.59
    %Lehman Brothers Holdings, Inc.
    
    
    5
    
    
    
    37,870
    
    
    
    23,173
    
    
    $16,329 at 9.40%; $6,844 at 8.9%JP Morgan Chase Bank
    
    
    2
    
    
    
    8,714
    
    
    
    10,385
    
    
    
    7.25
    %DDL Kinser
    
    
    1
    
    
    
    3,164
    
    
    
    2,336
    
    
    
    8.25
    %Column Financial, Inc.
    
    
    1
    
    
    
    8,893
    
    
    
    8,749
    
    
    
    9.45
    %Column Financial, Inc.
    
    
    1
    
    
    
    6,046
    
    
    
    3,140
    
    
    
    10.74
    %Total  other financing
    
    
    19
    
    
    
    126,021
    
    
    
    73,99284
    
    
    
    581,398
    
    
    
    451,129
    
    
    
    6.63%
    (2)Long-term debt  otherDeferred rent on a long-term ground lease
    
    
    
    
    
    
    
    
    
    
    1,842Tax notes issued pursuant to our Joint Plan
of Reorganization
    
    
    
    
    
    
    
    
    
    
    3,779Other
    
    
    
    
    
    
    
    
    
    
    924
    
    
    
    
    
    
    
    6,545Property, plant and equipment  other
    
    
    3
    
    
    
    15,519
    
    
    
    87
    
    
    
    596,917
    
    
    
    457,674Held for sale (3)
    
    
    (10
    )
    
    
    (35,173
    )
    
    
    (34,350
    )Total June 30, 2004
    
    
    77
    
    
    
    561,744
    
    
    
    423,324
   (1)
    
    Long-term obligations and property, plant and equipment of
one hotel in which we have a non-controlling equity interest
that we do not consolidate are excluded from the table above.(2)
    
    The 6.63% in the table above represents our annual weighted
average cost of debt at June 30, 2004, using a 1.36% LIBOR rate.(3)
    
    Debt on assets held for sale of $34.4 million reflects new
allocated loan amounts as part of the Refinancing Debt. Refinancing Debt On June 25, 2004, we closed on the $370 million Merrill Lynch Mortgage
Lending, Inc. (Merrill Lynch Mortgage) refinance (Refinancing Debt) secured
by 64 of our hotels. We refinanced (1) our outstanding mortgage debt (Merrill
Lynch Exit Financing) with Merrill Lynch Mortgage which, as of June 25, 2004,
had a balance of $290.9 million, (2) certain of our outstanding mortgage debt
(the Lehman Financing) with Lehman Brothers Holdings, Inc. (Lehman) which,
as of June 25, 2004, had a balance of $56.1 million and (3) our
outstanding mortgage debt on the Crowne Plaza Hotel in Macon, Georgia, in
which we own a 60% interest that, as of June 25, 2004, had a balance of $6.9
million. Prepayment penalties totaling $2.7 million were paid on the Merrill Lynch
Mortgage Exit Financing debt (not including $0.2 million allocated to
discontinued operations). Deferred loan costs related to the Merrill Lynch
Exit Financing debt, Lehman debt, and Macon debt that were written off and
charged to other interest expense were $3.4 million, $3.3 million and nil,
respectively (not including the write-off of $0.3 million and $0.4 million of
deferred loan costs for Merrill Lynch and Lehman, respectively, that were
allocated to discontinued operations). We purchased a swaption contract to
hedge against rising interest rates until the interest rate
on the fixed rate Refinancing Debt was determined. The swaption net cost of $1.9 million was expensed to other
interest expense and the $1.1 million of loan origination fees incurred on the
Floating Rate Debt was expensed to other interest expense with $0.8 million
allocated to continuing operations (and $0.3 million allocated to discontinued
operations). The Refinancing Debt consists of a loan of $110 million bearing a floating
rate of interest (the Floating Rate Debt) and is secured by 29 of our hotels,
and four loans totaling $260 million each bearing a fixed interest rate of
6.58% (the Fixed Rate Debt) and secured, in the aggregate, by 35 of our
hotels. Merrill Lynch Mortgage also has the right to further divide the
Refinancing Debt into first priority mortgage loans and mezzanine loans. Prior
to any securitization of the four fixed rate loans, such loans will be
cross-defaulted and cross-collateralized. 13




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Each of the four fixed rate loans (Fixed Rate Loan) comprising the Fixed
Rate Debt is a five-year loan and bears a fixed rate of interest of 6.58%.
Except as provided for through defeasance, we may not prepay the Fixed Rate
Debt except during the 60 days prior to maturity. We may, after the earlier of
48 months after the closing of any Fixed Rate Debt or the second anniversary of
the securitization of any Fixed Rate Debt, defease such Fixed Rate Debt, in
whole, or in part. The Floating Rate Debt is a two-year loan with three one-year extension
options and bears interest at LIBOR plus 3.40%. The first extension option
will be available to us only if no defaults exist and we have entered into the
requisite interest rate cap agreement. The second and third extension options
will be available to us only if no defaults exist, a minimum debt yield ratio
of 13% is met, and minimum debt service coverage ratios of 1.3x for the second
extension and 1.35x for the third extension are met. An extension fee of 0.25%
of the outstanding Floating Rate Debt is payable if we opt to exercise each of
the second and third extensions. We may prepay the Floating Rate Debt in whole
or in part, subject to a prepayment penalty in the amount of 3% of the amount
prepaid during the first year of the loan and 1% of the amount prepaid during
the second year of the loan. If the loan is prepaid after the second year of
the loan, there is no prepayment penalty. The Refinancing Debt provides that when either (i) the debt yield ratio
for the hotels securing the Floating Rate Debt or any Fixed Rate Loan for the
trailing 12-month period is below 9% during the first year, 10% during the
second year and 11%, 12% and 13% during each of the next three years (in the
case of the Floating Rate Debt to the extent extended), or (ii) in the case of
the Floating Rate Debt (to the extent extended), the debt service coverage
ratio is less than 1.30x in the fourth year or 1.35x in the fifth year, excess
cash flows produced by the mortgaged hotels securing the applicable loan (after
payment of operating expenses, management fees, required reserves, service
fees, principal and interest) must be deposited in a restricted cash account.
These funds can be used for the prepayment of the applicable loan in an amount
required to satisfy the applicable test, capital expenditures reasonably
approved by the lender with respect to the hotels securing the applicable loan,
and scheduled principal and interest payments due on the Floating Rate Debt of
up to $0.9 million or any Fixed Rate Loan of up to $525,000, as applicable.
Funds will no longer be deposited into the restricted cash account when the
debt yield ratio and, if applicable, the debt service coverage ratio are
sustained above the minimum requirements for three consecutive months and there
are no defaults. As of August 9, 2004, our debt yield ratios were above the
minimum requirements. Each loan comprising the Refinancing Debt is non-recourse; however, we
have agreed to indemnify Merrill Lynch Mortgage in certain situations, such as
fraud, waste, misappropriation of funds, certain environmental matters, asset
transfers in violation of the loan agreements, or violation of certain
single-purpose entity covenants. In addition, each loan comprising the
Refinancing Debt will become full recourse in certain limited cases such as
bankruptcy of a borrower or Lodgian. During the term of the Refinancing Debt,
we will be required to fund, on a
monthly basis, a reserve for furniture, fixtures and equipment equal to 4%
of the previous months gross revenues from the hotels securing each of the
respective loans comprising the Refinancing Debt. Third party paid loan costs, incurred
as a part of the Refinancing Debt, totaling
$5.4 million, were deferred and will be amortized using the effective yield
method over five years for the Fixed Rate Debt and three years for the Floating
Rate Debt. In the table above, approximately 75.6% of our long-term mortgage debt
(including current portion) at June 30, 2004, bears interest at a fixed rate
and 24.4% bears interest at a floating rate. 9. Commitments and Contingencies Franchise Agreements and Capital Expenditures We benefit from the superior brand qualities of the Crowne Plaza, Holiday
Inn, Marriott, Hilton and other brands, including the reputation of these
brands, reservation bookings through their central reservation systems, global
distribution systems, guest loyalty programs and brand Internet booking sites.
Reservations made by means of these franchisor facilities generally account for
approximately 30% of our total reservations. 14




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) To obtain these franchise affiliations, we enter into franchise agreements
with hotel franchisors that generally have terms of between 10 and 20 years.
The franchise agreements typically authorize us to operate the hotel under the
franchise name, at a specific location or within a specified area, and require
that we operate a hotel in accordance with the standards specified by the
franchisor. As part of our franchise agreements, we are generally required to
pay a royalty fee, an advertising/marketing fee, a fee for the use of the
franchisors nationwide reservation system and certain ancillary charges.
Royalty fees generally range from 3.0% to 6.0% of gross room revenues,
advertising/marketing fees generally range from 1.0% to 4.0% of gross room
revenues and reservation system fees generally range from 1.0% to 2.0% of gross
room revenues. In the aggregate, royalty fees, advertising/marketing fees and
reservation fees for the various brands under which we operate our hotels range
from 5.0% to 12.0% of gross room revenues. These costs vary with revenues and are not fixed commitments. Franchise
fees incurred for the three and six months ended June 30, 2004 and June 30,
2003 were as follows: Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Unaudited in thousands)
    
    (Unaudited in thousands)Continuing operations
    
    $
    5,871
    
    
    $
    5,378
    
    
    $
    11,121
    
    
    $
    10,158Discontinued operations
    
    
    696
    
    
    
    1,053
    
    
    
    1,284
    
    
    
    1,778$
    6,567
    
    
    $
    6,431
    
    
    $
    12,405
    
    
    $
    11,936
 During the term of the franchise agreements, the franchisors may require
us to upgrade facilities to comply with their current standards. Our current
franchise agreements terminate at various times and have differing remaining
terms, for example, the terms of 3, 10 and 9 of our franchise agreements are
scheduled to expire in 2004, 2005, and 2006, respectively. As franchise
agreements expire, we may apply for a franchise renewal. In connection with
renewals, the franchisor may require payment of a renewal fee, increased
royalty and other recurring fees and substantial renovation of the facilities,
or the franchisor may elect not to renew the franchise. The costs incurred in
connection with these agreements are primarily monthly payments due to the
franchisors based on a percentage of room revenues. If we do not comply with the terms of a franchise agreement, following
notice and an opportunity to cure, the franchisor has the right to terminate
the agreement, which could lead to a default under one or more of our loan
agreements, and which could materially and adversely affect us. Prior to
terminating a franchise agreement, franchisors are required to notify us of the areas of non-compliance and
give us the opportunity to cure the non-compliance. In the past, we have been
able to cure most cases of non-compliance and most defaults within the cure
periods, and those events of non-compliance and defaults did not cause
termination of our franchises or defaults on our loan agreements. If we perform
an economic analysis of the hotel and determine that it is not economically
feasible to comply with a franchisors requirements, we will either select an
alternative franchisor or operate the hotel without a franchise affiliation. As of August 9, 2004, we have been notified that we were not in compliance
with some of the terms of eight of our franchise agreements and have received
default and termination notices from franchisors with respect to an additional
six hotels. We cannot assure you that we will be able to complete our action
plans (which we estimate will cost approximately $3.8 million) to cure the
alleged defaults prior to the specified termination dates or be granted
additional time in which to cure any defaults. We are not aware of any other
instances of non-compliance with our franchise agreements. We believe that we will cure the non-compliance and defaults on these
hotels before the applicable termination dates, but we cannot provide assurance
that we will be able to do so or that we will be able to obtain additional time
in which to do so. If a franchise agreement is terminated, we will either
select an alternative franchisor or, with the respective lenders approval,
operate the hotel independently of any franchisor. However, terminating or
changing the franchise affiliation of a hotel could require us to incur
significant expenses, including liquidated damages, and capital expenditures.
Our loan agreements generally prohibit a hotel from operating without a
franchise. 15




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) In addition, as part of our bankruptcy reorganization proceedings, we
entered into stipulations with each of our major franchisors setting forth a
timeline for completion of capital expenditures for some of our hotels.
However, as of August 9, 2004, we have not completed the required capital
expenditures for 32 hotels in accordance with the stipulations and estimate
that completing those improvements will cost $19.8 million. Under the
stipulations, the applicable franchisors could therefore seek to declare
certain franchise agreements in default and, in certain circumstances, seek to
terminate the franchise agreement. We have scheduled or have begun renovations
on 17 of these hotels aggregating $8.5 million of the $19.8 million. In
addition, five of these hotels are held for sale and represent $2.4 million of
the $19.8 million. We agreed to renew our 15 Marriott franchise agreements during 2004 and to
pay, over a three year period, a fee aggregating approximately $500,000,
subject to offsets. In connection with these renewals, and after Marriott
reviews the capital improvements we have made at our Marriott franchised hotels
during 2004, Marriott may, in its reasonable business judgment, require us to
make additional property improvements and to place amounts into a reserve
account for the purpose of funding those property improvements. To comply with the requirements of our franchisors and to improve our
competitive position in individual markets, we have enhanced our capital
improvement program in 2004. Letters of Credit As of June 30, 2004, we had issued two irrevocable letters of credit
totaling $3.6 million as guarantees to Zurich American Insurance Company and
Donlen Fleet Management Services. These letters of credit will expire in
November 2004 but may require renewal beyond that date. All letters of credit
are fully collateralized by our cash (classified as restricted cash in the
accompanying Condensed Consolidated Balance Sheets). Self-insurance We are self-insured up to certain limits with respect to employee medical,
employee dental, property insurance, general liability insurance, workers
compensation, auto liability and other forms of insurance. We establish
liabilities for these self-insured obligations annually, based on actuarial
valuations and our history of claims. Should unanticipated events cause these
claims to escalate beyond normal expectations, our financial condition and
results of operations would be negatively impacted. As of June 30, 2004, and
December 31, 2003, we had approximately $10.9 million and $10.0 million accrued
for these liabilities, respectively. There are other types of losses for which we cannot obtain insurance at
all or at a reasonable cost, including losses caused by acts of war. If an
uninsured loss or a loss that exceeds our insurance limits were to occur, we
could lose both the revenues generated from the affected hotel and the capital
that we have invested. We also could be liable for any outstanding mortgage
indebtedness or other obligations related to the hotel. Any such loss could
materially and adversely affect our financial condition and results of
operations. We believe that we maintain sufficient insurance coverage for the
operation of our business. Litigation From time to time, as we conduct our business, legal actions and claims
are brought against us. The outcome of these matters is uncertain. However, we
believe that all currently pending matters will be resolved without a material
adverse effect on our results of operations or financial condition. Claims
relating to the period before we filed for Chapter 11 protection are limited to
the amounts approved by the Bankruptcy Court for settlement of such claims and
are payable out of the disputed claims reserves provided for in our plans of
reorganization, which in the case of the Joint Plan of Reorganization, consists
of our common stock and Preferred Stock, and in the case of the Impac Plan of
Reorganization, consists of cash. On July 26, 2004 the Preferred Stock was
redeemed and cash of $2.2 million replaced the Preferred Stock shares held in
the disputed claims reserve. As of June 30, 2004, approximately $20,000 in
cash remained to be paid on the Impac claims. We have reserved for all claims
approved by the Bankruptcy Court which have not yet been paid. 16




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 10. Stockholders Equity On June 25, 2004, we completed a public equity offering of 18,285,714
shares of our common stock, par value $0.01 per share, at a price of $10.50 per
share. Net proceeds from this equity offering, after deducting the
underwriting discount, advisory fee and other offering expenses, amounted to
approximately $176.2 million. Additionally, immediately upon the consummation of the equity offering, we
exchanged 3,941,115 shares of our common stock for 1,483,558 shares of Series A
Preferred Stock (the Preferred Share Exchange) held by (1) certain affiliates
of, and investments accounts managed by, Oaktree Capital Management, LLC, (2)
an affiliate of Blackstone Real Estate Advisors and (3) Merrill Lynch, Pierce,
Fenner & Smith Incorporated, based on a common stock price of $10.50 per share.
In the Preferred Share Exchange, Oaktree, Blackstone and Merrill Lynch
received 2,262,661, 1,049,034 and 629,420 shares of our common stock,
respectively. As part of the Preferred Share Exchange, we recorded a
$1.6 million loss on preferred stock redemption for the 4%
prepayment premium on the Preferred Stock shares that were converted
to common stock. 11. New Accounting Pronouncements On July 1, 2003, in accordance with SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, we
reclassified the Preferred Stock to the liability section of the consolidated
balance sheet and began presenting the related dividends in interest expense.
Prior to the adoption of SFAS No. 150, we presented the Preferred Stock between
liabilities and equity in our consolidated balance sheet (called the
mezzanine section) and reported the Preferred Stock dividend as a deduction
from retained earnings with no effect on our results of operations. In
accordance with SFAS No. 150, the Preferred Stock and the dividends for the
period prior to July 1, 2003, have not been reclassified.. Thus the Preferred
Stock dividends for the three and six months ended June 30, 2004 of $4.2
million and $8.5 million, respectively, are presented as part of interest
expense while the Preferred Stock dividend for the three and six months ended
June 30, 2003 of $3.8 million and $7.6 million, respectively, are presented as
a deduction from retained earnings. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46), to address perceived weaknesses in
accounting for entities commonly known as special-purpose or off-balance sheet
entities. In addition to numerous FASB Staff Positions written to clarify and
improve the application of FIN 46, the FASB recently announced a deferral for
certain entities, and an amendment to FIN 46 entitled FASB Interpretation No.
46 (revised December 2003), Consolidation of Variable Interest Entities (FIN
46R). FIN 46 establishes consolidation criteria for entities for which
control is not easily discernible under Accounting Research
Bulletin 51, Consolidated Financial Statements, which is based on the
premise that holders of the equity of an entity, control the entity by virtue
of voting rights. FIN 46 provides guidance for identifying the party with a
controlling financial interest resulting from arrangements or financial
interests rather than from voting interests. FIN 46 defines the term variable
interest entity (VIE) and is based on the premise that if a business
enterprise absorbs a majority of the VIEs expected losses and/or receives a
majority of its expected residual returns (measure of risk and reward), that
enterprise (the primary beneficiary) has a controlling financial interest in
the VIE. The assets, liabilities, and results of the activities of the VIE
should be included in the consolidated financial statements of the primary
beneficiary. We were required to adopt the provisions of FIN 46R relating to
any interests in special-purpose entities (SPEs) as of December 31, 2003. In
addition, during the first quarter of 2004, we were required to apply the
provisions of FIN 46R to any other entities falling within its scope. The
adoption of FIN 46 and the counterpart revision (FIN 46R) has not had and is
not expected to have a material impact on our financial position and results of
operations. 12. Related Party Transactions Oaktree and Blackstone, representatives of which serve on our board of
directors, and/or affiliates received 2,262,661 shares and 1,049,034 shares of
common stock that were exchanged as part of the Preferred Share Exchange.
Approximately $26.3 million and $11.1 million of the net
proceeds from the equity offering were used to redeem the remaining shares of Preferred Stock held by
Oaktree and Blackstone, respectively. Including the Preferred Share Exchange
shares, Oaktree and Blackstone are currently the beneficial owners of 2,817,577
and 1,326,909 shares of our common stock, respectively. 17




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Richard Cartoon, our Executive Vice President and Chief Financial Officer
between October 4, 2001 and October 13, 2003, is a principal in a business
which we 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 as Chief Financial
Officer, we were billed $28,000 and $47,000 including expenses, for other
support and services provided by Richard Cartoon, LLC for the three and six
months ended June 30, 2004, respectively. Richard Cartoon, LLC is continuing to
provide restructuring support and other services in the short-term. Until May 1, 2004, we had a revolving loan agreement with OCM Fund II that
allowed us to borrow up to $2 million; however, all of our borrowings under
that agreement were repaid in full in December 2003. The interest rate on the
loan was 10% per annum, and in 2003 we paid $42,222 in interest to OCM Fund II
on our borrowings. This revolving loan agreement, secured by two land parcels,
expired on May 1, 2004. OCM Fund II is a greater than 10% stockholder, and
Oaktree is the general partner of OCM Fund II. Russel S. Bernard, a principal
of Oaktree and Sean F. Armstrong, a managing director of Oaktree, are directors
of Lodgian. Merrill Lynch, which served as a
joint lead managing underwriter in the
offering with Citigroup (see Note 10), is currently the owner of 890,031 shares of our common
stock, including 629,420 shares obtained as part of the Preferred Share
Exchange, and warrants to purchase 4,287 shares of our common stock. Merrill
Lynch also received approximately $6.7 million in cash from the net proceeds of
the offering for the remaining shares of Preferred Stock held on July 26,
2004. In November 2002, in connection with our emergence from Chapter 11
bankruptcy, we received exit financing of $302.7 million of senior and
mezzanine debt provided by Merrill Lynch Mortgage, an affiliate of Merrill
Lynch, which was refinanced as part of our Refinancing Debt in June 2004. On June 25, 2004 the public equity offering was completed along with the
funding of the $370 million of Refinancing Debt with Merrill Lynch Mortgage.
Lodgian paid Merrill Lynch an advisory fee of $1,440,000, a 1% origination fee
on the Floating Rate Debt of $1.1 million, and prepayment penalties on the exit
financing debt of $2.9 million. 13. Subsequent Events As previously discussed, between November 1, 2003 and August 9, 2004, we
sold an office building and ten of the hotels identified for sale. One of these
hotels was sold in 2003, five were sold in the first quarter of 2004, three
were sold in the second quarter of 2004, and one hotel was sold subsequent
to the second quarter 2004. Summarized below is certain financial data relating
to the one hotel sold between July 1, 2004 and August 9, 2004: (Unaudited in thousands)Aggregate sales price
    
    $
    3,350Carrying value of property, plant and equipment at June 30, 2004
    
    
    1,044Debt paid down from sales proceeds
    
    
    3,209Total revenues for the three months ended June 30, 2004
($1.0 million for the three months ended June 30, 2003)
    
    
    1,458Direct operating expenses for the three months ended June 30, 2004
$1.2 million for the three months ended June 30, 2003)
    
    
    634Other hotel operating expenses for the three months ended June
30, 2004 ($0.4 million for the three months ended June 30, 2003)
    
    
    391
 On July 26, 2004, we redeemed 4,048,183 shares of outstanding Series A
Preferred Stock totaling approximately $114.0 million. The 79,278 shares of
Preferred Stock that remained in the disputed claims reserve were replaced with
approximately $2.2 million of cash. Approximately $4.5 million was paid for the 4% prepayment premium on the
Preferred Stock when it was redeemed on July 26, 2004. 18




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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the discussion below in conjunction with the unaudited
condensed consolidated financial statements and accompanying notes, set forth
in Item I. Financial Statements included in thisForm 10-Q. Also, the
discussion which follows contains forward-looking statements which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those discussed in ourForm 10-Kfor the year ended December 31,
2003. Executive Summary We are one of the largest independent owners and operators of full-service
hotels in the United States in terms of our number of guest rooms and gross
annual revenues, as reported by Hotel & Motel Management Magazine in September
2003. We are considered an independent owner and operator because we do not
operate our hotels under our own name. We operate substantially all of our
hotels under nationally recognized brands, such as Crowne Plaza, Holiday
Inn, Marriott, and Hilton. As of August 9, 2004, we operated 87 hotels
with an aggregate of 16,366 rooms, located in 30 states and Canada. Of the 87
hotels, 78 hotels, with an aggregate of 14,348 rooms, are part of our
continuing operations, while nine hotels, with an aggregate of 2,018 rooms, are
held for sale. Our portfolio of 87 hotels consists of:  
    
    82 hotels that we wholly own and operate through subsidiaries;
    
    four hotels that we operate in joint ventures in which we have a 50%
or greater voting equity interest and exercise control; and
    
    one hotel that we operate in a joint venture in which we have a 30%
non-controlling equity interest. We consolidate all of these hotels in our financial statements, other than
the one hotel in which we hold a minority interest and which we account for on
the equity method. During 2003, we developed a portfolio improvement strategy which was
consistent with our goals of operating a portfolio of profitable,
well-maintained and appealing hotels at superior locations in strong markets.
In accordance with this strategy and our efforts to reduce debt and interest
costs, we identified 19 hotels, one office building and three land parcels for
sale. Between November 1, 2003 and August 9, 2004, we sold the office building
and ten of the nineteen hotels. As of August 9, 2004, our portfolio consisted
of 87 hotels, 78 of which represent our continuing portfolio (including one
hotel in which we have a non-controlling equity interest and which we do not
consolidate). Reverse Stock Split On April 27, 2004, our Board of Directors authorized a reverse stock split
of our common stock in a ratio of one-for-three (1:3). The reverse split
affected all of our issued and outstanding common shares, warrants, stock
options and restricted stock. The record date for the reverse split was April
29, 2004 and our new common stock began trading under the split adjustment on
April 30, 2004. Fractional shares which resulted from the reverse stock split were paid in
cash. Each holder of a fractional share of common stock after the effective
date of the reverse split has been paid cash equal to the product of (i) the
average of the closing prices of the common stock for the last ten trading days
prior to April 30, 2004, multiplied by (ii) the fraction of a share of common
stock held by such holder. All amounts for common stock, warrants, stock options, restricted stock
and all earnings per share computations have been retroactively adjusted to
reflect this change in our capital structure. Equity Offering On June 25, 2004, we completed an offering of 18,285,714 shares of common
stock at a price of $10.50 per share. Net proceeds from this equity offering,
after deducting the underwriting discount, advisory fee and other offering
expenses, amounted to approximately $176.2 million. On July 26, 2004,
approximately $114.0 million of 19




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the net proceeds was to be used to redeem all of our outstanding Series A
Preferred Stock shares including accrued dividends and a 4% prepayment premium,
and approximately $2.2 million in cash replaced the 79,278 shares of Preferred
Stock held in the disputed claims reserve. We intend to use approximately $35.2
million of the net proceeds to fund capital expenditures, of which $22.7
million was deposited into a reserve account with Merrill Lynch Mortgage as
part of the Refinancing Debt. Approximately $3.0 million of the net proceeds
of the equity offering was used to fund a reserve account pursuant to other
requirements in our June 2004 debt refinancing agreements. We intend to use
the remaining net proceeds for general corporate purposes including funding our
growth strategy. Series A Preferred Stock On June 25, 2004, immediately following the consummation of our equity
offering, we exchanged 3,941,115 shares of our common stock for 1,483,558
shares of Series A Preferred Stock held by (1) certain affiliates of, and
investments accounts managed by, Oaktree Capital Management, LLC, (2) an
affiliate of Blackstone Real Estate Advisors and (3) Merrill Lynch, Pierce,
Fenner & Smith Incorporated, based on a common stock price of $10.50 per share.
In the Preferred Share exchange, Oaktree, Blackstone and Merrill Lynch
received 2,262,661, 1,049,034, and 629,420 shares of our common stock,
respectively. On July 26, 2004, we used approximately $114.0 million of the net proceeds
from the equity offering to redeem all of the outstanding shares of Series A
Preferred Stock including accrued dividends and a 4% prepayment premium, and
approximately $2.2 million to replace the 79,278 shares of Preferred Stock held
in the disputed claims reserve. Summary of Continuing Operations Below is a summary of our results of operations, which are presented in
more detail in Results of Operations  Continuing Operations:  
    
    Revenues increased as a result of an increase in leisure and business
travel as the hospitality industry and the economy continued to recover
in the second quarter 2004. In addition, hotels that were renovated in
2003 experienced improved occupancy levels upon the completion of their
renovations.
    
    Operating expenses, including direct hotel and other operating
expenses, decreased $3.1 million in the second quarter 2004 as compared
to the second quarter 2003. Our hotels were negatively affected by
increased benefit costs for 401k, workers compensation, union costs and
state unemployment tax rate increases, higher fuel costs, advertising,
and repair and maintenance costs. The hotels benefited, however, from
the stabilization of health insurance costs due to better claims
experience, successful appeals on tax assessments, the settlement of a
deferred ground rent obligation on one of our hotels and reduced
corporate overhead costs primarily due to lower post-emergence
bankruptcy costs. Depreciation and amortization costs were lower due to
a reduced asset base from impairment charges. Finally, no impairment
charges were recorded in the second quarter 2004, whereas, impairment
charges were recorded in the second quarter 2003.
    
    Interest expense and other financing costs was impacted by the
write-off of our deferred loan costs on the debt that was refinanced,
the origination fee on the Refinancing Debt, and the costs incurred for
a derivative instrument used to cap our interest rate exposure on the
fixed-rate Refinancing Debt. Interest expense and other was also higher
in the second quarter 2004 compared with the prior year because we did
not incur interest on the debt related to 18 properties in 2003 until
those properties emerged from Chapter 11 on May 22, 2003.
    
    Loss on preferred stock redemption represents the 4% prepayment
premium due at the time the Preferred Stock shares were exchanged for
common stock shares.
    
    Net loss attributable to common stock was $7.2 million for the second
quarter 2004 and $6.3 million for the second quarter 2003. 20




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Summary of Discontinued Operations As discussed above, during 2003, we identified 19 hotels, one office
building and three land parcels for sale as part of our portfolio improvement
strategy and our efforts to reduce debt and interest costs. Between November 1,
2003 and August 9, 2004, we sold ten of the nineteen hotels and the office
building. Summarized below is certain financial data related to the ten hotels
and one office building sold between November 1, 2003 and August 9, 2004: (Unaudited in thousands)Aggregate sales price
    
    $
    51,613Debt pay down (principal only)
    
    
    38,722Total revenues for the year ended December 31, 2003
    
    
    28,121Direct operating expenses for the year ended December 31, 2003
    
    
    12,918Other hotel operating expenses for the year ended December 31, 2003
    
    
    10,899
 In accordance with SFAS No. 144,
we have included the hotel assets sold during
2003 and 2004 as well as the hotel assets held for sale at June 30, 2004 (including
any related impairment charges) in Discontinued Operations in the Consolidated
Statement of Operations. The assets held for sale at June 30, 2004 and December
31, 2003 and the liabilities related to these assets are separately disclosed
in the Condensed Consolidated Balance Sheets. Where the carrying values of the
assets held for sale exceeded the estimated fair values, net of selling costs,
we reduced the carrying values and recorded impairment charges. We determine
fair values using quoted market prices, when available, or other accepted
valuation techniques. During the three and six months ended June 30, 2004, we
recorded impairment charges of $0.5 million and $2.6 million on assets held for
sale. Where the estimated selling prices, net of selling costs, of assets held
for sale exceeded the carrying values, we did not increase the carrying values
of the assets. Among other criteria, we classify an asset as held for sale if
we expect to dispose of it within one year. While we believe that the completion of these dispositions is probable,
the sale of these assets is subject to market conditions and we cannot provide
assurance that we will finalize the sale of all or any of these assets on
favorable terms or at all. The results of operations of the other 77 hotels that we consolidate in
our financial statements are reported in continuing operations. Our continuing
operations reflect the results of operations of those hotels which we plan to
retain in our portfolio for the foreseeable future. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with GAAP. As we
prepare our financial statements, we make estimates and assumptions which
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. Actual
results could differ from our estimates. A summary of our significant
accounting policies is included in Note 1 of the notes to our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2003. Also, our critical accounting policies and estimates
are discussed in our Annual Report on Form 10-K for the year ended December 31,
2003, and we believe no changes have occurred. Income Statement Overview The discussion below focuses primarily on our continuing operations. In
the continuing operations discussions, we compare the results of operations for
the 77 consolidated hotels which we plan to retain in our portfolio for the
foreseeable future, for the three months ended June 30, 2004 and June 30, 2003
and the results of operations for the six months ended June 30, 2004 and June
30, 2003. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Income Statement Overview in our Annual Report on Form
10-K for the fiscal year ended December 31, 2003 for a general description of
the categorization of our revenues and expenses. We have modified how we categorize our general, administrative and other
expenses to better separate the general and administrative expenses that are
hotel related from the expenses that relate to corporate overhead and 21




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##### 



other. Accordingly, we have divided our general, administrative and other
expenses into three expense categories: (1) other hotel operating expenses,
(2) property and other taxes, insurance and leases, and (3) corporate and
other. Three Months Ended June 30, 2004 (Second Quarter 2004) Compared to the Three
Months Ended June 30, 2003 (Second Quarter 2003) and Six Months Ended June
30, 2004 (2004 Period) Compared to the Six Months Ended June 30, 2003 (2003
Period) Results of Operations  Continuing Operations Revenues  Continuing Operations Second Quarter 2004 Compared to Second Quarter 2003 Three months endedRevenues (unaudited in thousands):
    
    June 30, 2004
    
    June 30, 2003
    
    Increase (decrease)Rooms
    
    $
    64,325
    
    
    $
    61,010
    
    
    $
    3,315
    
    
    
    5.4
    %Food and beverage
    
    
    19,436
    
    
    
    18,977
    
    
    
    459
    
    
    
    2.4
    %Other
    
    
    2,816
    
    
    
    2,838
    
    
    
    (22
    )
    
    
    (0.8
    )%Total revenues
    
    $
    86,577
    
    
    $
    82,825
    
    
    $
    3,752
    
    
    
    4.5
    %Occupancy
    
    
    64.4
    %
    
    
    63.4
    %
    
    
    
    
    
    
    1.6
    %ADR
    
    $
    77.81
    
    
    $
    74.98
    
    
    $
    2.83
    
    
    
    3.8
    %RevPAR
    
    $
    50.10
    
    
    $
    47.52
    
    
    $
    2.58
    
    
    
    5.4
    %
 The 5.4% increase in room revenues is a result of a 1.6% increase in
occupancy and a 3.8% increase in ADR (average daily rate). The 1.6% occupancy
increase for the second quarter 2004 was negatively impacted by displacement at
our hotels that were being renovated during the quarter. Renovation
displacement occurs as we receive reservations at a hotel under renovation for
which we cannot fulfill the room order because the room is out of service. Food and beverage revenues increased 2.4% over the same period last year
primarily due to increased a la carte and banquet revenues resulting from
higher occupancy levels. Other revenues declined by 0.8% and were affected by a
25.7% decline in telephone revenues as a result of the increased usage of cell
phones by our guests as well as the availability of free high speed Internet
access at most of our hotels. The reduction in telephone revenues was offset by
an 8.1% increase in other (non-telephone) revenues, such as in-room movies,
parking services, laundry services, sundries and snacks and golf and activity
sales, which increased due to higher hotel occupancy levels. 2004 Period Compared to 2003 Period Six months endedRevenues (unaudited in thousands):
    
    June 30, 2004
    
    June 30, 2003
    
    Increase (decrease)Rooms
    
    $
    121,888
    
    
    $
    114,924
    
    
    $
    6,964
    
    
    
    6.1
    %Food and beverage
    
    
    35,924
    
    
    
    35,584
    
    
    
    339
    
    
    
    1.0
    %Other
    
    
    5,570
    
    
    
    5,696
    
    
    
    (126
    )
    
    
    (2.2
    )%Total revenues
    
    $
    163,382
    
    
    $
    156,204
    
    
    $
    7,177
    
    
    
    4.6
    %Occupancy
    
    
    61.8
    %
    
    
    60.1
    %
    
    
    
    
    
    
    2.8
    %ADR
    
    $
    76.82
    
    
    $
    74.89
    
    
    $
    1.93
    
    
    
    2.6
    %RevPAR
    
    $
    47.47
    
    
    $
    45.00
    
    
    $
    2.47
    
    
    
    5.5
    %
 The 6.1% increase in room revenues is a result of a 5.5% increase in
RevPAR and the impact of the leap years additional day in February. RevPAR
increased as a result of a 2.8% increase in occupancy and a 2.6% increase in
ADR. 22




---



##### 



Food and beverage revenues increased 1.0% primarily due to increased
banquet room rentals. Other revenues decreased 2.2% primarily driven by a
23.7% decrease in telephone revenues as a result of increased cell phone use by
our guests and the availability of free high speed Internet service
at most of
our hotels. Other (non-telephone) revenues increased by 5.7% for the first six
months of the year primarily due to increases in pay TV and parking revenues. Direct operating expenses  Continuing Operations Second Quarter 2004 Compared to Second Quarter 2003 Three months endedDirect operating expenses:
    
    June 30, 2004
    
    June 30, 2003
    
    Increase (decrease)(Unaudited in thousands)Rooms
    
    $
    16,960
    
    
    $
    16,730
    
    
    $
    230
    
    
    
    1.4
    %Food and beverage
    
    
    12,713
    
    
    
    12,365
    
    
    
    348
    
    
    
    2.8
    %Other
    
    
    2,077
    
    
    
    1,842
    
    
    
    235
    
    
    
    12.8
    %$
    31,750
    
    
    $
    30,937
    
    
    $
    813
    
    
    
    2.6
    %% of total revenues
    
    
    36.7
    %
    
    
    37.4
    %
 Rooms expenses, which vary with room revenues, were higher due to
increased revenues. However, rooms expenses did not increase proportionately as
room revenues increased due to the moderating effect of the fixed portion of
our room expenses. Rooms expenses as a percentage of room revenues for the
second quarter 2004 were 26.4% as compared to 27.4% for the second quarter
2003. Total rooms expenses, on an actual cost per occupied room basis, were
$20.52 for the second quarter 2004 as compared to $20.56 for second quarter
2003. Payroll and related benefits, on an actual cost per occupied room basis,
were $13.01 for the second quarter 2004 as compared to $12.97 for the second
quarter 2003. Other rooms expenses, on an actual cost per occupied room basis,
decreased from $7.59 in the second quarter 2003 to $7.50 for the second quarter
2004 primarily driven by a decrease in cable television expenses. Food and beverage department expenses increased 2.8% in the second quarter
2004 as revenues increased 2.4%. Food and beverage costs as a percentage of
revenues were 0.2% higher than second quarter 2003 partially due to higher
salaries in the second quarter 2004. Other direct operating expenses include telephone service expenses and the
costs of providing ancillary services to our guests such as in-room movies,
parking, laundry and vending machine sales. Other direct operating expenses for
the second quarter 2004 increased 12.8% as compared to the second quarter 2003
while other revenues declined 0.8%. Telephone expenses for the second quarter
2004 increased 5.1% as compared to the second quarter 2003 while ancillary
service costs for the second quarter 2004 increased 16.8% as compared to the
second quarter 2003 primarily due to an increase in parking costs. 2004 Period Compared to 2003 Period Six months endedDirect operating expenses:
    
    June 30, 2004
    
    June 30, 2003
    
    Increase (decrease)(Unaudited in thousands)Rooms
    
    $
    32,978
    
    
    $
    32,093
    
    
    $
    885
    
    
    
    2.8
    %Food and beverage
    
    
    24,247
    
    
    
    24,099
    
    
    
    148
    
    
    
    0.6
    %Other
    
    
    4,049
    
    
    
    3,780
    
    
    
    269
    
    
    
    7.1
    %$
    61,274
    
    
    $
    59,972
    
    
    $
    1,302
    
    
    
    2.2
    %% of total revenues
    
    
    37.5
    %
    
    
    38.4
    %
 Total direct operating expenses as a percentage of revenues for the first
six months of 2004 were 37.5% as compared to 38.4% in the same period 2003 due
to continued cost containment programs. Rooms expenses increased 2.8% while
room revenues increased 6.1% for the six months ended June 30, 2004. On a cost
per occupied room basis, rooms expenses for the first six months of 2004 were
$20.78 as compared to $20.91 in the 23




---



##### 



same period in 2003. Payroll and related
benefits, on an actual cost per occupied room basis, were $13.24 for the first
six months of 2004 as compared to $13.39 for the same period in 2003. Other
rooms expenses, on an actual cost per occupied room basis, increased from $7.52
for the first six months of 2003 to $7.55 for the same period in 2004 primarily
driven by increases in credit card commissions and guest loyalty program
expenses. Food and beverage expenses increased 0.6% for the first six months of 2004
from the same period in 2003 as revenues increased 1.0%. Other direct
operating expenses increased 7.1% for the first six months of 2004 as compared
to the same period in 2003 while other revenues declined by 2.2%. Telephone
expenses declined 3.4% while other direct operating costs increased 12.5%
primarily due to increases in parking and pay TV costs. Other operating expenses  Continuing Operations Second Quarter 2004 Compared to Second Quarter 2003 Three months endedJune 30, 2004
    
    June 30, 2003
    
    Increase (decrease)(Unaudited in thousands)Other operating expenses:Other hotel operating costs
    
    $
    23,822
    
    
    $
    22,797
    
    
    $
    1,025
    
    
    
    4.5
    %Property and other taxes, insurance and leases
    
    
    5,376
    
    
    
    6,923
    
    
    
    (1,547
    )
    
    
    (22.3
    )%Corporate and other
    
    
    4,782
    
    
    
    6,075
    
    
    
    (1,293
    )
    
    
    (21.3
    )%Depreciation and amortization
    
    
    6,870
    
    
    
    7,573
    
    
    
    (703
    )
    
    
    (9.3
    )%Impairment of long-lived assets
    
    
    
    
    
    
    1,378
    
    
    
    (1,378
    )
    
    
    (100.0
    )%$
    40,850
    
    
    $
    44,746
    
    
    $
    (3,896
    )
    
    
    (8.7
    )%% of total revenues
    
    
    47.2
    %
    
    
    54.0
    %
 Other hotel operating costs increased due to the following:  
    
    Hotel administration costs increased $0.1 million, primarily as a
result of salary and employee benefit increases;
    
    Advertising and promotion costs increased $0.2 million, primarily
as a result of salary and employee benefit increases;
    
    Franchise fees increased $0.5 million as a result of the increase
in revenues and the increased cost of brand loyalty programs;
    
    Repairs and maintenance costs increased $0.2 million primarily as
a result of our continuing preventative maintenance program and
our renovation projects; and
    
    Utility costs increased $0.1 million as a result of rate and
consumption increases. Property and other taxes, insurance and leases decreased $1.5 million as
compared to second quarter 2003 as a result of stabilization in the insurance
markets and improved loss experience, successful appeals related to property
tax assessments, reductions in franchise taxes, and settlement of a deferred
ground rent obligation at one of our hotels. Corporate and other expenses decreased 21.3% in the second quarter 2004 as
compared to the same period in 2003 as a result of the significant reduction in
post-emergence legal, professional and other costs related to the Chapter 11
proceedings. For the second quarter 2004, these costs totaled $0.1 million
compared to $1.8 million for the second quarter 2003 (not including the $0.8
million of reorganization items). Depreciation and amortization expenses decreased as a result of our
reduced asset base on the continuing operations hotels. The asset base on these
hotels was reduced by a $1.4 million impairment charge in the second 24




---



##### 



quarter 2003 and subsequent impairment charges of $11.3 million recorded
in the last six months of 2003 on assets held for use. 2004 Period Compared to 2003 Period Six months ended
    
    Increase (decrease)June 30, 2004
    
    June 30, 2003(Unaudited in thousands)Other operating expenses:Other hotel operating costs
    
    $
    47,894
    
    
    $
    45,272
    
    
    $
    2,622
    
    
    
    5.8
    %Property and other taxes, insurance and leases
    
    
    11,127
    
    
    
    13,584
    
    
    
    (2,457
    )
    
    
    (18.1
    )%Corporate and other
    
    
    9,195
    
    
    
    12,045
    
    
    
    (2,850
    )
    
    
    (23.7
    )%Depreciation and amortization
    
    
    13,675
    
    
    
    14,995
    
    
    
    (1,320
    )
    
    
    (8.8
    )%Impairment of long-lived assets
    
    
    
    
    
    
    1,378
    
    
    
    (1,378
    )
    
    
    (100.0
    )%$
    81,891
    
    
    $
    87,274
    
    
    $
    (5,383
    )
    
    
    (6.2
    )%% of total revenues
    
    
    50.1
    %
    
    
    55.9
    %
 Other hotel operating costs increased due to the following:  
    
    Hotel administration costs increased $0.4 million primarily
as a result of salary and employee benefit cost increases;
    
    Advertising and promotion costs increased $0.5 million
primarily as a result of salary and benefit cost increases;
    
    Franchise fees increased $1.0 million as a result of the
increase in revenues and the increased cost of brand loyalty
programs;
    
    Repair and maintenance costs increased $0.5 million due to
our preventative maintenance and hotel renovation programs; and
    
    Utility costs increased $0.3 million due to rate and
consumption increases. Property and other tax savings of $0.7 million, insurance savings of $0.7
million, franchise tax savings of $0.2 million, and ground rent savings of $0.9
million in the first six months of 2004 were offset partially by equipment
rental increases of $0.1 million. Corporate and other expenses decreased 23.7% in the six months ended June
30, 2004 as compared to the same period in 2003 as a result of a significant
reduction in post-emergence legal, professional and other costs related to the
Chapter 11 proceedings. For the six months ended June 30, 2004 these costs
totaled $0.3 million as compared to $3.2 million for the same period in 2003
(not including $2.0 million of reorganization items). Depreciation and amortization expenses decreased $1.3 million as a result
of our reduced asset base on the continuing operations hotels due to asset
write-downs for impairment charges. The asset base on these hotels was reduced
by a $1.4 million impairment charge in the second quarter 2003 and subsequent
impairment charges of $11.3 million recorded in the last six months of 2003 on
assets held for use. Non-operating income (expenses)  Continuing Operations Second Quarter 2004 Compared to Second Quarter 2003 Three months ended
    
    Increase (decrease)June 30, 2004
    
    June 30, 2003(Unaudited in thousands)Non-operating income (expenses):Interest income and other
    
    $
    66
    
    
    $
    124
    
    
    $
    (58
    )
    
    
    (46.8
    )%Interest expense and other financing costs:Preferred stock dividend
    
    
    (4,233
    )
    
    $
    
    
    
    
    (4,233
    )
    
    
    N/A
    %Other interest expense
    
    
    (19,920
    )
    
    $
    (6,919
    )
    
    
    (13,001
    )
    
    
    187.9
    %Loss on
preferred stock redemption
    
    
    (1,592
    )
    
    
    
    
    
    
    (1,592
    )
    
    
    N/A
    %Reorganization items
    
    
    
    
    
    
    (808
    )
    
    
    808
    
    
    
    (100.0
    )%Minority interests
    
    
    (71
    )
    
    
    (69
    )
    
    
    (2
    )
    
    
    2.9
    %
 25




---



##### 



The Preferred Stock dividend relates to dividends on the Preferred Stock
issued on November 25, 2002. Dividends for the second quarter 2004 were $4.2
million. In accordance with SFAS No. 150 effective for us on July 1, 2003,
dividends relating to the period after the effective date are reported as
interest expense. Dividends for the period prior to the effective date continue
to be shown as a deduction from retained earnings with no effect on our results
of operations. As a result, the $4.2 million dividend accrued for the second
quarter 2004 is reported in interest expense while the $3.8 million dividend
accrued for the period April 1, 2003 to June 30, 2003 is shown as a deduction
from retained earnings. Other interest expense for the second quarter 2004 increased $13.0 million
as compared to the same period in 2003 because of the following transactions:  
    
    The $1.9 million net cost of the swaption contract to
hedge against rising interest rates until the Fixed Rate Loans
interest rate was locked;
    
    Prepayment penalties paid to Merrill Lynch Mortgage of
$1.9 million on the Senior Loan and $0.8 million on the Mezzanine
Loan (not including $0.2 million of prepayment penalties
allocated to discontinued operations) with the extinguishment of
Merrill Lynch Exit Financing debt;
    
    The write-off of $6.7 million in deferred loan costs
($3.3 million for Lehman, $3.4 million for Merrill Lynch
and nil for Macon), not including $0.7 million in deferred loan costs
allocated to discontinued operations, as a result of the
extinguishment of the Merrill Lynch Mortgage, Lehman Debt and
Macon Debt;
    
    The $0.8 million loan origination costs incurred as a
part of the Refinancing Debt (not including $0.3 million of
origination costs allocated to discontinued operations); and
    
    Loss on preferred stock redemption of $1.6 million
representing the 4% prepayment premium on the Preferred Stock shares that were converted to common stock immediately following
the consummation of our equity offering on June 25, 2004. We continue to incur expenses related to the Chapter 11 proceedings but
currently report these expenses as part of general, administrative and other
expenses. Reorganization items for the second quarter 2003 of $0.8 million
represent Chapter 11 expenses incurred between April 1, 2003 and May 22, 2003
relating to the 18 hotels which emerged from Chapter 11 on May 22, 2003. In
accordance with generally accepted accounting principles (GAAP), all Chapter
11 expenses incurred in the second quarter 2003 from April 1, 2003 to May 22,
2003 that were related to the 18 hotels were reported as reorganization items. Minority interests represent the third party owners share of the net
income of the four joint ventures in which we have a controlling equity
interest. The aggregate results of these joint ventures for the second quarter
2004 were similar to the results for the second quarter 2003; hence our share
of the joint ventures income for the second quarter 2004 was flat compared to
the second quarter 2003. 2004 Period Compared to 2003 Period Six months ended
    
    Increase (decrease)June 30, 2004
    
    June 30, 2003(Unaudited in thousands)Non-operating income (expenses):Interest income and other
    
    $
    109
    
    
    $
    207
    
    
    $
    (98
    )
    
    
    (47.3
    )%Interest expense and other financing costs:Preferred stock dividend
    
    
    (8,518
    )
    
    
    
    
    
    
    (8,518
    )
    
    
    N/A
    %Other interest expense
    
    
    (28,079
    )
    
    
    (13,198
    )
    
    
    (14,881
    )
    
    
    112.8
    %Loss on preferred stock redemption
    
    
    (1,592
    )
    
    
    
    
    
    
    (1,592
    )
    
    
    N/A
    %Reorganization items
    
    
    
    
    
    
    (2,045
    )
    
    
    2,045
    
    
    
    (100.0
    )%Minority interests
    
    
    (218
    )
    
    
    (217
    )
    
    
    (1
    )
    
    
    0.5
    %
 The $8.5 million preferred stock dividend included in interest expense the
six months ended June 30, 2004 compares to the $7.6 million dividend charged
directly to retained earnings, per GAAP, in the same period in 2003. 26




---



##### 



Other interest expense increased $14.9 million in the six months ended
June 30, 2004 as compared to the same period in 2003 due to the purchase of a
$1.9 million swaption contract, the write-off of $6.7 million of deferred loan
costs due to the extinguishment of the Merrill Lynch Mortgage, Lehman Debt, and
Macon Debt, $2.7 million of prepayment penalties for early retirement on the
Merrill Lynch Mortgage debt, the expensing of $0.8 million in loan origination
costs incurred as part of the Refinancing Debt and additional mortgage interest
in 2004 on the former Lehman hotels since we did not pay interest expense
during 2003 while the hotels were in Chapter 11. Loss on preferred stock redemption of $1.6 million represents the 4%
prepayment premium on the Preferred Stock shares that were converted to common
stock immediately following the consummation of our equity offering on June 25,
2004. Post-emergence bankruptcy charges incurred during the six months ended
June 30, 2004 are included in corporate general and administrative expenses
whereas reorganization expenses for the 18 hotels that were in Chapter 11 in
the same period in 2003 are categorized as reorganization expenses per GAAP. The aggregate results of our four joint ventures in which we have a
controlling equity interest for the six months ended June 30, 2004 were similar
to the same period in 2003; hence, our share of the joint ventures income for
six months ended June 30, 2004 is flat as compared to the same period in 2003. Results of Operations  Discontinued Operations Discontinued operations include results of operations for both assets sold
during the reporting period and assets that have been identified for sale.
Consequently, the 10 hotels and three land parcels which were held for sale at
June 30, 2004, as well as the 18 hotels and the office building that were
disposed of between January 1, 2003 and June 30, 2004, are included in
discontinued operations. We present the current quarters results of these
hotels as discontinued operations as well as the comparative results for the
prior quarter. 27




---



##### 



Set forth below are the condensed combined statement of operations for the
properties classified as discontinued operations: Second Quarter 2004 Compared to Second Quarter 2003 Three months endedJune 30,
    
    June 30,
    
    Increase2004
    
    2003
    
    (Decrease)(Unaudited in thousands)Revenues:Rooms
    
    $
    8,491
    
    
    $
    12,709
    
    
    $
    (4,218
    )Food and beverage
    
    
    2,439
    
    
    
    3,176
    
    
    
    (737
    )Other
    
    
    358
    
    
    
    893
    
    
    
    (535
    )11,288
    
    
    
    16,778
    
    
    
    (5,490
    )Operating expenses:Direct:Rooms
    
    
    2,339
    
    
    
    3,714
    
    
    
    (1,375
    )Food and beverage
    
    
    1,751
    
    
    
    2,360
    
    
    
    (609
    )Other
    
    
    253
    
    
    
    586
    
    
    
    (333
    )4,343
    
    
    
    6,660
    
    
    
    (2,317
    )6,945
    
    
    
    10,118
    
    
    
    (3,173
    )Other operating expenses:Other hotel operating costs
    
    
    3,460
    
    
    
    5,721
    
    
    
    (2,261
    )Property and other taxes, insurance and leases
    
    
    74
    
    
    
    1,871
    
    
    
    (1,797
    )Depreciation and amortization
    
    
    18
    
    
    
    1,502
    
    
    
    (1,484
    )Impairment of long-lived assets
    
    
    451
    
    
    
    2,070
    
    
    
    (1,619
    )Other operating expenses
    
    
    4,003
    
    
    
    11,164
    
    
    
    (7,161
    )2,942
    
    
    
    (1,046
    )
    
    
    3,988Interest expense and other financing costs
    
    
    (2,583
    )
    
    
    (791
    )
    
    
    (1,792
    )Gain on asset dispositions
    
    
    4,242
    
    
    
    1
    
    
    
    4,241Loss before income taxes
    
    
    4,601
    
    
    
    (1,836
    )
    
    
    6,437Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    4,601
    
    
    $
    (1,836
    )
    
    $
    6,437
 Second quarter 2004 revenues and expenses reflected in discontinued
operations above are not fully comparable with the second quarter 2003 revenues
and expenses as a result of the following:  
    
    For the second quarter 2004 there are no revenues and expenses in the
table for the hotel and office building sold during 2003 and the five
properties sold in first quarter 2004. Hence, the second quarter 2003
results reflect the full quarters operations for these seven
properties. For the second quarter 2003, revenues for these seven
properties were $3.8 million and direct operating expenses were $1.6
million in aggregate.
    
    Less than a full quarters revenues and expenses are included in the
results for the second quarter 2004 for the three hotels sold at various
intervals during the quarter. Additionally, the following factors affected the results of the hotels
included in discontinued operations:  
    
    Depreciation on these hotels was suspended by our classification of
these assets as held for sale. Fourteen of the nineteen hotels were
identified for sale in June 2003 and therefore the full quarters
depreciation would have been recorded in the second quarter 2003 with no
depreciation on these assets recorded during the second quarter 2004.
Impairment charges of $0.5 million recorded in the second quarter 2004
represent the excess of the carrying values of assets held for sale over
the revised estimated selling price less estimated selling costs. 28




---



##### 




    
    Interest expense increased as a result of the Lehman Financing which
was executed in May 2003 and which replaced debt on which we were not
required to pay interest while the related hotels were in Chapter 11.
    
    The gain on asset dispositions of $4.2 million represents the gain on
sale of two of the three hotels sold during the second quarter 2004. 2004 Period Compared to 2003 Period Six months endedJune 30,
    
    June 30,
    
    Increase2004
    
    2003*
    
    (Decrease)(Unaudited in thousands)Revenues:Rooms
    
    $
    16,435
    
    
    $
    21,843
    
    
    $
    (5,408
    )Food and beverage
    
    
    4,757
    
    
    
    5,535
    
    
    
    (778
    )Other
    
    
    836
    
    
    
    1,686
    
    
    
    (850
    )22,028
    
    
    
    29,064
    
    
    
    (7,036
    )Operating expenses:Direct:Rooms
    
    
    5,035
    
    
    
    6,910
    
    
    
    (1,875
    )Food and beverage
    
    
    3,585
    
    
    
    4,388
    
    
    
    (803
    )Other
    
    
    638
    
    
    
    1,184
    
    
    
    (546
    )9,258
    
    
    
    12,482
    
    
    
    (3,224
    )12,770
    
    
    
    16,582
    
    
    
    (3,812
    )Other operating expenses:Other hotel operating costs
    
    
    8,514
    
    
    
    11,474
    
    
    
    (2,960
    )Property and other taxes, insurance and leases
    
    
    1,083
    
    
    
    3,868
    
    
    
    (2,785
    )Depreciation and amortization
    
    
    151
    
    
    
    2,949
    
    
    
    (2,798
    )Impairment of long-lived assets
    
    
    2,604
    
    
    
    2,070
    
    
    
    534Other operating expenses
    
    
    12,352
    
    
    
    20,361
    
    
    
    (8,009
    )418
    
    
    
    (3,779
    )
    
    
    4,197Interest expense and other financing costs
    
    
    (3,768
    )
    
    
    (1,301
    )
    
    
    (2,467
    )Gain on asset dispositions
    
    
    7,249
    
    
    
    1
    
    
    
    7,248Loss before income taxes
    
    
    3,899
    
    
    
    (5,079
    )
    
    
    8,978Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    3,899
    
    
    $
    (5,079
    )
    
    $
    8,978
   *The six months ended June 30, 2003 revenues and expenses in the table above includes de
minimus amounts for the eight hotels conveyed to a lender in January 2003 and the one hotel
returned to the lessor of a capital lease, also in January 2003. The six months ended June 30, 2004 revenues and expenses reflected in
discontinued operations above are not fully comparable with the six months
ended June 30, 2003 revenues and expenses as a result of the following:  
    
    For the six months ended June 30, 2004 there are no revenues and
expenses in the table for the hotel and office building sold during
2003. The hotel was sold in November 2003 and the office building was
sold in December 2003. Hence, the six months ended June 30, 2003 results
reflect the full periods operations for these two properties. For the
six months ended June 30, 2003, revenues for these two properties were
$1.4 million and direct operating expenses were $0.6 million in
aggregate.
    
    Less than six months revenues and expenses are included in the
results for the six months ended June 30, 2004 for the eight hotels sold
at various intervals during the period. Additionally the following factors affected the results of the hotels
included in discontinued operations: 29




---



##### 




    
    Depreciation on these hotels was suspended by our classification of
these assets as held for sale. All nineteen hotels were identified for
sale in June 2003 or later and hence the full six months depreciation
would have been recorded in the six months ended June 30, 2003 with no
depreciation on these assets being recorded during the six months ended
June 30, 2004. Impairment charges of $2.6 million and $2.1 million were
recorded for the six months ended June 30, 2004 and June 30, 2003,
respectively, which represent the excess of the carrying values of
assets held for sale over the revised estimated selling price less
estimated selling costs.
    
    Interest expense increased as a result of the Lehman Financing which
was executed in May 2003 and which replaced debt on which we were not
required to pay interest while the related hotels were in Chapter 11.
    
    The gain on asset dispositions of $7.2 million represents the gain on
sale of six of the eight hotels sold during the six months ended June
30, 2004. Income taxes At December 31, 2003, we had available net operating loss carryforwards of
approximately $270 million for federal income tax purposes, which will expire
in 2004 through 2023. Our reorganization under Chapter 11 resulted in an
ownership change, as defined in Section 382 of the Internal Revenue Code.
Consequently, our ability to use the net operating loss carryforwards to offset
future income is subject to certain annual limitations. The recently concluded equity offering resulted in another Section 382
ownership change, placing further limitations on the Companys ability to
utilize these losses. Due to these and other limitations, a portion or all of
the net operating loss carryforwards could expire unused. At December 31,
2003, we established a valuation allowance of $140.0 million to fully offset
our net deferred tax asset. EBITDA We use earnings before interest, taxes, depreciation and amortization
(EBITDA) to measure our performance and to assist us in the assessment of
hotel property values. EBITDA is also a widely-used industry measure. However,
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. Depreciation and amortization
are significant non-cash expenses for us as a result of the high proportion of
our assets which are long-lived, including property, plant and equipment. We
depreciate property, plant and equipment over their estimated useful lives and
amortize deferred financing and franchise fees over the term of the applicable
agreements. We also believe that EBITDA provides pertinent information to
investors and is an additional indicator of our operating performance. The following table presents EBITDA, a non-GAAP measure, for the second
quarter 2004 and second quarter 2003 and the six months ended June 30, 2004 and
June 30, 2003, and provides a reconciliation with the loss from continuing
operations, a GAAP measure: 30




---



##### 



Three months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(Unaudited in thousands)
    
    (Unaudited in thousands)Continuing operations:Loss  continuing operations
    
    $
    (11,848
    )
    
    $
    (605
    )
    
    $
    (18,232
    )
    
    $
    (6,446
    )Depreciation and amortization
    
    
    6,870
    
    
    
    7,573
    
    
    
    13,675
    
    
    
    14,995Impairment of long-lived assets
    
    
    
    
    
    
    1,378
    
    
    
    
    
    
    
    1,378Interest income and other
    
    
    (66
    )
    
    
    (124
    )
    
    
    (109
    )
    
    
    (207
    )Interest expense and other financing costs
    
    
    19,920
    
    
    
    6,919
    
    
    
    28,079
    
    
    
    13,198Preferred stock dividends
    
    
    4,233
    
    
    
    
    
    
    
    8,518
    
    
    
    Loss on preferred stock redemption
    
    
    1,592
    
    
    
    
    
    
    
    1,592
    
    
    
    Provision for income taxes  continuing
operations
    
    
    75
    
    
    
    75
    
    
    
    151
    
    
    
    151EBITDA
    
    $
    20,776
    
    
    $
    15,216
    
    
    $
    33,674
    
    
    $
    23,069
    Additional Financial Information Regarding Quarterly Results of Our Continuing
Operations The following table presents certain quarterly data for our continuing
operations for the six quarters ended June 30, 2004. The data have been
derived from our unaudited condensed consolidated financial statements for the
periods indicated. Our unaudited consolidated financial statements have been
prepared on substantially the same basis as our audited consolidated financial
statements and include all adjustments, consisting primarily of normal
recurring adjustments we consider to be necessary to present fairly this
information when read in conjunction with our consolidated financial
statements. The results of operations for certain quarters may vary from the
amounts previously reported on our Forms 10-Q filed for prior quarters due to
timing of our identification of assets held for sale during the course of the
fiscal year ended December 31, 2003. The allocation of results of operations
between our continuing operations and discontinued operations, at the time of
the quarterly filings, was based on the assets held for sale, if any, as of the
dates of those filings. This table represents the comparative quarterly
operating results for the 77 hotels classified in continuing operations at June
30, 2004. Three Months EndedJune 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,2004
    
    2004
    
    2003
    
    2003
    
    2003
    
    2003Revenues:Rooms
    
    $
    64,325
    
    
    $
    57,563
    
    
    $
    52,089
    
    
    $
    62,506
    
    
    $
    61,010
    
    
    $
    53,914Food and beverage
    
    
    19,436
    
    
    
    16,488
    
    
    
    18,800
    
    
    
    16,407
    
    
    
    18,977
    
    
    
    16,607Other
    
    
    2,816
    
    
    
    2,754
    
    
    
    2,817
    
    
    
    2,841
    
    
    
    2,838
    
    
    
    2,85886,577
    
    
    
    76,805
    
    
    
    73,706
    
    
    
    81,754
    
    
    
    82,825
    
    
    
    73,379Operating expenses:Direct:Rooms
    
    
    16,960
    
    
    
    16,018
    
    
    
    16,023
    
    
    
    17,697
    
    
    
    16,730
    
    
    
    15,363Food and beverage
    
    
    12,713
    
    
    
    11,534
    
    
    
    12,557
    
    
    
    12,030
    
    
    
    12,365
    
    
    
    11,734Other
    
    
    2,077
    
    
    
    1,972
    
    
    
    2,178
    
    
    
    2,013
    
    
    
    1,842
    
    
    
    1,93831,750
    
    
    
    29,524
    
    
    
    30,758
    
    
    
    31,740
    
    
    
    30,937
    
    
    
    29,03554,827
    
    
    
    47,281
    
    
    
    42,948
    
    
    
    50,014
    
    
    
    51,888
    
    
    
    44,344Other operating expenses:Other hotel operating expenses
    
    
    23,822
    
    
    
    24,072
    
    
    
    22,546
    
    
    
    24,164
    
    
    
    22,797
    
    
    
    22,475Property and other taxes, insurance and leases
    
    
    5,376
    
    
    
    5,751
    
    
    
    5,343
    
    
    
    6,087
    
    
    
    6,923
    
    
    
    6,661Corporate and other
    
    
    4,782
    
    
    
    4,413
    
    
    
    4,791
    
    
    
    4,235
    
    
    
    6,075
    
    
    
    5,970Depreciation and amortization
    
    
    6,870
    
    
    
    6,805
    
    
    
    7,156
    
    
    
    7,572
    
    
    
    7,573
    
    
    
    7,422Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    11,286
    
    
    
    2
    
    
    
    1,378
    
    
    
    Other operating expenses
    
    
    40,850
    
    
    
    41,041
    
    
    
    51,122
    
    
    
    42,060
    
    
    
    44,746
    
    
    
    42,52813,977
    
    
    
    6,240
    
    
    
    (8,174
    )
    
    
    7,954
    
    
    
    7,142
    
    
    
    1,816Other income (expenses):Interest income and other
    
    
    66
    
    
    
    43
    
    
    
    366
    
    
    
    114
    
    
    
    124
    
    
    
    83Interest expense and other financing costs:Preferred stock dividend
    
    
    (4,233
    )
    
    
    (4,285
    )
    
    
    (4,065
    )
    
    
    (4,027
    )Other interest expense
    
    
    (19,920
    )
    
    
    (8,159
    )
    
    
    (7,756
    )
    
    
    (7,665
    )
    
    
    (6,919
    )
    
    
    (6,279
    )Gain on asset dispositions
    
    
    
    
    
    
    0
    
    
    
    444
    
    
    
    
    
    
    
    
    
    
    
    Loss on preferred stock redemption
    
    
    (1,592
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income before income taxes,
reorganization items and minority interests
    
    
    (11,702
    )
    
    
    (6,161
    )
    
    
    (19,185
    )
    
    
    (3,624
    )
    
    
    347
    
    
    
    (4,380
    )Reorganization items
    
    
    
    
    
    
    
    
    
    
    647
    
    
    
    
    
    
    
    (808
    )
    
    
    (1,237
    )Loss before income taxes and minority interest
    
    
    (11,702
    )
    
    
    (6,161
    )
    
    
    (18,538
    )
    
    
    (3,624
    )
    
    
    (461
    )
    
    
    (5,617
    )Minority interests
    
    
    (71
    )
    
    
    (147
    )
    
    
    1,412
    
    
    
    99
    
    
    
    (69
    )
    
    
    (148
    )Loss before income taxes  continuing operations
    
    
    (11,773
    )
    
    
    (6,308
    )
    
    
    (17,126
    )
    
    
    (3,525
    )
    
    
    (530
    )
    
    
    (5,765
    )(Provision) benefit for income taxes -
continuing operations
    
    
    (75
    )
    
    
    (76
    )
    
    
    48
    
    
    
    (75
    )
    
    
    (75
    )
    
    
    (76
    )Loss  continuing operations
    
    
    (11,848
    )
    
    
    (6,384
    )
    
    
    (17,078
    )
    
    
    (3,600
    )
    
    
    (605
    )
    
    
    (5,841
    )Discontinued operations:(Loss) income from discontinued operations
before income taxes
    
    
    4,601
    
    
    
    (702
    )
    
    
    572
    
    
    
    (46
    )
    
    
    (1,836
    )
    
    
    (3,243
    )Income tax benefit (provision)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from discontinued operations
    
    
    4,601
    
    
    
    (702
    )
    
    
    572
    
    
    
    (46
    )
    
    
    (1,836
    )
    
    
    (3,243
    )Net loss
    
    
    (7,247
    )
    
    
    (7,086
    )
    
    
    (16,506
    )
    
    
    (3,646
    )
    
    
    (2,441
    )
    
    
    (9,084
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,818
    )
    
    
    (3,776
    )Net loss attributable to common stock
    
    $
    (7,247
    )
    
    $
    (7,086
    )
    
    $
    (16,506
    )
    
    $
    (3,646
    )
    
    $
    (6,259
    )
    
    $
    (12,860
    )
 EBITDA Reconciliation of Continuing Operations 31




---



##### 



The following table is a reconciliation of the quarterly EBITDA for the hotels
classified as continuing operations as of June 30, 2004, reflecting the
reclassification of certain hotels from continuing operations to discontinued
operations as discussed in connection with the preceding table: Three Months EndedJune 30, 2004
    
    March 30, 2004
    
    December 31, 2003
    
    September 30, 2003
    
    June 30, 2003
    
    March 31, 2003Continuing
operations:Loss  continuing operations
    
    $
    (11,848
    )
    
    $
    (6,384
    )
    
    $
    (17,078
    )
    
    $
    (3,600
    )
    
    $
    (605
    )
    
    $
    (5,841
    )Depreciation and amortization
    
    
    6,870
    
    
    
    6,805
    
    
    
    7,156
    
    
    
    7,572
    
    
    
    7,573
    
    
    
    7,422Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    11,286
    
    
    
    2
    
    
    
    1,378
    
    
    
    Interest income and other
    
    
    (66
    )
    
    
    (43
    )
    
    
    (366
    )
    
    
    (114
    )
    
    
    (124
    )
    
    
    (83
    )Interest expense and other financing
costs
    
    
    19,920
    
    
    
    8,159
    
    
    
    7,756
    
    
    
    7,665
    
    
    
    6,919
    
    
    
    6,279Preferred stock dividends
    
    
    4,233
    
    
    
    4,285
    
    
    
    4,065
    
    
    
    4,027
    
    
    
    
    
    
    
    Gain on asset dispositions
    
    
    
    
    
    
    (0
    )
    
    
    (444
    )
    
    
    
    
    
    
    
    
    
    
    Loss on preferred stock redemption
    
    
    1,592
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision (benefit) for income
taxescontinuing operations
    
    
    75
    
    
    
    76
    
    
    
    (48
    )
    
    
    75
    
    
    
    75
    
    
    
    76EBITDA
    
    $
    20,776
    
    
    $
    12,898
    
    
    $
    12,327
    
    
    $
    15,627
    
    
    $
    15,216
    
    
    $
    7,853
 Hotel data by market segment and region The following two tables present data on occupancy, ADR and RevPAR for the
hotels in our portfolio (including one hotel that we do not consolidate) at
June 30, 2004, by market segment for the second quarter 2004 and the second
quarter 2003 and the six months ended June 30, 2004 and June 30, 2003. From
November 1, 2003 through August 9, 2004, we sold ten of the hotels included in
the following table as part of our discontinued operations. 32




---



##### 



Combined Continuing and Discontinued Operations  88 hotels Capital expenditures
    
    Three Months Ended
    
    Six Months EndedSix Months EndedJune 30, 2004
    
    June 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(in thousands $)Upper UpscaleNumber of properties
    
    $
    753
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Number of rooms
    
    
    
    
    
    
    825
    
    
    
    825
    
    
    
    825
    
    
    
    825Occupancy
    
    
    
    
    
    
    72.0
    %
    
    
    57.7
    %
    
    
    68.0
    %
    
    
    59.6
    %Average daily rate
    
    
    
    
    
    $
    95.43
    
    
    $
    88.93
    
    
    $
    94.87
    
    
    $
    90.76RevPAR
    
    
    
    
    
    $
    68.74
    
    
    $
    51.35
    
    
    $
    64.53
    
    
    $
    54.11UpscaleNumber of properties
    
    
    4,571
    
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    17Number of rooms
    
    
    
    
    
    
    3,002
    
    
    
    3,002
    
    
    
    3,002
    
    
    
    3,002Occupancy
    
    
    
    
    
    
    69.2
    %
    
    
    68.2
    %
    
    
    68.9
    %
    
    
    67.1
    %Average daily rate
    
    
    
    
    
    $
    84.95
    
    
    $
    83.67
    
    
    $
    86.73
    
    
    $
    85.75RevPAR
    
    
    
    
    
    $
    58.77
    
    
    $
    57.08
    
    
    $
    59.78
    
    
    $
    57.51Midscale with Food & BeverageNumber of properties
    
    
    6,755
    
    
    
    55
    
    
    
    55
    
    
    
    55
    
    
    
    55Number of rooms
    
    
    
    
    
    
    11,198
    
    
    
    11,198
    
    
    
    11,198
    
    
    
    11,198Occupancy
    
    
    
    
    
    
    61.6
    %
    
    
    61.2
    %
    
    
    57.3
    %
    
    
    56.3
    %Average daily rate
    
    
    
    
    
    $
    74.20
    
    
    $
    72.31
    
    
    $
    72.02
    
    
    $
    70.69RevPAR
    
    
    
    
    
    $
    45.67
    
    
    $
    44.24
    
    
    $
    41.24
    
    
    $
    39.77Midscale without Food & BeverageNumber of properties
    
    
    325
    
    
    
    9
    
    
    
    9
    
    
    
    9
    
    
    
    9Number of rooms
    
    
    
    
    
    
    1,067
    
    
    
    1,067
    
    
    
    1,067
    
    
    
    1,067Occupancy
    
    
    
    
    
    
    63.5
    %
    
    
    60.1
    %
    
    
    60.3
    %
    
    
    52.6
    %Average daily rate
    
    
    
    
    
    $
    60.99
    
    
    $
    59.73
    
    
    $
    61.13
    
    
    $
    59.52RevPAR
    
    
    
    
    
    $
    38.76
    
    
    $
    35.89
    
    
    $
    36.85
    
    
    $
    31.31Independent HotelsNumber of properties
    
    
    80
    
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    3Number of rooms
    
    
    
    
    
    
    535
    
    
    
    535
    
    
    
    535
    
    
    
    535Occupancy
    
    
    
    
    
    
    43.4
    %
    
    
    49.7
    %
    
    
    39.1
    %
    
    
    44.7
    %Average daily rate
    
    
    
    
    
    $
    67.19
    
    
    $
    62.02
    
    
    $
    63.18
    
    
    $
    59.95RevPAR
    
    
    
    
    
    $
    29.14
    
    
    $
    30.82
    
    
    $
    24.71
    
    
    $
    26.82All HotelsNumber of properties
    
    
    12,484
    
    
    
    88
    
    
    
    88
    
    
    
    88
    
    
    
    88Number of rooms
    
    
    
    
    
    
    16,627
    
    
    
    16,627
    
    
    
    16,627
    
    
    
    16,627Occupancy
    
    
    
    
    
    
    63.0
    %
    
    
    61.8
    %
    
    
    59.5
    %
    
    
    57.8
    %Average daily rate
    
    
    
    
    
    $
    76.53
    
    
    $
    74.29
    
    
    $
    75.50
    
    
    $
    73.95RevPAR
    
    
    
    
    
    $
    48.21
    
    
    $
    45.94
    
    
    $
    44.93
    
    
    $
    42.73
 The categories in the table above are based on the
Smith Travel Research Chain Scales and are defined as:  Upper Upscale: Hilton and Marriott
Upscale: Courtyard by Marriott, Crowne Plaza, Radisson and Residence Inn by Marriott
Midscale with Food & Beverage: Clarion, Doubletree, Four Points, Holiday Inn, Holiday Inn Select,  Holiday
Inn SunSpree Resort and Quality Inn
Midscale without Food & Beverage: Fairfield Inn by Marriott and Holiday Inn Express Continuing Operations  78 hotels 33




---



##### 



Capital expenditures
    
    Three Months Ended
    
    Six Months EndedSix Months EndedJune 30, 2004
    
    June 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(in thousands $)Upper UpscaleNumber of properties
    
    $
    753
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Number of rooms
    
    
    
    
    
    
    825
    
    
    
    825
    
    
    
    825
    
    
    
    825Occupancy
    
    
    
    
    
    
    72.0
    %
    
    
    57.7
    %
    
    
    68.0
    %
    
    
    59.6
    %Average daily rate
    
    
    
    
    
    $
    95.43
    
    
    $
    88.93
    
    
    $
    94.87
    
    
    $
    90.76RevPAR
    
    
    
    
    
    $
    68.74
    
    
    $
    51.35
    
    
    $
    64.53
    
    
    $
    54.11UpscaleNumber of properties
    
    
    4,571
    
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    17Number of rooms
    
    
    
    
    
    
    3,002
    
    
    
    3,002
    
    
    
    3,002
    
    
    
    3,002Occupancy
    
    
    
    
    
    
    69.2
    %
    
    
    68.2
    %
    
    
    68.9
    %
    
    
    67.1
    %Average daily rate
    
    
    
    
    
    $
    84.95
    
    
    $
    83.67
    
    
    $
    86.73
    
    
    $
    85.75RevPAR
    
    
    
    
    
    $
    58.77
    
    
    $
    57.08
    
    
    $
    59.78
    
    
    $
    57.51Midscale with Food & BeverageNumber of properties
    
    
    6,307
    
    
    
    45
    
    
    
    44
    
    
    
    44
    
    
    
    44Number of rooms
    
    
    
    
    
    
    8,919
    
    
    
    8,526
    
    
    
    8,526
    
    
    
    8,526Occupancy
    
    
    
    
    
    
    62.9
    %
    
    
    64.6
    %
    
    
    59.9
    %
    
    
    60.7
    %Average daily rate
    
    
    
    
    
    $
    75.60
    
    
    $
    72.74
    
    
    $
    73.34
    
    
    $
    71.40RevPAR
    
    
    
    
    
    $
    47.53
    
    
    $
    47.02
    
    
    $
    43.91
    
    
    $
    43.34Midscale without Food & BeverageNumber of properties
    
    
    325
    
    
    
    9
    
    
    
    7
    
    
    
    7
    
    
    
    7Number of rooms
    
    
    
    
    
    
    1,067
    
    
    
    833
    
    
    
    833
    
    
    
    833Occupancy
    
    
    
    
    
    
    63.5
    %
    
    
    58.2
    %
    
    
    60.3
    %
    
    
    51.7
    %Average daily rate
    
    
    
    
    
    $
    60.99
    
    
    $
    60.89
    
    
    $
    61.13
    
    
    $
    60.68RevPAR
    
    
    
    
    
    $
    38.76
    
    
    $
    35.42
    
    
    $
    36.85
    
    
    $
    31.35Independent HotelsNumber of properties
    
    
    80
    
    
    
    3
    
    
    
    6
    
    
    
    6
    
    
    
    6Number of rooms
    
    
    
    
    
    
    535
    
    
    
    1,162
    
    
    
    1,162
    
    
    
    1,162Occupancy
    
    
    
    
    
    
    43.4
    %
    
    
    46.2
    %
    
    
    39.1
    %
    
    
    41.2
    %Average daily rate
    
    
    
    
    
    $
    67.19
    
    
    $
    62.90
    
    
    $
    63.18
    
    
    $
    60.93RevPAR
    
    
    
    
    
    $
    29.14
    
    
    $
    29.05
    
    
    $
    24.71
    
    
    $
    25.10All HotelsNumber of properties
    
    
    12,036
    
    
    
    78
    
    
    
    78
    
    
    
    78
    
    
    
    78Number of rooms
    
    
    
    
    
    
    14,348
    
    
    
    14,348
    
    
    
    14,348
    
    
    
    14,348Occupancy
    
    
    
    
    
    
    64.0
    %
    
    
    63.1
    %
    
    
    61.5
    %
    
    
    59.9
    %Average daily rate
    
    
    
    
    
    $
    77.70
    
    
    $
    74.85
    
    
    $
    76.72
    
    
    $
    74.75RevPAR
    
    
    
    
    
    $
    49.76
    
    
    $
    47.24
    
    
    $
    47.18
    
    
    $
    44.75
 The categories in the table above are based on the Smith Travel Research Chain Scales and are defined as:  Upper Upscale: Hilton and Marriott
Upscale: Courtyard by Marriott, Crowne Plaza, Radisson and Residence Inn by Marriott
Midscale with Food & Beverage: Clarion, Doubletree, Four Points, Holiday Inn, Holiday Inn Select,  Holiday
Inn SunSpree Resort and Quality Inn
Midscale without Food & Beverage: Fairfield Inn by Marriott and Holiday Inn Express The categories in the tables above are based on the Smith Travel Research
Chain Scales and are defined as:  
    
    Upper Upscale: Hilton and Marriott;  
    
    Upscale: Courtyard by Marriott, Crowne Plaza, Radisson and Residence Inn by Marriott;  
    
    Midscale with Food & Beverage: Clarion, DoubleTree, Four Points,
Holiday Inn, Holiday Inn Select, Holiday Inn SunSpree Resort and Quality
Inn; and  
    
    Midscale without Food & Beverage: Fairfield Inn by Marriott and
Holiday Inn Express. The following two tables present data on occupancy, ADR and RevPAR for the
hotels in our portfolio (including one hotel that we do not consolidate) at
June 30, 2004, by market segment for the second quarter 2004 and the second
quarter 2003 and the six months ended June 30, 2004 and June 30, 2003. From
November 1, 2003 through August 9, 2004, we sold ten of the hotels included in
the following table as part of our discontinued operations. 34




---



##### 



Combined Continuing and Discontinued Operations  88 hotels Capital expenditures
    
    Three Months Ended
    
    Six Months EndedSix Months EndedJune 30, 2004
    
    June 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(in thousands $)Northeast RegionNumber of properties
    
    $
    3,064
    
    
    
    33
    
    
    
    33
    
    
    
    33
    
    
    
    33Number of rooms
    
    
    
    
    
    
    6,325
    
    
    
    6,325
    
    
    
    6,325
    
    
    
    6,325Occupancy
    
    
    
    
    
    
    66.5
    %
    
    
    65.2
    %
    
    
    60.3
    %
    
    
    58.8
    %Average daily rate
    
    
    
    
    
    $
    83.34
    
    
    $
    81.85
    
    
    $
    81.24
    
    
    $
    79.82RevPAR
    
    
    
    
    
    $
    55.42
    
    
    $
    53.38
    
    
    $
    48.98
    
    
    $
    46.90Southeast RegionNumber of properties
    
    
    4,378
    
    
    
    30
    
    
    
    30
    
    
    
    30
    
    
    
    30Number of rooms
    
    
    
    
    
    
    5,088
    
    
    
    5,088
    
    
    
    5,088
    
    
    
    5,088Occupancy
    
    
    
    
    
    
    61.5
    %
    
    
    62.5
    %
    
    
    59.3
    %
    
    
    58.4
    %Average daily rate
    
    
    
    
    
    $
    72.17
    
    
    $
    68.33
    
    
    $
    69.86
    
    
    $
    67.08RevPAR
    
    
    
    
    
    $
    44.36
    
    
    $
    42.69
    
    
    $
    41.45
    
    
    $
    39.20Midwest RegionNumber of properties
    
    
    1,453
    
    
    
    18
    
    
    
    18
    
    
    
    18
    
    
    
    18Number of rooms
    
    
    
    
    
    
    3,895
    
    
    
    3,895
    
    
    
    3,895
    
    
    
    3,895Occupancy
    
    
    
    
    
    
    60.6
    %
    
    
    56.2
    %
    
    
    56.0
    %
    
    
    53.3
    %Average daily rate
    
    
    
    
    
    $
    69.33
    
    
    $
    68.60
    
    
    $
    69.90
    
    
    $
    69.83RevPAR
    
    
    
    
    
    $
    42.00
    
    
    $
    38.57
    
    
    $
    39.16
    
    
    $
    37.26West RegionNumber of properties
    
    
    3,589
    
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    7Number of rooms
    
    
    
    
    
    
    1,319
    
    
    
    1,319
    
    
    
    1,319
    
    
    
    1,319Occupancy
    
    
    
    
    
    
    59.2
    %
    
    
    59.8
    %
    
    
    66.7
    %
    
    
    63.6
    %Average daily rate
    
    
    
    
    
    $
    79.03
    
    
    $
    74.59
    
    
    $
    83.82
    
    
    $
    82.54RevPAR
    
    
    
    
    
    $
    46.77
    
    
    $
    44.62
    
    
    $
    55.90
    
    
    $
    52.49All HotelsNumber of properties
    
    
    12,484
    
    
    
    88
    
    
    
    88
    
    
    
    88
    
    
    
    88Number of rooms
    
    
    
    
    
    
    16,627
    
    
    
    16,627
    
    
    
    16,627
    
    
    
    16,627Occupancy
    
    
    
    
    
    
    63.0
    %
    
    
    61.8
    %
    
    
    59.5
    %
    
    
    57.8
    %Average daily rate
    
    
    
    
    
    $
    76.53
    
    
    $
    74.29
    
    
    $
    75.50
    
    
    $
    73.95RevPAR
    
    
    
    
    
    $
    48.21
    
    
    $
    45.94
    
    
    $
    44.93
    
    
    $
    42.73
 The regions in the table above are defined as:  Northeast: Canada, Connecticut, Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania,
Vermont, West Virginia
Southeast: Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee
Midwest: Arkansas, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Oklahoma, Texas
West: Arizona, California, Colorado, New Mexico Continuing Operations  78 hotels 35




---



##### 



Capital expenditures
    
    Three Months Ended
    
    Six Months EndedSix Months EndedJune 30, 2004
    
    June 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003(in thousands $)Northeast RegionNumber of properties
    
    $
    2,681
    
    
    
    28
    
    
    
    28
    
    
    
    28
    
    
    
    28Number of rooms
    
    
    
    
    
    
    5,154
    
    
    
    5,154
    
    
    
    5,154
    
    
    
    5,154Occupancy
    
    
    
    
    
    
    69.2
    %
    
    
    67.9
    %
    
    
    64.0
    %
    
    
    62.5
    %Average daily rate
    
    
    
    
    
    $
    85.60
    
    
    $
    83.09
    
    
    $
    83.30
    
    
    $
    81.38RevPAR
    
    
    
    
    
    $
    59.23
    
    
    $
    56.41
    
    
    $
    53.34
    
    
    $
    50.86Southeast RegionNumber of properties
    
    
    4,327
    
    
    
    27
    
    
    
    27
    
    
    
    27
    
    
    
    27Number of rooms
    
    
    
    
    
    
    4,612
    
    
    
    4,612
    
    
    
    4,612
    
    
    
    4,612Occupancy
    
    
    
    
    
    
    61.3
    %
    
    
    62.7
    %
    
    
    59.8
    %
    
    
    59.3
    %Average daily rate
    
    
    
    
    
    $
    72.62
    
    
    $
    69.06
    
    
    $
    70.62
    
    
    $
    67.83RevPAR
    
    
    
    
    
    $
    44.50
    
    
    $
    43.33
    
    
    $
    42.21
    
    
    $
    40.23Midwest RegionNumber of properties
    
    
    1,439
    
    
    
    16
    
    
    
    16
    
    
    
    16
    
    
    
    16Number of rooms
    
    
    
    
    
    
    3,263
    
    
    
    3,263
    
    
    
    3,263
    
    
    
    3,263Occupancy
    
    
    
    
    
    
    61.8
    %
    
    
    57.5
    %
    
    
    57.8
    %
    
    
    55.0
    %Average daily rate
    
    
    
    
    
    $
    70.34
    
    
    $
    68.51
    
    
    $
    70.79
    
    
    $
    69.75RevPAR
    
    
    
    
    
    $
    43.44
    
    
    $
    39.37
    
    
    $
    40.93
    
    
    $
    38.35West RegionNumber of properties
    
    
    3,589
    
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    7Number of rooms
    
    
    
    
    
    
    1,319
    
    
    
    1,319
    
    
    
    1,319
    
    
    
    1,319Occupancy
    
    
    
    
    
    
    59.2
    %
    
    
    59.8
    %
    
    
    66.7
    %
    
    
    63.6
    %Average daily rate
    
    
    
    
    
    $
    79.03
    
    
    $
    74.59
    
    
    $
    83.82
    
    
    $
    82.54RevPAR
    
    
    
    
    
    $
    46.77
    
    
    $
    44.62
    
    
    $
    55.90
    
    
    $
    52.49All HotelsNumber of properties
    
    
    12,036
    
    
    
    78
    
    
    
    78
    
    
    
    78
    
    
    
    78Number of rooms
    
    
    
    
    
    
    14,348
    
    
    
    14,348
    
    
    
    14,348
    
    
    
    14,348Occupancy
    
    
    
    
    
    
    64.0
    %
    
    
    63.1
    %
    
    
    61.5
    %
    
    
    59.9
    %Average daily rate
    
    
    
    
    
    $
    77.70
    
    
    $
    74.85
    
    
    $
    76.72
    
    
    $
    74.75RevPAR
    
    
    
    
    
    $
    49.76
    
    
    $
    47.24
    
    
    $
    47.18
    
    
    $
    44.75
 The regions in the table above are defined as:  Northeast: Canada, Connecticut, Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania,
Vermont, West Virginia
Southeast: Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee
Midwest: Arkansas, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Oklahoma, Texas
West: Arizona, California, Colorado, New MexicoThe regions in the tables above are defined as:
    
    Northeast: Canada, Connecticut, Massachusetts, Maryland, New
Hampshire, New York, Ohio, Pennsylvania, Vermont, West Virginia;  
    
    Southeast: Alabama, Florida, Georgia, Kentucky, Louisiana, South
Carolina, Tennessee;  
    
    Midwest: Arkansas, Iowa, Illinois, Indiana, Kansas, Michigan,
Minnesota, Missouri, Oklahoma, Texas; and  
    
    West: Arizona, California, Colorado, New Mexico. Liquidity and Capital Resources Working Capital We use our cash flows primarily for operating expenses, debt service, and
capital expenditures. Currently, our principal sources of liquidity consist of
cash flows from operations and existing cash balances. Cash flows from
operations may be adversely affected by factors such as a reduction in demand
for lodging or certain large scale renovations being performed at our hotels.
To the extent that significant amounts of our accounts receivable are due from
airline companies, a further downturn in the airline industry also could
materially and adversely affect the collectibility of our accounts receivable,
and hence our liquidity. At June 30, 2004, airline receivables represented 36




---



##### 



approximately 18.2% of our accounts receivable, net of allowances. A
further downturn in the airline industry could also affect our revenues by
decreasing the aggregate levels of demand for travel. Between November 1, 2003
and August 9, 2004, we sold ten hotels and an office building with another nine
hotels and three land parcels classified as assets held for sale. The aggregate
sales price from the sale of the ten hotels and office building sold between
November 1, 2003 and August 9, 2004, was $51.6 million, $38.7 million of which
was used to pay down debt and $9.4 million of which was used for general
corporate purposes, including capital expenditures. Our ability to make scheduled debt service payments and fund operations
and capital expenditures depends on our future performance and financial
results, including the successful implementation of our business strategy and,
to a certain extent, the general condition of the lodging industry and the
general economic, political, financial, competitive, legislative and regulatory
environment. In addition, our ability to refinance our indebtedness depends to
a certain extent on these factors as well. Many factors affecting our future
performance and financial results, including the severity and duration of
macro-economic downturns, are beyond our control. See Matters Which May Affect
Future Results  Risks Related to Our Business in our Annual Report on Form
10-K for the year ended December 31, 2003. In June 2004, we completed an offering to the public of our common stock,
the purpose of which was to redeem our outstanding Preferred Stock, to fund
capital expenditures related to renovations and repositionings of selected
hotels, and for general corporate purposes including funding our growth
strategy. In connection with this offering, we refinanced approximately $370
million of our floating rate mortgage debt in order to extend maturities and to
convert a substantial portion of floating rate debt to fixed rate debt. We intend to continue to use our cash flow to make scheduled debt service
payments and fund operations and capital expenditures and, therefore, do not
anticipate paying dividends on our common stock in the foreseeable future. Although we have emerged from Chapter 11, the distribution of shares to
general unsecured creditors is not complete as we continue to reconcile the
claims made by these creditors. We have established a disputed claims reserve
out of which those claims will be paid. Until this process is complete, we will
continue to incur expenses in respect of these claims as well as Bankruptcy
Court fees and professional fees. In accordance with GAAP, all assets held for sale, including assets that
would normally be classified as long-term assets in the normal course of
business, were reported as assets held for sale in current assets. Similarly,
all liabilities related to assets held for sale were reported as liabilities
related to assets held for sale in current liabilities, including debt that
would otherwise be classified as long-term liabilities in the ordinary course
of business. At June 30, 2004, we had working
capital (current assets less current
liabilities) of $49.4 million compared to $2.4 million at December 31, 2003.
Working capital of $2.4 million as of December 31, 2003 was determined based on current assets and current liabilities as of that
date. Had the preferred stock liability been classified as a current
liability at December 31, 2003, consistent with the
classification as of June 30, 2004, the working capital deficit
would have been 139.7 million. See Managements Discussion and Analysis of Financial Condition and Results of
Operations  Debt, Contractual Obligations and Franchise Agreements  Exit
Financing in our Annual Report on Form 10-K for the fiscal year ended December
31, 2003 with respect to our decision to include the Merrill Lynch Mortgage
debt financing in long-term debt. The increase in working capital was primarily the result of an increase in
cash and cash equivalents due to the cash proceeds received from the June 2004
common stock offering. The net proceeds to us from the common stock offering
approximated $176.2 million, of which approximately $25.7 million was used to
fund reserve accounts with Merrill Lynch Mortgage ($22.7 million for capital
expenditures and $3.0 million for other requirements related to a hotel ground
lease) pursuant to requirements in our June 2004 Refinancing Debt agreements.
The remaining $150.6 million in cash proceeds received from the offering was
held in cash and cash equivalents at June 30, 2004. On July 26, 2004, we used
approximately $114.0 million of the proceeds from our equity offering to redeem
all of our outstanding shares of Series A Preferred Stock, including accrued
dividends and a 4% prepayment premium. Approximately $2.2 million in cash
replaced the 79,278 shares of Preferred Stock held in the disputed claims
reserve. During the second quarter 2004 and the six months ended June 30, 2004, we
spent approximately $7.9 million and $12.9 million, respectively, on capital
expenditures. We expect to spend an additional $30.1 million during the 37




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##### 



remainder of 2004, with an additional $10.5 million that will be spent in
the first quarter 2005 to complete the projects started in 2004, thereby
completing substantially all of our deferred renovations. We believe that the combination of our current cash, cash flows from
operations, capital expenditure escrows and the proceeds of asset sales will be
sufficient to meet our liquidity needs for the next 24 months. Our ability to meet our long-term cash needs is dependent on the
continuation and extent of the recovery of the economy and the lodging
industry, improvement in our operating results, the successful implementation
of our portfolio improvement strategy and our ability to obtain third party
sources of capital on favorable terms as and when needed. In the short term, we
continue to diligently monitor our costs. Our future liquidity needs and
sources of working capital are subject to uncertainty and we can provide no
assurance that we will have sufficient liquidity to be able to meet our
operating expenses, debt service requirements, including scheduled maturities,
and planned capital expenditures. We could lose the right to operate certain
hotels under nationally recognized brand names, and furthermore, the
termination of one or more franchise agreements could lead to defaults and
acceleration under one or more loan agreements as well as obligations to pay
liquidated damages under the franchise agreements. See Matters Which May
Affect Future Results  Risks Related to Our Business in our Annual Report on
Form 10-K for the year ended December 31, 2003, for further discussion of
conditions that could adversely affect our estimates of future liquidity needs
and sources of working capital. Cash Flow Operating Activities Net cash provided by operating activities was $11.1 million and $13.2
million for the six months ended June 30, 2004 and 2003, respectively. Although
EBITDA of $33.7 million for six months ended June 30, 2004 was $10.6 million
higher than six months ended June 30, 2003, net cash provided by operating
activities was $2.0 million lower in the six months ended June 30, 2004
primarily as the result of the release of bankruptcy-related restricted cash
during 2003. During the six months ended June 30, 2003, $10.8 million of restricted
cash was released and made available for our operations. Investing Activities Investing activities provided net cash flow of $0.5 million for the six
months ended June 30, 2004 while investing activities accounted for a net cash
outflow of approximately $13.3 million for the first six months of 2003. The
increase in investing activities in the six months ended June 30, 2004 as
compared to the six months ended June 30, 2003 is primarily a result of cash
inflows from the sale of hotels during the six months ended June 30, 2004. Net
proceeds from the sale of eight hotels during the six months ended June 30,
2004 totaled $33.9 million. Investing activities for the six months ended June
30, 2004 also consisted of deposits to lender controlled capital reserves of
$20.5 million and capital expenditure outlays of $12.9 million. Due primarily
to large scale renovations being performed at some of our hotels during the six
months ended June 30, 2003, capital expenditures totaled $19.5 million, which
were partially funded by withdrawals of $7.0 million from lender-controlled
capital expenditure escrows. Financing activities The increase in financing activities in the six months ended June 30, 2004
was primarily due to the proceeds received from the equity offering of our
common stock in June 2004 of $176.2 million, net of the underwriting discount,
offset by approximately $3.8 million of other expenses we incurred related to
the equity offering. Primarily as a result of our debt refinance with Merrill Lynch and the
sale of eight hotels, we paid down portions of our debt in the six months ended
June 30, 2004. Principal payments, including scheduled principal payments, were
approximately $393.1 million for the six months ended June 30, 2004 compared
with principal payments and the refinance of 18 of our hotels upon their
emergence from Chapter 11 of $78.8 million in the six 38




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##### 



months ended June 30, 2003. Financing activities also consisted of
payments of financing costs of $5.4 million and $4.4 million for the six months
ended June 30, 2004 and six months ended June 30, 2003, respectively. On September 18, 2003, we drew down the full availability of $2.0 million
under a revolving credit facility with OCM Real Estate Opportunities Fund II,
L.P. (the OCM Fund). The revolving loan agreement, secured by two land parcels, expired on May 1, 2004. We did not renew the
facility on May 1, 2004. Borrowings under the facility bore interest at the
fixed rate of 10% per annum and were repaid in December 2003 out of the
proceeds we received from the sale of an office building. Debt, Contractual Obligations and Franchise Agreements See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Debt, Contractual Obligations and Franchise Agreements
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003
and the Notes to our unaudited condensed consolidated financial statements
included in Item 1. Financial Statements herein for more information on our
debt, contractual obligations and franchise agreements, including the
following:  
    
    Our existing mortgage debt and refinancing plans;
    
    Encumbrances on our properties;
    
    Our Preferred Stock; and
    
    Our franchise agreements and capital expenditures. Off Balance Sheet Arrangements We have no off balance sheet arrangements. Market Risk We are exposed to interest rate risks on our variable rate debt. At June
30, 2004 and December 31, 2003, we had outstanding variable rate debt of
approximately $110.0 million and $382.8 million, respectively. In order to manage our exposure to fluctuations in interest rates with the
U.S. portion of the exit financing received in November 2002 ($299.3 million at
December 31, 2003), we entered into two interest rate cap agreements, which
allowed us to obtain exit financing at floating rates and effectively cap them
at LIBOR of 6.44% plus the spread. If LIBOR exceeded 6.44%, the contracts would
have required settlement of net interest receivable at specified intervals,
which generally coincide with the dates on which interest was payable on the
underlying debt. If LIBOR would have been below 6.44%, there would have been no
settlement from the interest rate caps. Therefore, we were exposed to interest
rate risks on the exit financing debt for increases in LIBOR up to 6.44% but we
were not exposed to increases in LIBOR above 6.44% because settlements from the
interest rate caps would have offset the incremental interest expense. The
one-month LIBOR as of June 30, 2004 was 1.36%. The notional principal amount of
the interest rate caps outstanding was $302.2 million at December 31, 2003. On May 22, 2003, we finalized the $80 million Lehman Financing. The Lehman
Financing was a two-year term loan with an optional one-year extension and bore
interest at the higher of 7.25% or LIBOR plus 5.25%. In order to manage our
exposure to fluctuations in interest rates with the Lehman Financing, we
entered into an interest rate cap agreement, which allowed us to obtain this
financing at a partial floating rate and effectively capped the interest rate
at LIBOR of 5.00% plus 5.25%. When LIBOR exceeded 5.00%, the contracts would
have required settlement of net interest receivable at specified intervals,
which generally coincided with the dates on which interest was payable on the
underlying debt. If LIBOR would have fallen below 5.00%, there would have been
no settlement from the interest rate cap. We were exposed to interest rate
risks on the Lehman Financing for LIBOR of between 2.00% and 5.00%. The
notional principal amount of the interest rate cap outstanding was $79.2
million at December 31, 2003. 39




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##### 



On June 25, 2004, we refinanced both the exit financing and Lehman
financing with Merrill Lynch Mortgage. The new refinancing is organized in
four fixed rate pools and one floating rate pool. In order to manage our
exposure to fluctuations in interest rates with the floating pool, we entered
into an interest rate cap agreement, which allowed us to obtain this financing
at a floating rate and effectively cap the interest rate at LIBOR of 5.00% plus
3.40%. When LIBOR exceeds 5.00%, the contract requires 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. We are exposed to
interest rate risks on the floating pool for increases in LIBOR up to 5.00%,
but we are not exposed to increases in LIBOR above 5.00% because settlements
from the interest rate caps would offset the incremental interest expense. The
notional principal amount of the interest rate cap outstanding was $110.0
million at June 30, 2004. The fair value of the interest rate cap related to Refinanced Debt as of
June 30, 2004 was approximately $175,000. The fair values of the two interest
rate caps related to the Merrill Lynch Exit Financing and the one cap related
to the Lehman Financing as of June 30, 2004 and December 31, 2003 were
approximately $15,000 and nil, 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. With respect to the fair market value of the four interest rate caps, we
believe that our interest rate risk at June 30, 2004 and December 31, 2003 was
minimal. The impact on annual results of operations of a hypothetical one-point
interest rate reduction on the interest rate caps as of June 30, 2004 would be
a reduction in net income of approximately $145,000. These derivative financial
instruments are viewed as risk management tools. We do not use derivative financial instruments for
trading or speculative purposes. However, we have not elected the hedging
requirements of SFAS No. 133. The nature of our fixed rate obligations does not expose us to
fluctuations in interest payments. The impact on the fair value of our fixed
rate obligations of a hypothetical one-point interest rate increase on the
outstanding fixed-rate debt as of June 30, 2004 and December 31, 2003 would be
approximately $13.1 million and $3.0 million, respectively. In addition, the hotel business is inherently capital intensive, as the
vast majority of assets are hotels, which are long-lived. Lodgians exposure to
market risk associated with changes in interest rates relates primarily to its
debt obligations. As of June 30, 2004, approximately 24.4% of the long-term
debt carries floating rates of interest. For the balance of long-term debt, the
nature of fixed rate obligations does not expose us to the risk of changes in
the fair value of these instruments. Our outstanding debt was $457.7 million,
at June 30, 2004, including current maturities and long-term debt related to
assets held for sale. At June 30, 2004, approximately $110.0 million of debt instruments
outstanding were subject to changes in the LIBOR rate. Without regard to
additional borrowings under those instruments or scheduled amortization, the
annualized effect of each twenty five basis point increase in LIBOR would be a
reduction in income before income taxes of approximately $0.3 million. The fair
value of the fixed rate debt (book value $341.1 million) at June 30, 2004 is
estimated at $350.5 million. Forward-looking Statements We make forward looking statements in this report and other reports we
file with the SEC. In addition, management may make oral forward-looking
statements in discussions with analysts, the media, investors and others. These
statements include statements relating to our plans, strategies, objectives,
expectations, intentions and adequacy of resources, and are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The words believes, anticipates, expects, intends, plans,
estimates, and projects and similar expressions are intended to identify
forward-looking statements. These forward-looking statements reflect our
current views with respect to future events and the impact of these events on
our business, financial condition, results of operations and prospects are
subject to many risks and uncertainties including the following: 40




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##### 




    
    The effects of regional, national and international economic
conditions, including the magnitude and duration of the economic
recovery in the United States;
    
    Competitive conditions in the lodging industry and increases in room
capacity;
    
    The effects of actual and threatened terrorist attacks and
international conflicts and their impact on domestic and international
travel, including the potentially marked decrease in travel in
connection with military action in Iraq or elsewhere;
    
    The effectiveness of changes in management and our ability to retain
qualified individuals to serve in senior management positions;
    
    Requirements of franchise agreements, including the right of some
franchisors to immediately terminate their respective agreements if we
breach certain provisions;
    
    Seasonality of the hotel business;
    
    The financial condition of the airline industry and its impact on air travel;
    
    The effect that Internet reservation channels may have on the rates
that we are able to charge for hotel rooms;
    
    Increases in the cost of debt and our continued compliance with the terms of our loan agreements;
    
    Our high level of secured debt;
    
    Our ability to complete planned hotel and land parcel dispositions;
    
    Our ability to meet the continuing listing requirements of the American Stock Exchange;
    
    The effect of self-insured claims in excess of our reserves, or our
ability to obtain adequate property and liability insurance to protect
against losses, or to obtain insurance at reasonable rates;
    
    Potential litigation and/or governmental inquiries and
investigations;
    
    Laws and regulations applicable to our business, including federal,
state or local hotel, resort, restaurant or land use regulations,
employment, labor or disability laws and regulations;
    
    The short time that the public market for our new securities has
existed; and
    
    The risks identified under Risks Related to Our Business and Risks
Relating to Our Common Stock in our Annual Report on Form 10-K for the
year ended December 31, 2003. Any of these risks and uncertainties could cause actual results to differ
materially from historical results or those anticipated. Although we believe
the expectations reflected in our forward-looking statements are based upon
reasonable assumptions, we can give no assurance that our expectations will be
attained and caution you not to place undue reliance on such statements. We
undertake no obligation to publicly update or revise any forward-looking
statements to reflect current or future events or circumstances or their impact
on our business, financial condition, results of operations and prospects. Many
of these factors are not within our control and we caution you not to put undue
reliance on forward looking statements. Inflation We have not determined the precise impact of inflation. However, we
believe that the rate of inflation has not had a material effect on our
revenues or expenses in recent years. It is difficult to predict whether
inflation will have a material effect on our results in the long-term. 41




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##### 



New Accounting Pronouncements The table below summarizes recent accounting pronouncements and their
effects on Lodgian: Month
    
    Effective date for
    
    Summary of MajorDescription
    
    Issued
    
    Lodgian
    
    Provisions
    
    Effect on LodgianFIN No. 46
    
    Consolidation of Variable
Interest Entities
    
    January-03
    
    Special purpose
entities  December
31, 2003.
Other
entities  first
quarter of 2004.
    
    Addresses
consolidation by a
business of variable
interest entities in
which it is the
primary beneficiary.
    
    No impact, since we
have no variable
interest entitiesSFAS No. 150
    
    Accounting for Certain
Financial Instruments
with Characteristics of
both Liabilities and
Equity
    
    May-03
    
    July-03
    
    Aims to eliminate
diversity by requiring
that certain types of
freestanding
instruments be
reported as
liabilities including
mandatorily redeemable
shares which
unconditionally
obligate the issuer to
redeem the shares for
cash or by
transferring other
assets
    
    Our Mandatorily
Redeemable 12.25%
Cumulative Preferred
Stock has been
reclassified to
long-term debt in the
Condensed Consolidated
Financial Statements
and the related
dividends for the
period January 1, 2004
to June 30, 2004 has
been included in
interest expense.
 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk See Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations  Market Risk. 
 Item 4.Controls and Procedures a) Based on an evaluation of our disclosure controls and procedures
carried out as of June 30, 2004, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective since they would cause material information required to be disclosed
by us in the reports we file or submit 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. b) During the quarter ended June 30, 2004, there were no changes in our
internal controls over financial reporting which materially affected, or are
likely to materially affect, our internal control over financial reporting. 
 PART II  OTHER INFORMATION 
 Item 1.Legal Proceedings From time to time, as we conduct our business, legal actions and claims
are brought against us. The outcome of these matters is uncertain. However, we
believe that all currently pending matters will be resolved without a material
adverse effect on our results of operations or financial condition. Claims
relating to the period before we filed for Chapter 11 protection are limited to
the amounts approved by the Bankruptcy Court for settlement of such claims and
are payable out of the disputed claims reserves provided for in our plans of
reorganization, which in the case of the Joint Plan of Reorganization, consists
of our securities, and in the case of the Impac Plan of Reorganization,
consists of $0.1 million of cash as of June 30, 2004. We have reserved for all
claims approved by the Bankruptcy Court which have not yet been paid. 42




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##### 



Item 2.Changes in Securities On April 27, 2004, our Board of Directors authorized a reverse stock split
of our common stock in a ratio of one-for-three (1:3). The reverse split
affected all of our issued and outstanding common shares, warrants, restricted
stock and stock options. The record date for the reverse split was April 29,
2004 and our new common stock began trading under the split adjustment on April
30, 2004. At the annual meeting of stockholders on April 8, 2004, our stockholders
authorized us to affect a reverse split of our common stock at one of the
following ratios:  
    
    1-for-1 1⁄2;
    
    1-for-2;
    
    1-for-2 1⁄2;
    
    1-for-3;
    
    1-for-3 1⁄2; and
    
    1-for-4 as determined by the Board of Directors. Fractional shares which resulted from the reverse stock split were paid in
cash. Each holder of a fractional share of common stock after the effective
date of the reverse split was paid in cash equal to the product of (i) the
average of the closing prices of the common stock for the last ten trading days
prior to April 30, 2004, multiplied by (ii) the fraction of a share of common
stock held by such holder. Also, at the annual meeting of stockholders on April 8, 2004, our
stockholders authorized an increase in our authorized share capital from 40
million to 70 million shares. On June 25, 2004, we completed an equity offering of 18,285,714 shares of
our common stock, par value $0.01 per share, at a price of $10.50 per share.
Net proceeds from this equity offering, after deducting the underwriting
discount, advisory fee and other offering expenses, amounted to approximately
$176.2 million. We have not declared or paid any cash dividends on our common stock and
our board of directors do not anticipate declaring or paying any cash dividends
in the foreseeable future. We anticipate that all of our earnings and other
cash resources, if any, will be retained to fund our business and will be
available for other strategic opportunities that may develop. Future dividend
policy will be subject to the discretion of our board of directors, and will be
contingent upon our results of operations, financial position, cash flow,
liquidity, capital expenditure plan and requirements, general business
conditions, restrictions imposed by financing arrangements, if any, legal and
regulatory restrictions on the payment of dividends and other factors that our
board of directors deems relevant. The Preferred Stock issued on November 25, 2002 (the date on which the
first of the two plans of reorganization became effective) accrued dividends at
the rate of 12.25% per annum. As required, we paid the dividend due on November
21, 2003 by issuing additional shares of Preferred Stock, except for fractional
shares which we paid in cash. On June 25, 2004, immediately following the consummation of our equity
offering, we exchanged 3,941,115 shares of our common stock for 1,483,558
shares of Series A Preferred Stock held by (1) certain affiliates of, and
investments accounts managed by, Oaktree Capital Management, LLC, (2) an
affiliate of Blackstone Real Estate Advisors, and (3) Merrill Lynch, Pierce,
Fenner & Smith Incorporated, based on a common stock price of $10.50 per share.
In the Preferred Share exchange, Oaktree, Blackstone and Merrill Lynch
received 2,262,661, 1,049,034, and 629,420 shares of our common stock,
respectively. 43




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##### 



On July 26, 2004, we used approximately $114.0 million of the net proceeds
from the equity offering to redeem all of the outstanding shares of Series A
Preferred Stock including accrued dividends and a 4% prepayment premium; and
approximately $2.2 million replaced the 79,278 shares of Preferred Stock held
in the disputed claims reserve, an amount equal to the liquidation preference
of those shares, plus accrued dividends and a 4% prepayment premium. 
 Item 4.Submission of Matters to a Vote of Security Holders We held our Annual Meeting on April 8, 2004. The stockholders voted as follows: 1. For the election of eight directors to hold office until the 2005
Annual Meeting: For
    
    WithheldSean F. Armstrong
    
    
    5,995,987
    
    
    
    26,815Russel S. Bernard
    
    
    5,995,987
    
    
    
    26,815Stewart J. Brown
    
    
    5,993,487
    
    
    
    29,315Kenneth A. Caplan
    
    
    5,995,987
    
    
    
    26,815Stephen P. Grathwohl
    
    
    5,994,987
    
    
    
    27,815Jonathan D. Gray
    
    
    5,763,908
    
    
    
    258,894Kevin C. McTavish
    
    
    5,995,987
    
    
    
    26,815W. Thomas Parrington
    
    
    5,994,942
    
    
    
    27,860
 2. For the approval of an amendment and restatement of the Lodgian, Inc.
2002 Stock Incentive Plan: Common StockFor
    
    
    4,250,670Against
    
    
    329,265Abstain
    
    
    197Broker Non Vote
    
    
    1,442,670
 3. For the approval of a capital restructuring proposal to permit the
board of directors, in its sole discretion, to amend our certificate of
incorporation to implement a reverse stock split of our issued and outstanding
common stock at one of the following ratios: 1-for-1 1⁄2, 1-for-2, 1-for-2
1⁄2, 1-for-3, 1-for-3 1⁄2, and 1-for-4: Common Stock
    
    Preferred StockFor
    
    
    5,727,224
    
    
    
    4,528,585Against
    
    
    295,023
    
    
    
    251,792Abstain
    
    
    555
    
    
    
    168
 4. For the approval of a Second Amended and Restated Certificate of
Incorporation as described in the Proxy Statement for the Annual Meeting, among
other things, (a) increasing the number of authorized shares of common stock,
(b) providing our stockholders the right to remove any or all of the members of
the board of directors with or without cause, (c) electing out of the Delaware
law restricting business combinations with interested stockholders, (d)
eliminating the designation of an obsolete series of preferred stock, and (e)
implementing the reverse stock split (if Proposal 3 is approved): Common Stock
    
    Preferred StockFor
    
    
    4,519,598
    
    
    
    3,256,680Against
    
    
    59,734
    
    
    
    53,126Abstain
    
    
    800
    
    
    
    179Broker Non Vote
    
    
    1,442,670
    
    
    
    1,470,560
 5. To ratify the appointment of Deloitte & Touche LLP as our independent
public auditors: Common StockFor
    
    
    5,996,052Against
    
    
    1,279Abstain
    
    
    25,471
 44




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##### 



Item 6.Exhibits and Reports on Form 8-K (a) A list of the exhibits required to be filed as part of this Report on
Form 10-Q, is set forth in the Exhibit Index which immediately precedes such
exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K A Form 8-K was filed on April 26, 2004 relating to results for the quarter
ended March 31, 2004. 45




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. LODGIAN, INC.By:
    /s/ W. THOMAS PARRINGTONDate: August 16, 2004
    
    W. Thomas ParringtonPresident and Chief Executive Officer By:
    /s/ MANUEL ARTIMEDate: August 16, 2004
    
    Manuel ArtimeExecutive Vice President and
Chief Financial Officer 46




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##### 



INDEX TO EXHIBITS ExhibitNumber
    
    Description1.1
    
    Purchase Agreement, dated June 22, 2004.10.1.1
    
    Loan and Security Agreement (Floating Rate), dated as of June 25,
2004, by and between the Borrowers listed on Schedule 1 thereto
and Merrill Lynch Mortgage Lending, Inc.10.1.2
    
    Promissory Note A in the original amount of $72,000,000.00, dated
as of June 25, 2004, by the Borrowers listed on the signature
pages thereto in favor of Merrill Lynch Mortgage Lending, Inc.10.1.3
    
    Promissory Note B in the original amount of $38,000,000, dated as
of June 25, 2004, by the Borrowers listed on the signature pages
thereto in favor of Merrill Lynch Mortgage Lending, Inc.10.1.4
    
    Guaranty of Recourse Obligations, dated as of June 25, 2004, by
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.1.5
    
    Conditional Assignment of Hotel Management Agreement, dated as of
June 25, 2004, made by Lodgian Management Corp. and the Lodgian
Entities listed on the signature pages thereto, to and for the
benefit of Merrill Lynch Mortgage Lending, Inc.10.1.6
    
    Conditional Assignment of Hotel Management Agreement (Beverage),
dated as of June 25, 2004, made by Lodgian Management Corp. and
the Lodgian Entities listed on the signature pages thereto, to
and for the benefit of Merrill Lynch Mortgage Lending, Inc.10.1.7
    
    Assignment of Agreements, Licenses, Permits and Contracts, dated
as of June 25, 2004, made by the Lodgian Entities listed on the
signature pages thereto to Merrill Lynch Mortgage Lending, Inc.10.1.8
    
    Cooperation Agreement, dated as of June 25, 2004, by and between
the Mortgage Borrowers listed on the signature pages thereto,
Lodgian Mezzanine Floating, LLC and Merrill Lynch Mortgage
Lending, Inc.10.1.9
    
    Collateral Assignment of Interest Rate Protection Agreement,
dated as of June 25, 2004, made by the Lodgian Entities listed on
the signature pages thereto in favor of Merrill Lynch Mortgage
Lending, Inc.10.1.10
    
    Cash Management Agreement, dated as of June 25, 2004, among the
Lodgian Entities listed on the signature pages thereto, Merrill
Lynch Mortgage Lending, Inc., Wachovia Bank, National Association
and Lodgian Management Corp.10.1.11
    
    Environmental Indemnity, dated as of June 25, 2004, by the
Lodgian Entities listed on the signature pages thereto and
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.2.1
    
    Loan and Security Agreement (Fixed Rate #1), dated as of June 25,
2004, 2004, by and between the Borrowers listed on Schedule 1
thereto and Merrill Lynch Mortgage Lending, Inc.10.2.2
    
    Promissory Note in the original amount of $63,801,000.00, dated
as of June 25, 2004, by the Borrowers listed on the signature
pages thereto in favor of Merrill Lynch Mortgage Lending, Inc.10.2.3
    
    Guaranty of Recourse Obligations, dated as of June 25, 2004, by
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.2.4
    
    Cross-Guaranty, dated as of June 25, 2004, from the parties
listed as Guarantors on the signature pages thereto to Merrill
Lynch Mortgage Lending, Inc.10.2.5
    
    Conditional Assignment of Hotel Management Agreement, dated as of
June 25, 2004, made by Lodgian Management Corp. and the Lodgian
Entities listed on the signature pages thereto, to and for the
benefit of Merrill Lynch Mortgage Lending, Inc.10.2.6
    
    Assignment of Agreements, Licenses, Permits and Contracts, dated
as of June 25, 2004, made by the Lodgian Entities listed on the
signature pages thereto to Merrill Lynch Mortgage Lending, Inc.




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ExhibitNumber
    
    Description10.2.7
    
    Cooperation Agreement, dated as of June 25, 2004, by and between
the Mortgage Borrowers listed on the signature pages thereto,
Lodgian Mezzanine Fixed, LLC and Merrill Lynch Mortgage Lending,
Inc.10.2.8
    
    Cash Management Agreement, dated as of June 25, 2004, among the
Lodgian Entities listed on the signature pages thereto, Merrill
Lynch Mortgage Lending, Inc., Wachovia Bank, National Association
and Lodgian Management Corp.10.2.9
    
    Environmental Indemnity, dated as of June 25, 2004, by the
Lodgian Entities listed on the signature pages thereto and
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.3.1
    
    Loan and Security Agreement (Fixed Rate #2), dated as of June 25,
2004, by and between the Borrowers listed on Schedule 1 thereto
and Merrill Lynch Mortgage Lending, Inc.10.3.2
    
    Promissory Note in the original amount of $67,864,000.00, dated
as of June 25, 2004, by the Borrowers listed on the signature
pages thereto in favor of Merrill Lynch Mortgage Lending, Inc.10.3.3
    
    Guaranty of Recourse Obligations, dated as of June 25, 2004, by
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.3.4
    
    Cross-Guaranty, dated as of June 25, 2004, from the parties
listed as Guarantors on the signature pages thereto to Merrill
Lynch Mortgage Lending, Inc.10.3.5
    
    Conditional Assignment of Hotel Management Agreement, dated as of
June 25, 2004, made by Lodgian Management Corp. and the Lodgian
Entities listed on the signature pages thereto, to and for the
benefit of Merrill Lynch Mortgage Lending, Inc.10.3.6
    
    Conditional Assignment of Hotel Management Agreement (Beverage),
dated as of June 25, 2004, made by Lodgian Management Corp. and
the Lodgian Entities listed on the signature pages thereto, to
and for the benefit of Merrill Lynch Mortgage Lending, Inc.10.3.7
    
    Assignment of Agreements, Licenses, Permits and Contracts, dated
as of June 25, 2004, made by the Lodgian Entities listed on the
signature pages thereto to Merrill Lynch Mortgage Lending, Inc.10.3.8
    
    Cooperation Agreement, dated as of June 25, 2004, by and between
the Mortgage Borrowers listed on the signature pages thereto,
Lodgian Mezzanine Fixed, LLC and Merrill Lynch Mortgage Lending,
Inc.10.3.9
    
    Cash Management Agreement, dated as of June 25, 2004, among the
Lodgian Entities listed on the signature pages thereto, Merrill
Lynch Mortgage Lending, Inc., Wachovia Bank, National Association
and Lodgian Management Corp.10.3.10
    
    Environmental Indemnity, dated as of June 25, 2004, by the
Lodgian Entities listed on the signature pages thereto and
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.4.1
    
    Loan and Security Agreement (Fixed Rate #3), dated as of June 25,
2004, by and between the Borrowers listed on Schedule 1 thereto
and Merrill Lynch Mortgage Lending, Inc.10.4.2
    
    Promissory Note in the original amount of $66,818,500.00, dated
as of June 25, 2004, by the Borrowers listed on the signature
pages thereto in favor of Merrill Lynch Mortgage Lending, Inc.10.4.3
    
    Guaranty of Recourse Obligations, dated as of June 25, 2004, by
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.4.4
    
    Cross-Guaranty, dated as of June 25, 2004, from the parties
listed as Guarantors on the signature pages thereto to Merrill
Lynch Mortgage Lending, Inc.10.4.5
    
    Conditional Assignment of Hotel Management Agreement, dated as of
June 25, 2004, made by Lodgian Management Corp. and the Lodgian
Entities listed on the signature pages thereto, to and for the
benefit of Merrill Lynch Mortgage Lending, Inc.10.4.6
    
    Conditional Assignment of Hotel Management Agreement (Beverage),
dated as of June 25, 2004, made by Lodgian Management Corp. and
the Lodgian Entities listed on the signature pages thereto, to
and for the benefit of Merrill Lynch Mortgage Lending, Inc.




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##### 



ExhibitNumber
    
    Description10.4.7
    
    Assignment of Agreements, Licenses, Permits and Contracts, dated
as of June 25, 2004, made by the Lodgian Entities listed on the
signature pages thereto to Merrill Lynch Mortgage Lending, Inc.10.4.8
    
    Cooperation Agreement, dated as of June 25, 2004, by and between
the Mortgage Borrowers listed on the signature pages thereto,
Lodgian Mezzanine Fixed, LLC and Merrill Lynch Mortgage Lending,
Inc.10.4.9
    
    Cash Management Agreement, dated as of June 25, 2004, among the
Lodgian Entities listed on the signature pages thereto, Merrill
Lynch Mortgage Lending, Inc., Wachovia Bank, National Association
and Lodgian Management Corp.10.4.10
    
    Environmental Indemnity, dated as of June 25, 2004, by the
Lodgian Entities listed on the signature pages thereto and
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.5.1
    
    Loan and Security Agreement (Fixed Rate #4), dated as of June 25,
2004, by and between the Borrowers listed on Schedule 1 thereto
and Merrill Lynch Mortgage Lending, Inc.10.5.2
    
    Promissory Note in the original amount of $61,516,500.00, dated
as of June 25, 2004, 2004, by the Borrowers listed on the
signature pages thereto in favor of Merrill Lynch Mortgage
Lending, Inc.10.5.3
    
    Guaranty of Recourse Obligations, dated as of June 25, 2004, by
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.5.4
    
    Cross-Guaranty, dated as of June 25, 2004, from the parties
listed as Guarantors on the signature pages thereto to Merrill
Lynch Mortgage Lending, Inc.10.5.5
    
    Conditional Assignment of Hotel Management Agreement, dated as of
June 25, 2004, made by Lodgian Management Corp. and the Lodgian
Entities listed on the signature pages thereto, to and for the
benefit of Merrill Lynch Mortgage Lending, Inc.10.5.6
    
    Conditional Assignment of Hotel Management Agreement (Beverage),
dated as of June 25, 2004, made by Lodgian Management Corp. and
the Lodgian Entities listed on the signature pages thereto, to
and for the benefit of Merrill Lynch Mortgage Lending, Inc.10.5.7
    
    Assignment of Agreements, Licenses, Permits and Contracts, dated
as of June 25, 2004, made by the Lodgian Entities listed on the
signature pages thereto to Merrill Lynch Mortgage Lending, Inc.10.5.8
    
    Cooperation Agreement, dated as of June 25, 2004, by and between
the Mortgage Borrowers listed on the signature pages thereto,
Lodgian Mezzanine Fixed, LLC and Merrill Lynch Mortgage Lending,
Inc.10.5.9
    
    Cash Management Agreement, dated as of June 25, 2004, among the
Lodgian Entities listed on the signature pages thereto, Merrill
Lynch Mortgage Lending, Inc., Wachovia Bank, National Association
and Lodgian Management Corp.10.5.10
    
    Environmental Indemnity, dated as of June 25, 2004, by the
Lodgian Entities listed on the signature pages thereto and
Lodgian, Inc. in favor of Merrill Lynch Mortgage Lending, Inc.10.6
    
    General Form of Mortgage, Assignment of Leases and Rents and
Security Agreement by [Property Owner Name](Mortgagor) to and for
the benefit of Merrill Lynch Mortgage Lending, Inc.10.7
    
    General Form of Deed of Trust, Assignment of Leases and Rents and
Security Agreement (Credit Line Deed of Trust) by [Property Owner
Name](Trustor) to [Trustee Name] for the benefit of Merrill Lynch Mortgage
Lending, Inc.10.8
    
    General Form of Deed to Secure Debt, Assignment of Leases and
Rents and Security Agreement by [Property Owner
Name](Borrower)
to and for the benefit of Merrill Lynch Mortgage Lending, Inc.10.9
    
    Preferred Share Exchange Agreement, dated June 22, 2004, by and
among Lodgian, Inc. and the record and/or beneficial stockholders
as signatories thereto.10.10
    
    Registration Rights Agreement,
dated June 22, 2004,
by and among Lodgian, Inc. and the signatories thereto.10.11
    
    Restricted Unit Award Agreement with Thomas W. Parrington, dated
as of April 9, 2004




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##### 



ExhibitNumber
    
    Description(Incorporated by reference to Exhibit 10.2 to the Companys Quarterly
Report for the period ended March 31, 2004 (File No. 1-14537), filed
with the Commission on May 14, 2004).10.12
    
    Employment Agreement between Lodgian, Inc. and Daniel E. Ellis,
dated May 2, 2004 (Incorporated by reference to Exhibit 10.4 to
the Companys Quarterly Report for the period ended March 31,
2004 (File No. 1-14537), filed with the Commission on May 14,
2004).10.13
    
    Employment Agreement between Lodgian, Inc. and Manuel E. Artime,
dated May 10, 2004 (Incorporated by reference to Exhibit 10.5 to
the Companys Quarterly Report for the period ended March 31,
2004 (File No. 1-14537), filed with the Commission on May 14,
2004).10.14
    
    Employment Agreement between Lodgian, Inc. and Michael W. Amaral,
dated May 4, 2004 (Incorporated by reference to Exhibit 10.6 to
the Companys Quarterly Report for the period ended March 31,
2004 (File No. 1-14537), filed with the Commission on May 14,
2004).10.15
    
    Employment Agreement between Lodgian, Inc. and Samuel J. Davis,
dated May 14, 2004 (Incorporated by reference to Exhibit 10.19 to
the Companys Registration Statement on Form S-1 (Registration
Number 333-113410), filed with the Commission on June 4, 2004.).21.1
    
    Subsidiaries of Lodgian, Inc.31.1
    
    Sarbanes-Oxley Section 302 Certification by the CEO.31.2
    
    Sarbanes-Oxley Section 302 Certification by the CFO.32
    
    Sarbanes-Oxley Section 902 Certification by the CEO and CFO.