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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 1934
For the Period ended September 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 o
    
    For the transition period from            to
 Commission file no. 1-14537 Lodgian, Inc. (Exact name of registrant as specified in its charter) Delaware(State or other jurisdiction of
incorporation or organization)
    
    52-2093696(I.R.S. Employer
Identification No.)3445 Peachtree Road, N.E., Suite 700,
Atlanta, GA(Address of principal executive offices)
    
    30326(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.     Yesþ     No o Indicate the number of shares outstanding of each of the issuers classes
of common stock as of the latest practicable date. Class
    
    Outstanding as of November 8, 2004Common
    
    24,544,462




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LODGIAN, INC. AND SUBSIDIARIES INDEX  
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2004 and December
31, 2003 (unaudited)
    
    
    2Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 2004 and September 30, 2003 and for the Nine Months Ended
September 30, 2004 and September 30, 2003 (unaudited)
    
    
    3Condensed Consolidated Statement of Stockholders Equity for the Nine Months
Ended September 30, 2004 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and September 30, 2003 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4.
    
    Controls and Procedures
    
    
    43PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    43Item 6.
    
    Exhibits
    
    
    43Signatures
    
    
    
    
    44EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO
  1




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PART I  FINANCIAL INFORMATION 
 Item 1.Financial Statements LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2004
    
    December 31, 2003(Unaudited in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    57,344
    
    
    $
    10,897Cash, restricted
    
    
    9,963
    
    
    
    7,084Accounts receivable (net of allowances: 2004 - $985; 2003 - $689)
    
    
    11,380
    
    
    
    8,169Insurance receivable
    
    
    3,001
    
    
    
    Inventories
    
    
    6,096
    
    
    
    5,609Prepaid expenses and other current assets
    
    
    18,521
    
    
    
    17,068Assets held for sale
    
    
    35,540
    
    
    
    68,567Total current assets
    
    
    141,845
    
    
    
    117,394Property and equipment, net
    
    
    560,622
    
    
    
    563,818Deposits for capital expenditures
    
    
    36,828
    
    
    
    15,782Other assets, net
    
    
    7,828
    
    
    
    12,180$
    747,123
    
    
    $
    709,174LIABILITIES
AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    11,124
    
    
    $
    7,131Other accrued liabilities
    
    
    37,114
    
    
    
    31,432Advance deposits
    
    
    2,174
    
    
    
    1,882Current portion of long-term debt
    
    
    15,570
    
    
    
    16,563Liabilities related to assets held for sale
    
    
    34,531
    
    
    
    57,948Total current liabilities
    
    
    100,513
    
    
    
    114,956Long-term debt:12.25% Cumulative preferred shares subject to mandatory redemption
    
    
    
    
    
    
    142,177Long-term obligations
    
    
    404,968
    
    
    
    409,115Total long-term debt
    
    
    404,968
    
    
    
    551,292Total liabilities
    
    
    505,481
    
    
    
    666,248Minority interests
    
    
    2,036
    
    
    
    2,320Commitments and contingenciesStockholders equity:Common stock, $.01 par value, 60,000,000 shares authorized;
24,572,044 and 2,333,591 issued and outstanding at September 30, 2004
and December 31, 2003, respectively
    
    
    246
    
    
    
    23Additional paid-in capital
    
    
    306,932
    
    
    
    89,874Unearned stock compensation
    
    
    (371
    )
    
    
    (508
    )Accumulated deficit
    
    
    (68,177
    )
    
    
    (50,107
    )Accumulated other comprehensive income
    
    
    1,052
    
    
    
    1,324Less: Treasury stock
    
    
    (76
    )
    
    
    Total stockholders equity
    
    
    239,606
    
    
    
    40,606$
    747,123
    
    
    $
    709,174
 See notes to condensed
consolidated financial statements. 2




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LODGIAN, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended
    
    Nine months endedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003(Unaudited in thousands,
except per share data)
    
    (Unaudited in thousands,
except per share data)Revenues:Rooms
    
    $
    64,805
    
    
    $
    62,506
    
    
    $
    186,693
    
    
    $
    177,430Food and beverage
    
    
    16,950
    
    
    
    16,407
    
    
    
    52,874
    
    
    
    51,991Other
    
    
    2,806
    
    
    
    2,841
    
    
    
    8,376
    
    
    
    8,53784,561
    
    
    
    81,754
    
    
    
    247,943
    
    
    
    237,958Operating expenses:Direct:Rooms
    
    
    18,722
    
    
    
    17,697
    
    
    
    51,700
    
    
    
    49,790Food and beverage
    
    
    12,595
    
    
    
    12,030
    
    
    
    36,842
    
    
    
    36,129Other
    
    
    2,095
    
    
    
    2,013
    
    
    
    6,144
    
    
    
    5,79333,412
    
    
    
    31,740
    
    
    
    94,686
    
    
    
    91,71251,149
    
    
    
    50,014
    
    
    
    153,257
    
    
    
    146,246Other operating expenses:Other hotel operating costs
    
    
    25,577
    
    
    
    24,164
    
    
    
    73,471
    
    
    
    69,436Property and
other taxes, insurance and leases
    
    
    5,597
    
    
    
    6,087
    
    
    
    16,724
    
    
    
    19,671Corporate and other
    
    
    4,519
    
    
    
    4,235
    
    
    
    13,714
    
    
    
    16,280Casualty gains and losses
    
    
    2,019
    
    
    
    
    
    
    
    2,019
    
    
    
    Depreciation and amortization
    
    
    7,066
    
    
    
    7,572
    
    
    
    20,741
    
    
    
    22,567Impairment of long-lived assets
    
    
    607
    
    
    
    2
    
    
    
    607
    
    
    
    1,380Other operating expenses
    
    
    45,385
    
    
    
    42,060
    
    
    
    127,276
    
    
    
    129,3345,764
    
    
    
    7,954
    
    
    
    25,981
    
    
    
    16,912Other income (expenses):Interest income and other
    
    
    212
    
    
    
    114
    
    
    
    321
    
    
    
    321Interest expense and other financing costs:Preferred stock dividend
    
    
    (865
    )
    
    
    (4,027
    )
    
    
    (9,383
    )
    
    
    (4,027
    )Other interest expense
    
    
    (7,350
    )
    
    
    (7,665
    )
    
    
    (35,429
    )
    
    
    (20,863
    )Loss on preferred stock redemption
    
    
    (4,471
    )
    
    
    
    
    
    
    (6,063
    )
    
    
    Loss before
income taxes, reorganization items and minority interests
    
    
    (6,710
    )
    
    
    (3,624
    )
    
    
    (24,573
    )
    
    
    (7,657
    )Reorganization items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,045
    )Loss before
income taxes and minority interest
    
    
    (6,710
    )
    
    
    (3,624
    )
    
    
    (24,573
    )
    
    
    (9,702
    )Minority interests
    
    
    503
    
    
    
    99
    
    
    
    285
    
    
    
    (118
    )Loss before
income taxes  continuing operations
    
    
    (6,207
    )
    
    
    (3,525
    )
    
    
    (24,288
    )
    
    
    (9,820
    )Provision for income taxes  continuing
operations
    
    
    (337
    )
    
    
    (75
    )
    
    
    (488
    )
    
    
    (226
    )Loss from continuing operations
    
    
    (6,544
    )
    
    
    (3,600
    )
    
    
    (24,776
    )
    
    
    (10,046
    )Discontinued operations:Loss from discontinued operations
before income taxes
    
    
    2,807
    
    
    
    (46
    )
    
    
    6,706
    
    
    
    (5,125
    )Income tax provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations
    
    
    2,807
    
    
    
    (46
    )
    
    
    6,706
    
    
    
    (5,125
    )Net loss
    
    
    (3,737
    )
    
    
    (3,646
    )
    
    
    (18,070
    )
    
    
    (15,171
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,594
    )Net loss attributable to common stock
    
    $
    (3,737
    )
    
    $
    (3,646
    )
    
    $
    (18,070
    )
    
    $
    (22,765
    )Basic and diluted loss per common share:Net loss attributable to common stock
    
    $
    (0.15
    )
    
    $
    (1.56
    )
    
    $
    (1.77
    )
    
    $
    (9.76
    )
 See notes to condensed consolidated financial statements. 3




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LODGIAN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY ACCUMULATEDCOMMON STOCK
    
    ADDITIONAL
    
    UNEARNED
    
    
    
    
    
    OTHER
    
    
    
    
    
    TOTALPAID-IN
    
    STOCK
    
    ACCUMULATED
    
    COMPREHENSIVE
    
    TREASURY
    
    STOCKHOLDERSSHARES
    
    AMOUNT
    
    CAPITAL
    
    COMPENSATION
    
    DEFICIT
    
    LOSS (net of tax)
    
    STOCK
    
    EQUITY(Unaudited 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 restricted stock
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of new common shares
    
    
    18,285,714
    
    
    
    183
    
    
    
    175,693
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175.876Surrender of unexchanged shares
    
    
    (2,657
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Exercise of stock options
    
    
    241
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Exchange of preferred shares
for common shares
    
    
    3,941,115
    
    
    
    40
    
    
    
    41,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,381Vesting of restricted stock units
    
    
    22,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury stock
    
    
    (7,211
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    (76
    )Comprehensive loss:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,070
    )
    
    
    
    
    
    
    
    
    
    
    (18,070
    )Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    adjustments (related taxes
estimated at nil)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (272
    )
    
    
    
    
    
    
    (272
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,342
    )Balance September 30, 2004
    
    
    24,572,044
    
    
    
    246
    
    
    
    306,932
    
    
    
    (371
    )
    
    
    (68,177
    )
    
    
    1,052
    
    
    
    (76
    )
    
    
    239,606
 The comprehensive loss for the three months
ended September 30, 2004 was $3.7 million and the comprehensive loss for
the three months ended September 30, 2003 was $3.6 million. The comprehensive loss for the nine months ended September 30, 2003 was $14.2 million. See notes to condensed consolidated financial statements.




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LODGIAN, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months endedSeptember 30, 2004
    
    September 30, 2003(Unaudited in thousands)OPERATING
ACTIVITIES:Net loss
    
    $
    (18,070
    )
    
    $
    (15,171
    )Less: (loss) income from discontinued operations
    
    
    (6,706
    )
    
    
    5,125Loss from continuing operations
    
    
    (24,776
    )
    
    
    (10,046
    )Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:Depreciation and amortization
    
    
    20,741
    
    
    
    22,567Impairment of long-lived assets
    
    
    607
    
    
    
    1,380Amortization of unearned stock compensation
    
    
    137
    
    
    
    42Preferred stock dividends
    
    
    9,383
    
    
    
    4,027Loss on redemption of preferred stock
    
    
    6,063
    
    
    
    Casualty losses
    
    
    2,019
    
    
    
    Minority interests
    
    
    (285
    )
    
    
    118Write-off and amortization of deferred financing costs
    
    
    9,357
    
    
    
    2,606Other
    
    
    914
    
    
    
    470Changes in operating assets and liabilities:Accounts receivable, net of allowances
    
    
    (3,211
    )
    
    
    (1,123
    )Insurance receivable
    
    
    (46
    )
    
    
    Inventories
    
    
    (487
    )
    
    
    (108
    )Prepaid expenses, other assets and restricted cash
    
    
    (3,932
    )
    
    
    8,961Accounts payable
    
    
    2,204
    
    
    
    (2,647
    )Other accrued liabilities
    
    
    5,501
    
    
    
    2,796Advance deposits
    
    
    292
    
    
    
    698Net cash provided by operating activities from continuing operations
    
    
    24,481
    
    
    
    29,741Net cash provided by (used in) operating activities from
discontinued operations
    
    
    779
    
    
    
    (2,187
    )Net cash provided by operating activities
    
    
    25,260
    
    
    
    27,554INVESTING
ACTIVITIES:Capital improvements
    
    
    (22,312
    )
    
    
    (29,726
    )Net proceeds from disposition of discontinued operations and land
parcels
    
    
    38,919
    
    
    
    Withdrawals for capital expenditures
    
    
    (21,046
    )
    
    
    6,532Other
    
    
    (493
    )
    
    
    (397
    )Net cash used in investing activities
    
    
    (4,932
    )
    
    
    (23,591
    )FINANCING
ACTIVITIES:Proceeds from issuance of long term debt
    
    
    370,000
    
    
    
    80,000Proceeds from working capital revolver
    
    
    
    
    
    
    2,000Proceeds from exercise of stock options and issuance of common
stock
    
    
    175,904
    
    
    
    Shares redeemed from reverse stock split
    
    
    (5
    )
    
    
    Preferred stock redemption
    
    
    (114,043
    )
    
    
    Treasury stock
    
    
    (76
    )
    
    
    Principal payments on long-term debt
    
    
    (400,234
    )
    
    
    (81,584
    )Payments of deferred financing costs
    
    
    (5,409
    )
    
    
    (4,725
    )Net cash provided by (used in) financing activities
    
    
    26,137
    
    
    
    (4,309
    )Effect of exchange rate changes on cash
    
    
    (18)
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    46,447
    
    
    
    (346
    )Cash and cash equivalents at beginning of period
    
    
    10,897
    
    
    
    10,875Cash and cash equivalents at end of period
    
    $
    57,344
    
    
    $
    10,529Supplemental cash flow information:Cash paid during the period for:Interest, net of the amounts capitalized shown below
    
    $
    27,705
    
    
    $
    20,634Interest capitalized
    
    
    469
    
    
    
    898Income taxes, net of refunds
    
    
    753
    
    
    
    218Supplemental disclosure of non-cash investing and
financing activities:Net non-cash debt decrease
    
    
    (208
    )
    
    
    (10,981
    )Issuance of promissory notes as consideration for taxation
liabilities
    
    
    2,466
    
    
    
    852Preferred stock dividend accrued
    
    
    
    
    
    
    11,621
 See notes to condensed consolidated financial statements. 5




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##### Table of Contents



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
2004. 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 November 8, 2004, we operated 87 hotels
with an aggregate of 16,368 rooms, located in 30 states and Canada. Of the 87
hotels, 78 hotels, with an aggregate of 14,350 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 November 8,
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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##### Table of Contents



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 November 8, 2004, we sold the office
building, ten of the 19 hotels and two of the three land parcels. As of
November 8, 2004, our hotel portfolio consisted of 87 hotels, 78 of which
represent our continuing operations portfolio (including one hotel in which we
have a non-controlling equity interest which we do not consolidate). We
believe that our held for sale assets as of September 30, 2004 remain properly
classified in accordance with Statement of Financial Accounting
Standard (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. 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
September 30, 2004, the results of our operations for the three and nine months
ended September 30, 2004 and September 30, 2003 and our cash flows for the nine
months ended September 30, 2004 and September 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) with resulting fractional
shares paid in cash. 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. 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. Stock-based Compensation 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 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 7




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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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 to 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. On July 15, 2004, 22,222 restricted
stock units previously issued to Mr. Parrington vested. Pursuant to the terms
of his restricted unit award agreement, Mr. Parrington elected to have the
Company withhold an appropriate number of vested shares to satisfy the
employment tax withholding requirements associated with the vesting of the
restricted units. Accordingly, 7,211 shares were withheld and deemed
repurchased by the Company, thereby resulting in the reporting of treasury
stock in our Condensed Consolidated Statement of Stockholders Equity. We present below a summary of our stock option plan and the restricted
stock units activity under the plan for the nine months ended September 30,
2004: Weighted AverageOptions
    
    Exercise PriceBalance, December 31, 2003
    
    
    157,529
    
    
    $
    13.92Granted
    
    
    383,500
    
    
    
    10.52Exercised
    
    
    (241
    )
    
    
    15.21Forfeited
    
    
    (8,991
    )
    
    
    15.21Balance, September 30, 2004
    
    
    531,797
    
    
    $
    11.46
 RestrictedStock UnitsBalance, December 31, 2003
    
    
    66,666Issued
    
    
    1,382Forfeited
    
    
    Shares converted to common stock
    
    
    (22,222
    ) (1)Balance, September 30, 2004
    
    
    45,826
   (1)
    
    At September 30, 2004, 22,222 units of the restricted stock had vested. In the following table, we summarize information for options outstanding
and exercisable at September 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
    
    
    
    8.8
    
    
    $
    9.00
    
    
    
    11,111
    
    
    $
    9.00$10.51 to $15.00
    
    
    382,000
    
    
    
    9.7
    
    
    $
    10.52
    
    
    
    
    
    
    $
    10.52$15.01 to $15.50
    
    
    109,298
    
    
    
    8.9
    
    
    $
    15.21
    
    
    
    72,810
    
    
    $
    15.21$15.51 to $16.00
    
    
    7,166
    
    
    
    9.0
    
    
    $
    15.66
    
    
    
    2,389
    
    
    $
    15.66531,797
    
    
    
    9.5
    
    
    $
    11.46
    
    
    
    86,310
    
    
    $
    14.42
 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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##### Table of Contents



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
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
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003 (1)
    
    2004
    
    2003(1)Loss from continuing operationsAs reported
    
    $
    (6,544
    )
    
    $
    (3,600
    )
    
    $
    (24,776
    )
    
    $
    (10,046
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    62
    
    
    
    42
    
    
    
    162
    
    
    $
    42Deduct: Total pro forma stock-based
employee compensation expense, net of tax
effects
    
    
    (423
    )
    
    
    (504
    )
    
    
    (778
    )
    
    
    (504
    )Pro forma
    
    
    (6,905
    )
    
    
    (4,062
    )
    
    
    (25,392
    )
    
    
    (10,508
    )Income (loss) from discontinued operationsAs reported
    
    
    2,807
    
    
    
    (46
    )
    
    
    6,706
    
    
    
    (5,125
    )Add: Stock-based compensation expense
included in net income, net of tax effectsDeduct: Total pro forma stock-based
employee compensation expense, net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pro forma
    
    
    2,807
    
    
    
    (46
    )
    
    
    6,706
    
    
    
    (5,125
    )Net lossAs reported
    
    
    (3,737
    )
    
    
    (3,646
    )
    
    
    (18,070
    )
    
    
    (15,171
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    62
    
    
    
    42
    
    
    
    162
    
    
    
    42Deduct: Total pro forma stock based
employee compensation expense, net of tax
effects
    
    
    (423
    )
    
    
    (504
    )
    
    
    (778
    )
    
    
    (504
    )Pro forma
    
    
    (4,098
    )
    
    
    (4,108
    )
    
    
    (18,686
    )
    
    
    (15,633
    )Net loss attributable to common stockAs reported
    
    
    (3,737
    )
    
    
    (3,646
    )
    
    
    (18,070
    )
    
    
    (22,765
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    62
    
    
    
    42
    
    
    
    162
    
    
    
    42Deduct: Total pro forma stock based
employee compensation expense, net of tax
effects
    
    
    (423
    )
    
    
    (504
    )
    
    
    (778
    )
    
    
    (504
    )Pro forma
    
    
    (4,098
    )
    
    
    (4,108
    )
    
    
    (18,686
    )
    
    
    (23,227
    )Loss from continuing operations attributable to
common stock before discontinued operationsAs reported
    
    
    (6,544
    )
    
    
    (3,600
    )
    
    
    (24,776
    )
    
    
    (17,640
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    62
    
    
    
    42
    
    
    
    162
    
    
    
    42Deduct: Total pro forma stock based
employee compensation expense, net of tax
effects
    
    
    (423
    )
    
    
    (504
    )
    
    
    (778
    )
    
    
    (504
    )Pro forma
    
    
    (6,905
    )
    
    
    (4,062
    )
    
    
    (25,392
    )
    
    
    (18,102
    )Basic and diluted loss per common share:Loss from continuing operationsAs reported
    
    $
    (0.27
    )
    
    $
    (1.54
    )
    
    $
    (2.43
    )
    
    $
    (4.31
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.02Deduct: Total pro forma stock-based
employee compensation expense, net of tax
effects
    
    
    (0.01
    )
    
    
    (0.22
    )
    
    
    (0.08
    )
    
    
    (0.21
    )Pro forma
    
    
    (0.28
    )
    
    
    (1.74
    )
    
    
    (2.49
    )
    
    
    (4.50
    )Income (loss) from discontinued operationsAs reported
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.66
    
    
    
    (2.19
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: Total pro forma stock-based
employee compensation expense, net of tax
effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pro forma
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.66
    
    
    
    (2.19
    )Net lossAs reported
    
    
    (0.15
    )
    
    
    (1.56
    )
    
    
    (1.77
    )
    
    
    (6.50
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.02Deduct: Total pro forma stock-based
employee compensation expense, net of tax
effects
    
    
    (0.01
    )
    
    
    (0.22
    )
    
    
    (0.08
    )
    
    
    (0.22
    )Pro forma
    
    
    (0.16
    )
    
    
    (1.76
    )
    
    
    (1.84
    )
    
    
    (6.70
    )Net loss attributable to common stockAs reported
    
    
    (0.15
    )
    
    
    (1.56
    )
    
    
    (1.77
    )
    
    
    (9.76
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.02Deduct: Total pro forma stock-based
employee compensation expense, net of tax
effects
    
    
    (0.01
    )
    
    
    (0.22
    )
    
    
    (0.08
    )
    
    
    (0.22
    )Pro forma
    
    
    (0.16
    )
    
    
    (1.76
    )
    
    
    (1.84
    )
    
    
    (9.96
    )Loss from continuing operations
attributable to common
stock before discontinued operationsAs reported
    
    
    (0.27
    )
    
    
    (1.54
    )
    
    
    (2.43
    )
    
    
    (7.56
    )Add: Stock-based compensation expense
included in net income, net of tax effects
    
    
    
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.02Deduct: Total pro forma stock-based
employee compensation expense, net of tax
effects
    
    
    (0.01
    )
    
    
    (0.22
    )
    
    
    (0.08
    )
    
    
    (0.22
    )Pro forma
    
    
    (0.28
    )
    
    
    (1.74
    )
    
    
    (2.49
    )
    
    
    (7.76
    )
   (1)
    
    There were 150,666 options outstanding between January 1, 2003 and September 30, 2003. 3. 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 July 1,
2004 9




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) and September 30, 2004, we sold one hotel and two land parcels for an
aggregate sales price of $5.3 million. From the sale of these assets, we paid
down debt of approximately $3.2 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 September 30,
2004 (including any related impairment charges) in Discontinued Operations in
the Consolidated Statements of Operations. The assets held for sale at
September 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 nine
months ended September 30, 2004, we recorded impairment charges of $0.4 million
and $3.0 million, respectively, on assets held for sale. We consider properties
to be assets held for sale when management approves and commits to a formal
plan to actively market a property for sale. Upon designation of a property as
an asset held for sale, we record the carrying value of the property at the
lower of its carrying value or its estimated fair market value, less estimated
selling costs, and we stop recording depreciation expense. Among other
criteria, we classify an asset as held for sale if we expect to dispose of it
within one year. At September 30, 2004, nine hotels and one land parcel 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 September 30, 2004
and December 31, 2003: September 30, 2004
    
    December 31, 2003(Unaudited in thousands)ASSETSAccounts receivable, net of allowances
    
    $
    949
    
    
    $
    1,252Inventories
    
    
    739
    
    
    
    1,377Prepaid expenses and other current assets
    
    
    638
    
    
    
    1,039Property and equipment, net
    
    
    32,246
    
    
    
    61,624Other assets
    
    
    968
    
    
    
    3,275$
    35,540
    
    
    $
    68,567LIABILITIESAccounts payable
    
    $
    944
    
    
    $
    1,234Other accrued liabilities
    
    
    2,000
    
    
    
    3,120Advance deposits
    
    
    204
    
    
    
    390Current portion of long-term debt
    
    
    388
    
    
    
    771Long-term debt
    
    
    30,995
    
    
    
    52,433Total liabilities
    
    $
    34,531
    
    
    $
    57,948
 The condensed combined results of operations of the properties classified
as Discontinued Operations for the three and nine months ended September 30,
2004 were as follows: 10




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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited in thousands)
    
    (Unaudited in thousands)Revenues:Rooms
    
    $
    7,800
    
    
    $
    14,752
    
    
    $
    24,235
    
    
    $
    36,595Food and beverage
    
    
    1,673
    
    
    
    2,907
    
    
    
    6,430
    
    
    
    8,442Other
    
    
    254
    
    
    
    927
    
    
    
    1,090
    
    
    
    2,6139,727
    
    
    
    18,586
    
    
    
    31,755
    
    
    
    47,650Operating expenses:Direct:Rooms
    
    
    2,417
    
    
    
    4,117
    
    
    
    7,452
    
    
    
    11,027Food and beverage
    
    
    1,443
    
    
    
    2,360
    
    
    
    5,028
    
    
    
    6,748Other
    
    
    209
    
    
    
    626
    
    
    
    847
    
    
    
    1,8104,069
    
    
    
    7,103
    
    
    
    13,327
    
    
    
    19,5855,658
    
    
    
    11,483
    
    
    
    18,428
    
    
    
    28,065Other operating expenses:Other hotel operating costs
    
    
    3,301
    
    
    
    6,252
    
    
    
    11,815
    
    
    
    17,726Property and other taxes,
insurance and leases
    
    
    674
    
    
    
    1,870
    
    
    
    1,757
    
    
    
    5,738Depreciation and amortization
    
    
    65
    
    
    
    409
    
    
    
    216
    
    
    
    3,358Impairment of long-lived assets
    
    
    368
    
    
    
    1,678
    
    
    
    2,972
    
    
    
    3,748Other operating expenses
    
    
    4,408
    
    
    
    10,209
    
    
    
    16,760
    
    
    
    30,5701,250
    
    
    
    1,274
    
    
    
    1,668
    
    
    
    (2,505
    )Interest income
    
    
    50
    
    
    
    
    
    
    
    50
    
    
    
    Interest expense and other
financing costs
    
    
    (448
    )
    
    
    (1,320
    )
    
    
    (4,216
    )
    
    
    (2,621
    )Gain on asset dispositions
    
    
    1,955
    
    
    
    
    
    
    
    9,204
    
    
    
    1Income (loss) before income taxes
    
    
    2,807
    
    
    
    (46
    )
    
    
    6,706
    
    
    
    (5,125
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    2,807
    
    
    $
    (46
    )
    
    $
    6,706
    
    
    $
    (5,125
    )
 4. Cash, Restricted As of September 30, 2004, our restricted cash consisted of amounts
reserved for letter of credit collateral, a deposit required by our bankers and
cash reserved pursuant to certain loan agreements. 5. Loss Per Share The following table sets forth the computation of basic and diluted loss
per share: Three months ended
    
    Nine months endedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003(Unaudited in
    
    (Unaudited inthousands, except
    
    thousands, exceptper share data)
    
    per share data)Basic and diluted loss per share:Numerator:Loss from continuing operations
    
    $
    (6,544
    )
    
    $
    (3,600
    )
    
    $
    (24,776
    )
    
    $
    (10,046
    )Loss from discontinued operations
    
    
    2,807
    
    
    
    (46
    )
    
    
    6,706
    
    
    
    (5,125
    )Net loss
    
    
    (3,737
    )
    
    
    (3,646
    )
    
    
    (18,070
    )
    
    
    (15,171
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,594
    )Net loss attributable to common stock
    
    
    (3,737
    )
    
    
    (3,646
    )
    
    
    (18,070
    )
    
    
    (22,765
    )Loss from continuing operations
    
    
    (6,544
    )
    
    
    (3,600
    )
    
    
    (24,776
    )
    
    
    (10,046
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,594
    )Loss from continuing operations attributable to
common stock
before discontinued operations
    
    $
    (6,544
    )
    
    $
    (3,600
    )
    
    $
    (24,776
    )
    
    $
    (17,640
    )Denominator:Denominator for basic and diluted
loss per shareweighted-average shares
    
    
    24,571
    
    
    
    2,333
    
    
    
    10,205
    
    
    
    2,333Basic and diluted loss per common share:Loss from continuing operations
    
    $
    (0.27
    )
    
    $
    (1.54
    )
    
    $
    (2.43
    )
    
    $
    (4.31
    )Loss from discontinued operations
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.66
    
    
    
    (2.19
    )Net loss
    
    
    (0.15
    )
    
    
    (1.56
    )
    
    
    (1.77
    )
    
    
    (6.50
    )Net loss attributable to common stock
    
    
    (0.15
    )
    
    
    (1.56
    )
    
    
    (1.77
    )
    
    
    (9.76
    )Loss from continuing operations attributable to
common stock before discontinued operations
    
    $
    (0.27
    )
    
    $
    (1.54
    )
    
    $
    (2.43
    )
    
    $
    (7.56
    )
 We did not include the shares associated with the assumed conversion of
the restricted stock units (45,826 shares) or the exercise of stock options
(options to acquire 531,797 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 nine months ended
September 30, 2004 because their inclusion would have been antidilutive. 11




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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 (66,666 shares) or the exercise of stock options
(options to acquire 150,666 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 nine months ended
September 30, 2003 because their inclusion would have been antidilutive. 6. Other Accrued Liabilities At September 30, 2004 and December 31, 2003, other accrued liabilities
consisted of the following: September 30, 2004
    
    December 31, 2003(Unaudited in thousands)Salaries and related costs
    
    $
    17,615
    
    
    $
    16,211Property and sales taxes
    
    
    12,022
    
    
    
    9,427Professional fees
    
    
    920
    
    
    
    570Provision for state income taxes
    
    
    342
    
    
    
    2,361Franchise fee accrual
    
    
    1,464
    
    
    
    1,115Accrued interest
    
    
    1,871
    
    
    
    526Accrual for allowed claims
    
    
    2,180
    
    
    
    186Other
    
    
    700
    
    
    
    1,036$
    37,114
    
    
    $
    31,432
 7. Debt Substantially all of our property and equipment are pledged as collateral
for long-term obligations with the exception of three hotels and one land
parcel, of which two of the hotels and the land parcel are classified as held
for sale. 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 September 30, 2004 along with the
applicable interest rates and the related carrying values of the property,
plant and equipment which collateralize these debts: 12




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) September 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
    
    
    28
    
    
    $
    123,283
    
    
    $
    106,625
    
    
    LIBOR plus 3.40%Merrill Lynch Mortgage Lending,
Inc.  Fixed
    
    
    35
    
    
    
    313,980
    
    
    
    259,407
    
    
    
    6.58
    %Merrill Lynch Mortgage Lending, Inc.  Total
    
    
    63
    
    
    
    437,263
    
    
    
    366,032Other financingComputershare Trust Company of
Canada
    
    
    1
    
    
    
    14,870
    
    
    
    7,498
    
    
    
    7.88
    %Column Financial, Inc.
    
    
    9
    
    
    
    62,623
    
    
    
    25,641
    
    
    
    10.59
    %Lehman Brothers Holdings, Inc.
    
    
    5
    
    
    
    35,036
    
    
    
    23,051
    
    
    $16,242 at 9.40%; $6,809 at 8.90%JP Morgan Chase Bank
    
    
    2
    
    
    
    8,635
    
    
    
    10,248
    
    
    
    8.00
    %DDL Kinser
    
    
    1
    
    
    
    3,146
    
    
    
    2,311
    
    
    
    8.25
    %Column Financial, Inc.
    
    
    1
    
    
    
    10,297
    
    
    
    8,648
    
    
    
    9.45
    %Column Financial, Inc.
    
    
    1
    
    
    
    6,018
    
    
    
    3,105
    
    
    
    10.74
    %Total  other financing
    
    
    20
    
    
    
    140,625
    
    
    
    80,50283
    
    
    
    577,888
    
    
    
    446,534
    
    
    
    6.77%
    (2)Long-term debt  otherTax notes issued pursuant to our
Joint Plan
of Reorganization
    
    
    
    
    
    
    
    
    
    
    3,565Other
    
    
    
    
    
    
    
    
    
    
    1,822
    
    
    
    
    
    
    
    5,387Property, plant and equipment  other
    
    
    3
    
    
    
    14,980
    
    
    
    86
    
    
    
    592,868
    
    
    
    451,921Held for sale
    
    
    (9
    )
    
    
    (32,246
    )
    
    
    (31,383
    )Total September 30, 2004
    
    
    77
    
    
    
    560,622
    
    
    
    420,538
   (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 6.77% in the table above represents our annual
weighted average cost of mortgage debt at September 30, 2004,
using a 1.84% LIBOR rate. Mortgage 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, of which one was subsequently sold. 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
of which $0.8 million was allocated to continuing operations and $0.3 million
was allocated to discontinued operations. Immediately after closing, the Refinancing Debt consisted of a loan of
$110 million bearing a floating rate of interest (the Floating Rate Debt),
presently secured by 28 of our hotels (29 hotels at the loans inception), 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, those loans are subject to
cross-collateralization provisions. 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 for certain defeasance provisions, 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. Repayments of debt related to assets held for
sale at June 25, 2004, are exempt from the 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 September 30, 2004, our debt yield ratios were above the minimum
requirement for the four Fixed Rate Loans; however, we did not meet the
required debt yield ratio with regard to the Floating Rate Loan. As a result,
all excess cash generated by the assets that secure this floating rate loan
will be placed into a restricted cash account and these restricted funds can be
used for prepayment of the loan, capital expenditures, or scheduled principal
and interest payments up to $0.9 million as designated above. Funds will no
longer be retained in the restricted cash account when the debt yield ratio is
sustained above the minimum requirement for three consecutive months. As of
September 30, 2004, no funds were in the restricted cash account. 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. Additionally, as of September 30, 2004, we were not in compliance with the
debt service coverage ratio requirement of the loan from Column Financial
secured by nine of our hotels, primarily due to the fact that one of the hotels
securing this loan (New Orleans Airport Plaza Hotel) is not currently
affiliated with a national brand and is undergoing a major renovation. We have
entered into a franchise agreement with Radisson Hotels International, Inc. to
rebrand this property as a Radisson hotel and expect to complete the renovation
and open the hotel as a Radisson during the first quarter of 2005. The total
investment we are making on the renovation of this property and its rebranding
is $3.8 million. In addition, we will be completing capital expenditures of
approximately $7.0 million on two other hotels in this loan pool during the
fourth quarter 2004 and in 2005. 14




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Under the terms of the Column Financial loan agreement until the required
DSCR is met, the lender is permitted to require the borrowers to deposit all
revenues from the mortgaged properties into an account controlled by the
lender. The revenues are then disbursed to pay property expenses in accordance
with the loan agreement. The lender may apply excess proceeds after payment of
expenses to additional principal payments. However, as of November 8, 2004,
the lender has not elected to require revenue for these properties to be
deposited into its account. 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 76.1% of our mortgage debt (including
current portion) at September 30, 2004, bears interest at fixed rates and 23.9%
bears interest at a floating rate. 8. Commitments and Contingencies Franchise Agreements and Capital Expenditures We benefit from the superior brand qualities of Crowne Plaza, Holiday Inn,
Marriott, Hilton and other brands. Included in the benefits of these brands
are their reputation for quality and service, revenue generation through their
central reservation systems, access to revenue through the global distribution
systems, guest loyalty programs and brand Internet booking sites. Reservations
made by means of these franchisor facilities generally account for
approximately 35% of our total reservations. 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. These costs vary with revenues and are not fixed commitments. Franchise
fees incurred (which are reported in other hotel operating costs on our
Condensed Consolidated Statement of Operations) for the three and nine months
ended September 30, 2004 and September 30, 2003 were as follows: Three months ended
    
    Nine months endedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003(Unaudited in thousands)
    
    (Unaudited in thousands)Continuing operations
    
    $
    5,951
    
    
    $
    5,560
    
    
    $
    17,072
    
    
    $
    15,718Discontinued operations
    
    
    713
    
    
    
    1,221
    
    
    
    1,997
    
    
    
    2,999$
    6,664
    
    
    $
    6,781
    
    
    $
    19,069
    
    
    $
    18,717
 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 one, eleven and nine 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 15




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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. 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. As of November 8, 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 11 hotels. We believe that we will cure the non-compliance and
defaults on all of these hotels before the applicable termination dates. We
cannot, however, assure you that we will be able to complete our action plans
(which we estimate will cost approximately $1.6 million of which $0.4 million
is reserved with our lenders) to cure the alleged defaults prior to the
specified termination dates or be granted additional time in which to cure any
defaults. 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 November 8, 2004, we have not completed the required capital
expenditures for 33 hotels in accordance with the stipulations and estimate
that completing those improvements will cost $21.3 million of which $15.9
million is reserved with our lenders. 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 26 of these hotels
aggregating $16.5 million of the $21.3 million. In addition, five of these
hotels are held for sale and represent $2.2 million of the $21.3 million. We are not aware of any other instances of non-compliance with our
franchise agreements. We agreed to enter into new franchise agreements for all of our
Marriott-affiliated hotels during 2004, and to pay, over a three year period, a
fee aggregating approximately $0.5 million ($0.2 million of which has already
been paid), subject to offsets. As part of our agreement, Marriott will review
the capital improvements we have made at our Marriott franchised hotels during
2004, and 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 significantly enhanced our
capital improvement program in 2004. Letters of Credit As of September 30, 2004, we had one irrevocable letter of credit totaling
$3.4 million outstanding, fully collateralized by our cash (classified as
restricted cash in the accompanying Condensed Consolidated Balance Sheets), as
a guarantee to Zurich American Insurance Company. This letter of credit will
expire in November 2004 but may require renewal beyond that date. The Donlen
Fleet Management Services letter of credit for $0.1 million was cancelled on
September 30, 2004 and is no longer outstanding. 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 affected. As of September 30, 2004,
and December 31, 2003, we had approximately $11.2 million and $10.0 million
accrued for these liabilities, respectively. 16




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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. Casualty losses During August and September 2004, eight of our hotels were damaged (six
extensively) from the hurricanes that made landfall in the Southeastern United
States. Two of the hotels (West Palm Beach Crowne Plaza and Melbourne Holiday
Inn) remain closed and are not expected to reopen until the second quarter of
2005. All properties in our portfolio are covered by property casualty
insurance. With regard to physical property damage, we are recognizing expenses
related to hurricane damage repairs as we incur them. We have also written
off the net book value (NBV) of the assets that were destroyed by the
hurricane. As the combined repair expenses and net book value write-offs
exceed the relevant insurance deductibles, we have recorded a receivable from
the insurance carriers. For the three months ended September 30, 2004, we
incurred $1.2 million in hurricane repair costs, wrote off approximately $3.8
million in NBV of destroyed assets, and recorded a $3.0 million receivable due
from the insurance company for amounts that exceed the deductibles, which
results in a $2.0 million casualty loss for the nine months ended September 30,
2004. 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 a reserve for allowed claims as recorded on our balance
sheet. 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. Accordingly, as of September 30, 2004, a $2.2 million accrual for
allowed claims is recorded in other accrued liabilities for these claims. As
of September 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. 9. 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 $175.9 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
(Oaktree), (2) an affiliate of Blackstone Real Estate Advisors
(Blackstone), and (3) Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Merrill Lynch), 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. From the proceeds of the public equity offering 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 were
part 17




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LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) of 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. 10. 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 nine months ended September 30, 2004 of $0.9
million and $9.4 million, respectively, and the Preferred Stock dividends for
the three months ended September 30, 2003 of $4.0 million are presented as part
of interest expense while the Preferred Stock dividend for the period January
1, 2003 to June 30, 2003 of $7.6 million, is 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. 11. 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. 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 $116,000 and $190,000 including expenses, for other
support and services provided by Richard Cartoon, LLC for the three and nine
months ended September 30, 2004, respectively. Richard Cartoon, LLC is
continuing to provide restructuring support and Sarbanes-Oxley related
services. 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 18




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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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 was
secured by two land parcels and 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 9), 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 they 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. 19




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##### Table of Contents



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 Overview 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
2004. 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 November 8, 2004, we operated 87 hotels
with an aggregate of 16,368 rooms, located in 30 states and Canada. Of the 87
hotels, 78 hotels, with an aggregate of 14,350 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 November 8, 2004, we sold the office
building, ten of the nineteen hotels and two of the three land parcels. As of
November 8, 2004, our portfolio consisted of 87 hotels, 78 of which represent
our continuing operations 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) with resulting fractional
shares paid in cash. 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. 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 $175.9 million. On July 26, 2004,
approximately $114.0 million of the net proceeds was used to redeem the
remaining 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 that was previously 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 20




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##### Table of Contents



with Merrill Lynch Mortgage as part of the Refinancing Debt.
Approximately $1.8 million of the net proceeds of the equity offering was used
to settle a deferred ground rent obligation on one of our hotels. 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 the remaining 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. Overview of Continuing Operations Below is an overview 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 and average daily rates as the hospitality industry and the
economy continued to recover in the third quarter 2004. In addition,
hotels that were renovated in 2003 and early 2004 experienced improved
occupancy levels and rates upon the completion of their renovations.
    
    Operating expenses, including direct hotel and other operating
expenses, increased $3.1 million in the third quarter 2004 as compared
to the third quarter 2003. Our hotels were negatively affected by
increased benefit costs for 401k, workers compensation, union costs,
and state unemployment tax rate increases, and higher utility costs,
advertising, repair and maintenance costs, and bad debt costs related to
an airline bankruptcy filing. The hotels benefited, however, from the
stabilization of health insurance costs due to better claims experience,
and lower insurance premiums and self-insured losses for property and
casualty programs (excluding hurricane losses). Corporate overhead
expenses increased due to higher costs related to Sarbanes Oxley
compliance, partially offset by lower post-emergence Chapter 11 costs.
Depreciation and amortization costs were lower due to the reduced asset
base that resulted from impairment charges. We also recorded additional
impairment charges in the third quarter 2004.
    
    During August and September 2004, eight of our hotels were damaged by
the hurricanes that made landfall in the Southeastern United States.
Six of the hotels incurred damage which will result in costs that will
exceed the respective property insurance deductibles. Two of those six
hotels (West Palm Beach Crowne Plaza and Melbourne Holiday Inn) remain
closed and are not expected to reopen until the second quarter of 2005.
All of the affected hotels are covered by insurance which includes
coverage for business interruption. The deductibles for named
windstorms are 2% of replacement cost for each hotel, per occurrence.
Currently, we estimate that Lodgian will incur an aggregate deductible
of $2.9 million for claims associated with the six hotels whose losses
are expected to exceed their respective deductibles. The adjustment of
these claims is complex due to the fact that, in some cases, multiple
storms affected certain hotels in a relatively short time period, making
it difficult in some cases to determine which storm caused what damage
to each hotel. Under the terms of our insurance policies, we must
satisfy a separate deductible for each named windstorm for each hotel.
We are working with our insurance carrier to resolve these claims in as
prompt a manner as possible. On November 2, 2004, our insurer advanced
$1.5 million to us for losses associated with two of the affected
hotels.
    
    Interest expense and other financing costs were negatively affected
by the 4% prepayment premium due when the Preferred Stock was redeemed,
offset by a reduced Preferred Stock dividend cost as a result of the 21




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Preferred Stock shares that were exchanged on June 25, 2004 and the
remaining outstanding Preferred Stock shares that were redeemed on July 26,
2004.
    
    Net loss attributable to common stock was $3.7 million for the third
quarter 2004 compared with $3.6 million for the third quarter 2003. Overview 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 November 8, 2004, we sold ten of the nineteen hotels, the office
building, and two of the three land parcels. Summarized below is certain
financial data related to the ten hotels, the office building, and two land
parcels sold between November 1, 2003 and November 8, 2004: (Unaudited in thousands)Aggregate sales price
    
    $
    53,610Debt pay down (principal only)
    
    
    38,715Total 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
    
    
    10,900
 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 September 30,
2004 (including any related impairment charges) in Discontinued Operations in
the Consolidated Statement of Operations. The assets held for sale at September
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 nine months ended
September 30, 2004, we recorded impairment charges of $0.4 million and $3.0
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. We believe that all our held for sale assets as of
September 30, 2004 remain properly classified in accordance with SFAS No. 144. 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. 22




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##### Table of Contents



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 September 30, 2004 and September
30, 2003 and the results of operations for the nine months ended September 30,
2004 and September 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. Three Months Ended September 30, 2004 (Third Quarter 2004) Compared to the
Three Months Ended September 30, 2003 (Third Quarter 2003) and Nine Months
Ended September 30, 2004 (2004 Period) Compared to the Nine Months Ended
September 30, 2003 (2003 Period) Results of Operations  Continuing Operations Revenues  Continuing Operations Third Quarter 2004 Compared to Third Quarter 2003 Three months endedSeptember 30, 2004
    
    September 30, 2003
    
    Increase (decrease)Revenues (unaudited in thousands):Rooms
    
    $
    64,805
    
    
    $
    62,506
    
    
    $
    2,299
    
    
    
    3.7
    %Food and beverage
    
    
    16,950
    
    
    
    16,407
    
    
    
    543
    
    
    
    3.3
    %Other
    
    
    2,806
    
    
    
    2,841
    
    
    
    (35
    )
    
    
    (1.2
    )%Total revenues
    
    $
    84,561
    
    
    $
    81,754
    
    
    $
    2,807
    
    
    
    3.4
    %Occupancy
    
    
    65.5
    %
    
    
    64.7
    %
    
    
    
    
    
    
    1.2
    %ADR
    
    $
    76.55
    
    
    $
    74.43
    
    
    $
    2.12
    
    
    
    2.8
    %RevPAR
    
    $
    50.17
    
    
    $
    48.15
    
    
    $
    2.02
    
    
    
    4.2
    %
 The $2.3 million, or 3.7%, increase in rooms revenues is a result of a
4.2% increase in revenue per available room (RevPAR). Available rooms for the
quarter were reduced due to the closure of two hotels (West Palm Beach Crowne
Plaza and Melbourne Holiday Inn) resulting from the mandatory evacuation of
these properties by local authorities as hurricanes approached these locations
and the continuing closure of these two hotels for substantial damage that
resulted from the hurricanes. The 1.2% occupancy increase for the third
quarter was negatively affected by the displacement at our hotels that were
being renovated during the quarter. Additional displacement was caused by
cancellations at hotels impacted by hurricanes or the threat of hurricanes
during the quarter. For the three months ended September 30, 2004, total
revenue displacements from our renovation program and the impact of the
hurricanes were approximately $0.9 million and $1.1 million, respectively. 2004 Period Compared to 2003 Period Nine months endedSeptember 30, 2004
    
    September 30, 2003
    
    Increase (decrease)Revenues (unaudited in thousands):Rooms
    
    $
    186,693
    
    
    $
    177,430
    
    
    $
    9,263
    
    
    
    5.2
    %Food and beverage
    
    
    52,874
    
    
    
    51,991
    
    
    
    883
    
    
    
    1.7
    %Other
    
    
    8,376
    
    
    
    8,537
    
    
    
    (161
    )
    
    
    (1.9
    )%Total revenues
    
    $
    247,943
    
    
    $
    237,958
    
    
    $
    9,985
    
    
    
    4.2
    %Occupancy
    
    
    63.1
    %
    
    
    61.6
    %
    
    
    
    
    
    
    2.4
    %ADR
    
    $
    76.72
    
    
    $
    74.73
    
    
    $
    1.99
    
    
    
    2.7
    %RevPAR
    
    $
    48.37
    
    
    $
    46.06
    
    
    $
    2.31
    
    
    
    5.0
    %
 The $9.3 million, or 5.2%, increase in rooms revenues is a result of a
5.0% increase in RevPAR, the impact of leap years additional day in February
and the temporary closing of hotels in the third quarter due to mandatory
hurricane evacuations and the continuing closure of the West Palm Beach Crowne
Plaza and Melbourne Holiday Inn hotels. RevPAR increased as a result of a 2.4%
increase in occupancy and a 2.7% increase in ADR. The 2.4% occupancy increase
for the nine months ended September 30, 2004 reflects the negative impact of
displacement from our renovation programs and the hurricanes. For the nine
months ended September 30, 2004, total revenue 23




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displacement from our renovation programs and the hurricanes were
approximately $1.9 million and $1.1 million, respectively. Direct operating expenses  Continuing Operations Third Quarter 2004 Compared to Third Quarter 2003 Three months endedSeptember 30,
    
    September 30,
    
    Increase2004
    
    2003
    
    (decrease)(Unaudited in thousands)Direct operating expenses:Rooms
    
    $
    18,722
    
    
    $
    17,697
    
    
    $
    1,025
    
    
    
    5.8
    %Food and beverage
    
    
    12,595
    
    
    
    12,030
    
    
    
    565
    
    
    
    4.7
    %Other
    
    
    2,095
    
    
    
    2,013
    
    
    
    82
    
    
    
    4.1
    %$
    33,412
    
    
    $
    31,740
    
    
    $
    1,672
    
    
    
    5.3
    %% of total revenues
    
    
    39.5
    %
    
    
    38.8
    %
 Rooms expenses as a percentage of revenue were 28.9% in the third quarter
2004 as compared to 28.3% in the third quarter 2003. The cost per occupied
room (POR) was $22.11 in the third quarter 2004 as compared to $21.07 in the
second quarter 2003. Payroll and related benefits, on an actual POR basis,
were $13.47 in the third quarter 2004 as compared to $13.45 in the third
quarter 2003. Other rooms expenses, on an actual POR basis, were $8.64 in the
third quarter 2004 as compared to $7.62 in the third quarter 2003, partially
due to increased costs in linen expense resulting from upgraded linen packages
mandated at our Crowne Plaza Hotels during the quarter. 2004 Period Compared to 2003 Period Nine months endedSeptember 30,
    
    September 30,
    
    Increase2004
    
    2003
    
    (decrease)(Unaudited in thousands)Direct operating expenses:Rooms
    
    $
    51,700
    
    
    $
    49,790
    
    
    $
    1,910
    
    
    
    3.8
    %Food and beverage
    
    
    36,842
    
    
    
    36,129
    
    
    
    713
    
    
    
    2.0
    %Other
    
    
    6,144
    
    
    
    5,793
    
    
    
    351
    
    
    
    6.1
    %$
    94,686
    
    
    $
    91,712
    
    
    $
    2,974
    
    
    
    3.2
    %% of total revenues
    
    
    38.2
    %
    
    
    38.5
    %
 Rooms expenses increased $1.9 million while rooms revenues increased $9.3
million in the first nine months of 2004 as compared to the same period in
2003. Rooms expenses, as a percentage of room revenues, were 27.7% for the
first nine months of 2004 as compared to 28.1% in the same period in 2003.
Rooms expenses, on an actual POR basis, were $21.25 in the first nine months of
2004, as compared to $20.97 for the same period in 2003. Payroll and related
benefits, on an actual POR basis, were $13.32 for the first nine months of 2004
as compared to $13.41 for the same period in 2003. Other rooms expenses, on an
actual POR basis, were $7.93 for the first nine months of 2004 as compared to
$7.56 for the same period in 2003, partially due to increases in travel agent
commissions and guest loyalty program expenses. Other operating expenses  Continuing Operations Third Quarter 2004 Compared to Third Quarter 2003 Three months endedSeptember 30,
    
    September 30,
    
    Increase2004
    
    2003
    
    (decrease)(Unaudited in thousands)Other operating expenses:Other hotel operating costs
    
    $
    25,577
    
    
    $
    24,164
    
    
    $
    1,413
    
    
    
    5.8
    %Property and other taxes, insurance
and leases
    
    
    5,597
    
    
    
    6,087
    
    
    
    (490
    )
    
    
    (8.1
    )%Corporate and other
    
    
    4,520
    
    
    
    4,235
    
    
    
    285
    
    
    
    6.7
    %Casualty gains and losses, net
    
    
    2,019
    
    
    
    
    
    
    
    2,019
    
    
    
    100.0
    %Depreciation and amortization
    
    
    7,066
    
    
    
    7,572
    
    
    
    (506
    )
    
    
    (6.7
    )%Impairment of long-lived
assets
    
    
    607
    
    
    
    2
    
    
    
    605
    
    
    
    30,250.0
    %$
    45,386
    
    
    $
    42,060
    
    
    $
    3,326
    
    
    
    7.9
    %% of total revenues
    
    
    53.7
    %
    
    
    51.4
    %
 24




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Other hotel operating costs increased $1.4 million in the third quarter
2004 as compared to the same period 2003 primarily due to the following:  
    
    Hotel administration costs increased $0.7 million, with bad debt
expenses increasing $0.3 million primarily due to the USAir bankruptcy
filing, and increases in salary and employee benefits.
    
    Franchise fees increased $0.4 million as a result of the increase
in room revenues and the increased cost of brand loyalty programs. Property and other taxes, insurance and leases decreased $0.5 million as
compared to third quarter 2003 primarily as a result of stabilization in the
insurance markets and improved loss experience, successful appeals related to
property tax assessments and settlement of a deferred ground rent obligation at
one of our hotels. Casualty losses were $2.0 million as a result of eight properties
incurring, in the aggregate, $5.0 million in costs ($1.2 million in hurricane
repair expenses and approximately $3.8 million in net book value write-offs for
destroyed assets) caused by the hurricanes that hit the Southeastern United
States in August and September 2004, offset by expected insurance proceeds of
$3.0 million. 2004 Period Compared to 2003 Period Nine months endedSeptember 30,
    
    September 30,
    
    Increase2004
    
    2003
    
    (decrease)(Unaudited in thousands)Other operating expenses:Other hotel operating costs
    
    $
    73,471
    
    
    $
    69,436
    
    
    $
    4,035
    
    
    
    5.8
    %Property and other taxes, insurance and
leases
    
    
    16,724
    
    
    
    19,671
    
    
    
    (2,947
    )
    
    
    (15.0
    )%Corporate and other
    
    
    13,714
    
    
    
    16,280
    
    
    
    (2,566
    )
    
    
    (15.8
    )%Casualty gains and losses, net
    
    
    2,019
    
    
    
    
    
    
    
    2,019
    
    
    
    100.0
    %Depreciation and amortization
    
    
    20,741
    
    
    
    22,567
    
    
    
    (1,826
    )
    
    
    (8.1
    )%Impairment of long-lived assets
    
    
    607
    
    
    
    1,380
    
    
    
    (773
    )
    
    
    (56.0
    )%$
    127,276
    
    
    $
    129,334
    
    
    $
    (2,058
    )
    
    
    (1.6
    )%% of total revenues
    
    
    51.3
    %
    
    
    54.4
    %
 Other hotel operating costs increased $4.0 million in the first nine months of
2004 as compared to the same period 2003 due to the following:  
    
    Hotel administration costs increased $1.1 million, primarily due to
increases in salary and employee benefits and costs related to labor
union contract negotiations.
    
    Advertising and promotion costs increased $0.6 million due to
increased costs of advertising, market research materials and salary
and benefit increases.
    
    Franchise fees increased $1.4 million as a result of the increase
in room revenues and the increased cost of brand loyalty programs.
    
    Repairs and maintenance costs increased $0.5 million primarily as a
result of our continuing increased emphasis on preventive maintenance
programs and renovations projects.
    
    Utility costs increased $0.5 million as a result of increased
occupied rooms and rate and consumption increases. POR costs for 2004
were $6.08 as compared to $6.03 in 2003, an increase of 0.8%. Property and other tax savings of $0.5 million, insurance premium and
self-insured loss savings of $1.1 million, franchise tax savings of $0.4
million, and ground rent savings of $1.0 million in the first nine months of
2004 were offset partially by equipment rental increases of $0.1 million. Corporate and other expenses decreased $2.6 million in the nine months
ended September 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 25




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##### Table of Contents



related to the Chapter 11 proceedings. For the nine months ended
September 30, 2004 these costs totaled $0.4 million as compared to $3.5 million
for the same period in 2003 (not including $2.0 million of reorganization
items). Casualty losses were $2.0 million as a result of eight properties
incurring, in the aggregate, $5.0 million in costs ($1.2 million in hurricane
repair expenses and approximately $3.8 million in net book value write-offs for
destroyed assets) caused by the hurricanes that hit the Southeastern United
States in August and September 2004, offset by expected insurance proceeds of
$3.0 million. Depreciation and amortization expenses decreased $1.8 million as a result
of our reduced asset base on the continuing operations hotels due to asset
write-downs for impairment charges. Impairment of long-lived assets totaled
$0.6 million for the nine months ended September 30, 2004 and $1.4 million for
the nine months ended September 30, 2003. Non-operating income (expenses)  Continuing Operations Third Quarter 2004 Compared to Third Quarter 2003 Three months endedSeptember 30,
    
    September 30,
    
    Increase2004
    
    2003
    
    (decrease)(Unaudited in thousands)Non-operating income (expenses):Interest income and other
    
    $
    212
    
    
    $
    114
    
    
    $
    98
    
    
    
    86.0
    %Interest expense and other financing costs:Preferred stock dividend
    
    
    (865
    )
    
    
    (4,027
    )
    
    
    3,162
    
    
    
    (78.5
    )%Other interest expense
    
    
    (7,350
    )
    
    
    (7,665
    )
    
    
    315
    
    
    
    (4.1
    )%Loss on preferred stock redemption
    
    
    (4,471
    )
    
    
    
    
    
    
    (4,471
    )
    
    
    (100.0
    )%Minority interests
    
    
    (503
    )
    
    
    (99
    )
    
    
    (404
    )
    
    
    408.1
    %
 The Preferred Stock dividend relates to the 12.25% dividend on the
Preferred Stock issued on November 25, 2002. Dividends for the third quarter
2004 were $0.9 million as compared to $4.0 million for the third quarter 2003
as the Preferred Stock was redeemed in its entirety on July 26, 2004. Other interest expense for the third quarter 2004 decreased $0.3 million
as deferred loan cost amortization decreased $1.0 million, mortgage interest
charges increased $0.5 million as a larger portion of our mortgage debt is now
locked at higher fixed rates, and capitalized interest costs decreased $0.1
million. Loss on preferred stock redemption of $4.5 million represents the 4%
prepayment premium that was due when we redeemed the remaining outstanding
Preferred Stock on July 26, 2004. 2004 Period Compared to 2003 Period Nine months endedSeptember 30,
    
    September 30,
    
    Increase2004
    
    2003
    
    (decrease)(Unaudited in thousands)Non-operating income (expenses):Interest income and other
    
    $
    321
    
    
    $
    321
    
    
    $
    
    
    
    
    0.0
    %Interest expense and other financing costs:Preferred stock dividend
    
    
    (9,383
    )
    
    
    (4,027
    )
    
    
    (5,356
    )
    
    
    133.0
    %Other interest expense
    
    
    (35,429
    )
    
    
    (20,863
    )
    
    
    (14,566
    )
    
    
    69.8
    %Loss on preferred stock redemption
    
    
    (6,063
    )
    
    
    
    
    
    
    (6,063
    )
    
    
    (100.0
    )%Minority interests
    
    
    (285
    )
    
    
    118
    
    
    
    (403
    )
    
    
    (341.5
    )%
 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. Accordingly, the $9.4 million dividend charged for
the nine months ended September 30, 2004 is reported in interest expense while
$4.0 million of dividend expense is reported as interest expense for the period
July 1, 2003 to September 30, 2003 and $7.6 million is shown as a deduction
from retained earnings for the January 1, 2003 to June 30, 2003 period. As a 26




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##### Table of Contents



result of the redemption of our remaining outstanding Preferred Stock
shares, we did not incur Preferred Stock dividend expense after July 26, 2004. Other interest expense increased $14.6 million for the nine months ended
September 30, 2004 as compared to the same period in 2003 because we did not
pay interest on 18 hotels while they were in Chapter 11 in early 2003, because
a larger portion of our mortgage debt is locked in at slightly higher fixed
interest rates, and because of the following second quarter 2004 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 $6.1 million represents the 4%
prepayment premium for the shares converted to common stock immediately
following the consummation of our equity offering on June 25, 2004 and the
remaining shares that were redeemed on July 26, 2004. The aggregate results of our four joint ventures in which we have a
controlling equity interest for the nine months ended September 30, 2004 were
stronger in the first nine months of 2004 as compared to 2003; hence, the
credit in minority interests is $0.4 million more than in the same period 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 9 hotels and one land parcel which were held for sale at
September 30, 2004, as well as the 19 hotels (10 hotels sold and eight hotels
returned to lender and one hotel returned to lessor in January 2003 as part of
the bankruptcy process), one office building, and two land parcels that were
disposed of between January 1, 2003 and September 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




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##### Table of Contents



Set forth below are the condensed combined statement of operations for the
properties classified as discontinued operations: Third Quarter 2004 Compared to Third Quarter 2003 Three months endedSeptember 30,
    
    September 30,
    
    Increase2004
    
    2003
    
    (Decrease)(Unaudited in thousands)Revenues:Rooms
    
    $
    7,800
    
    
    $
    14,752
    
    
    $
    (6,952
    )Food and beverage
    
    
    1,673
    
    
    
    2,907
    
    
    
    (1,234
    )Other
    
    
    254
    
    
    
    927
    
    
    
    (673
    )9,727
    
    
    
    18,586
    
    
    
    (8,859
    )Operating expenses:Direct:Rooms
    
    
    2,417
    
    
    
    4,117
    
    
    
    (1,700
    )Food and beverage
    
    
    1,443
    
    
    
    2,360
    
    
    
    (917
    )Other
    
    
    209
    
    
    
    626
    
    
    
    (417
    )4,069
    
    
    
    7,103
    
    
    
    (3,034
    )5,658
    
    
    
    11,483
    
    
    
    (5,825
    )Other operating expenses:Other hotel operating costs
    
    
    3,301
    
    
    
    6,252
    
    
    
    (2,951
    )Property and other taxes, insurance and leases
    
    
    674
    
    
    
    1,870
    
    
    
    (1,196
    )Depreciation and amortization
    
    
    65
    
    
    
    409
    
    
    
    (344
    )Impairment of long-lived assets
    
    
    368
    
    
    
    1,678
    
    
    
    (1,310
    )Other operating expenses
    
    
    4,408
    
    
    
    10,209
    
    
    
    (5,801
    )1,250
    
    
    
    1,274
    
    
    
    (24
    )Interest income
    
    
    50
    
    
    
    
    
    
    
    50Interest expense and other financing costs
    
    
    (448
    )
    
    
    (1,320
    )
    
    
    872Gain on asset dispositions
    
    
    1,955
    
    
    
    
    
    
    
    1,955Income (loss) before income taxes
    
    
    2,807
    
    
    
    (46
    )
    
    
    2,853Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    2,807
    
    
    $
    (46
    )
    
    $
    2,853
 Third quarter 2004 revenues and expenses reflected in discontinued
operations above are not fully comparable with the third quarter 2003 revenues
and expenses as a result of the following:  
    
    For the third quarter 2004 there were no revenues or expenses for
the hotel and office building sold during 2003 or for the eight
properties sold in the first six months of 2004. However, the third
quarter 2003 results reflect the full quarters operations for these
ten properties. For the third quarter 2003, revenues for these ten
properties were $6.0 million and direct operating expenses were $2.7
million in aggregate.  
    
    Less than a full quarters revenues and expenses are in the results
for the third quarter 2004 for the one hotel and two land parcels sold
during the quarter. Additionally, the following factors affected the results of the hotels included
in discontinued operations:  
    
    Depreciation on these hotels was suspended when we classified these
assets as held for sale. Four of the nineteen hotels were identified
for sale at the end of the third quarter 2003; hence depreciation would
have been recorded in the third quarter 2003 with no depreciation on
these assets recorded during the third quarter 2004. Impairment charges
of $0.4 million recorded in the third quarter 2004 represent the excess
of the carrying values of assets held for sale over the revised
estimated selling price less estimated selling costs.  
    
    The gain on asset dispositions of $2.0 million represents the gain
on sale on one hotel sold during
the third quarter 2004. 28




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##### Table of Contents



2004 Period Compared to 2003 Period Nine months endedSeptember 30,
    
    September 30,
    
    Increase2004
    
    2003*
    
    (Decrease)(Unaudited in thousands)Revenues:Rooms
    
    $
    24,235
    
    
    $
    36,595
    
    
    $
    (12,360
    )Food and beverage
    
    
    6,430
    
    
    
    8,442
    
    
    
    (2,012
    )Other
    
    
    1,090
    
    
    
    2,613
    
    
    
    (1,523
    )31,755
    
    
    
    47,650
    
    
    
    (15,895
    )Operating expenses:Direct:Rooms
    
    
    7,452
    
    
    
    11,027
    
    
    
    (3,575
    )Food and beverage
    
    
    5,028
    
    
    
    6,748
    
    
    
    (1,720
    )Other
    
    
    847
    
    
    
    1,810
    
    
    
    (963
    )13,327
    
    
    
    19,585
    
    
    
    (6,258
    )18,428
    
    
    
    28,065
    
    
    
    (9,637
    )Other operating expenses:Other hotel operating costs
    
    
    11,815
    
    
    
    17,726
    
    
    
    (5,911
    )Property and other taxes, insurance and leases
    
    
    1,757
    
    
    
    5,738
    
    
    
    (3,981
    )Depreciation and amortization
    
    
    216
    
    
    
    3,358
    
    
    
    (3,142
    )Impairment of long-lived assets
    
    
    2,972
    
    
    
    3,748
    
    
    
    (776
    )Other operating expenses
    
    
    16,760
    
    
    
    30,570
    
    
    
    (13,810
    )1,668
    
    
    
    (2,505
    )
    
    
    4,173Interest income
    
    
    50
    
    
    
    
    
    
    
    50Interest expense and other financing costs
    
    
    (4,216
    )
    
    
    (2,621
    )
    
    
    (1,595
    )Gain on asset dispositions
    
    
    9,204
    
    
    
    1
    
    
    
    9,203Income (loss) before income taxes
    
    
    6,706
    
    
    
    (5,125
    )
    
    
    11,831Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    6,706
    
    
    $
    (5,125
    )
    
    $
    11,831
 *Revenues and expenses for the nine months ended September 30, 2003 include de minimus amounts for
the eight
hotels conveyed to a lender and one hotel returned to the lessor of a capital lease in January 2003. The nine months ended September 30, 2004 revenues and expenses reflected
in discontinued operations above are not fully comparable with the nine months
ended September 30, 2003 revenues and expenses as a result of the following:  
    
    For the nine months ended September 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. However, the nine months ended September 30, 2003
results reflect the full periods operations for these two properties.
For the nine months ended September 30, 2003, revenues for these two
properties were $2.2 million and direct operating expenses were $1.0
million in aggregate.
    
    Less than nine months revenues and expenses are included in the
results for the nine months ended September 30, 2004 for the nine hotels
and two land parcels sold at various intervals during the period. Additionally the following factors affected the results of the hotels
included in discontinued operations:  
    
    Depreciation on these hotels was suspended when we classified these
assets as held for sale. Seventeen of the nineteen hotels were
identified for sale from June 2003 to September 2003 and, hence,
depreciation would have been recorded in the nine months ended September
30, 2003 with no depreciation on these assets being recorded during the
nine months ended September 30, 2004. Impairment charges of $3.0 million
and $3.7 million were recorded for the nine months ended September 30,
2004 and September 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. 29




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##### Table of Contents




    
    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 $9.2 million represents the gain on
sale of seven of the nine hotels sold during the nine months ended
September 30, 2004. Income taxes At December 31, 2003, we had available net operating loss carryforwards of
approximately $254 million for federal income tax purposes, which will expire
in 2004 through 2023. The recently concluded equity offering resulted in
another Section 382 ownership change, placing further limitations on the
Companys ability to utilize these losses. As a result of the section 382
ownership change, our ability to use these net operating loss carryforwards is
subject to an annual limitation of approximately $8.3 million. 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, amortization and
impairment 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 impair properties when the book value exceeds
the fair market value. Preferred stock dividends are treated as interest
expense and, hence, are added back to loss from continuing operations to derive
EBITDA. We also believe that EBITDA provides pertinent information to
investors and is an additional indicator of our operating performance. The following table presents EBITDA from continuing operations, a non-GAAP
measure, for the three months ended September 30, 2004 and September 30, 2003,
and the nine months ended September 30, 2004 and September 30, 2003, and
provides a reconciliation with the loss from continuing operations, a GAAP
measure: Three months ended
    
    Nine months endedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003(Unaudited in thousands)
    
    (Unaudited in thousands)Continuing operations:Loss from continuing operations
    
    $
    (6,544
    )
    
    $
    (3,600
    )
    
    $
    (24,776
    )
    
    $
    (10,046
    )Depreciation and amortization
    
    
    7,066
    
    
    
    7,572
    
    
    
    20,741
    
    
    
    22,567Impairment of long-lived assets
    
    
    607
    
    
    
    2
    
    
    
    607
    
    
    
    1,380Interest income and other
    
    
    (212
    )
    
    
    (114
    )
    
    
    (321
    )
    
    
    (321
    )Interest expense
    
    
    7,350
    
    
    
    7,665
    
    
    
    35,429
    
    
    
    20,863Preferred stock dividends
    
    
    865
    
    
    
    4,027
    
    
    
    9,383
    
    
    
    4,027Loss on preferred stock redemption
    
    
    4,471
    
    
    
    
    
    
    
    6,063
    
    
    
    Provision
for income taxes 
continuing operations
    
    
    337
    
    
    
    75
    
    
    
    488
    
    
    
    226EBITDA from continuing operations
    
    $
    13,940
    
    
    $
    15,627
    
    
    $
    47,614
    
    
    $
    38,696
 Loss from continuing operations, and accordingly, EBITDA from continuing
operations, is after deducting the following items: Three months ended
    
    Nine months endedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2004
    
    September 30, 2003(Unaudited in thousands)
    
    (Unaudited in thousands)Post-emergence Chapter 11 expenses, included
in corporate and other on our consolidated
statement of operations
    
    $
    67
    
    
    $
    320
    
    
    $
    397
    
    
    $
    3,511Reorganization expenses
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,045Casualty losses for damage caused to our
properties by the hurricanes that hit the
southeastern United States in the third quarter
    
    $
    2,019
    
    
    $
    
    
    
    $
    2,019
    
    
    $
    
 30




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##### Table of Contents



Additional Financial Information Regarding Quarterly Results of Our Continuing
Operations The following table presents certain quarterly data for our continuing
operations for the seven quarters ended September 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
September 30, 2004. Three Months EndedSeptember 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,2004
    
    2004
    
    2004
    
    2003
    
    2003
    
    2003
    
    2003Revenues:Rooms
    
    $
    64,805
    
    
    $
    64,325
    
    
    $
    57,563
    
    
    $
    52,089
    
    
    $
    62,506
    
    
    $
    61,010
    
    
    $
    53,914Food and beverage
    
    
    16,950
    
    
    
    19,436
    
    
    
    16,488
    
    
    
    18,800
    
    
    
    16,407
    
    
    
    18,977
    
    
    
    16,607Other
    
    
    2,806
    
    
    
    2,816
    
    
    
    2,754
    
    
    
    2,817
    
    
    
    2,841
    
    
    
    2,838
    
    
    
    2,85884,561
    
    
    
    86,577
    
    
    
    76,805
    
    
    
    73,706
    
    
    
    81,754
    
    
    
    82,825
    
    
    
    73,379Operating expenses:Direct:Rooms
    
    
    18,722
    
    
    
    16,960
    
    
    
    16,018
    
    
    
    16,023
    
    
    
    17,697
    
    
    
    16,730
    
    
    
    15,363Food and beverage
    
    
    12,595
    
    
    
    12,713
    
    
    
    11,534
    
    
    
    12,557
    
    
    
    12,030
    
    
    
    12,365
    
    
    
    11,734Other
    
    
    2,095
    
    
    
    2,077
    
    
    
    1,972
    
    
    
    2,178
    
    
    
    2,013
    
    
    
    1,842
    
    
    
    1,93833,412
    
    
    
    31,750
    
    
    
    29,524
    
    
    
    30,758
    
    
    
    31,740
    
    
    
    30,937
    
    
    
    29,03551,149
    
    
    
    54,827
    
    
    
    47,281
    
    
    
    42,948
    
    
    
    50,014
    
    
    
    51,888
    
    
    
    44,344Other operating expenses:Other hotel operating costs
    
    
    25,577
    
    
    
    23,822
    
    
    
    24,072
    
    
    
    22,546
    
    
    
    24,164
    
    
    
    22,797
    
    
    
    22,475Property and other taxes, insurance and
leases
    
    
    5,597
    
    
    
    5,376
    
    
    
    5,751
    
    
    
    5,343
    
    
    
    6,087
    
    
    
    6,923
    
    
    
    6,661Corporate and other
    
    
    4,519
    
    
    
    4,782
    
    
    
    4,413
    
    
    
    4,791
    
    
    
    4,235
    
    
    
    6,075
    
    
    
    5,970Casualty gains and losses
    
    
    2,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    7,066
    
    
    
    6,870
    
    
    
    6,805
    
    
    
    7,156
    
    
    
    7,572
    
    
    
    7,573
    
    
    
    7,422Impairment of long-lived assets
    
    
    607
    
    
    
    
    
    
    
    
    
    
    
    11,286
    
    
    
    2
    
    
    
    1,378
    
    
    
    Other operating expenses
    
    
    45,385
    
    
    
    40,850
    
    
    
    41,041
    
    
    
    51,122
    
    
    
    42,060
    
    
    
    44,746
    
    
    
    42,5285,764
    
    
    
    13,977
    
    
    
    6,240
    
    
    
    (8,174
    )
    
    
    7,954
    
    
    
    7,142
    
    
    
    1,816Other income (expenses):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest income and other
    
    
    212
    
    
    
    66
    
    
    
    43
    
    
    
    366
    
    
    
    114
    
    
    
    124
    
    
    
    83Interest expense and other financing costs:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividend
    
    
    (865
    )
    
    
    (4,233
    )
    
    
    (4,285
    )
    
    
    (4,065
    )
    
    
    (4,027
    )
    
    
    Other interest expense
    
    
    (7,350
    )
    
    
    (19,920
    )
    
    
    (8,159
    )
    
    
    (7,756
    )
    
    
    (7,665
    )
    
    
    (6,919
    )
    
    
    (6,279
    )Gain on asset dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444
    
    
    
    
    
    
    
    
    
    
    
    Loss on preferred stock redemption
    
    
    (4,471
    )
    
    
    (1,592
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income before income taxes,
reorganization items and minority interests
    
    
    (6,710
    )
    
    
    (11,702
    )
    
    
    (6,161
    )
    
    
    (19,185
    )
    
    
    (3,624
    )
    
    
    347
    
    
    
    (4,380
    )Reorganization items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    647
    
    
    
    
    
    
    
    (808
    )
    
    
    (1,237
    )Loss before income taxes and minority
interest
    
    
    (6,710
    )
    
    
    (11,702
    )
    
    
    (6,161
    )
    
    
    (18,538
    )
    
    
    (3,624
    )
    
    
    (461
    )
    
    
    (5,617
    )Minority interests
    
    
    503
    
    
    
    (71
    )
    
    
    (147
    )
    
    
    1,412
    
    
    
    99
    
    
    
    (69
    )
    
    
    (148
    )Loss before income taxes  continuing
operations
    
    
    (6,207
    )
    
    
    (11,773
    )
    
    
    (6,308
    )
    
    
    (17,126
    )
    
    
    (3,525
    )
    
    
    (530
    )
    
    
    (5,765
    )(Provision)
benefit for income taxes  continuing operations
    
    
    (337
    )
    
    
    (75
    )
    
    
    (76
    )
    
    
    48
    
    
    
    (75
    )
    
    
    (75
    )
    
    
    (76
    )Loss from continuing operations
    
    
    (6,544
    )
    
    
    (11,848
    )
    
    
    (6,384
    )
    
    
    (17,078
    )
    
    
    (3,600
    )
    
    
    (605
    )
    
    
    (5,841
    )Discontinued operations:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from discontinued operations
before income taxes
    
    
    2,807
    
    
    
    4,601
    
    
    
    (702
    )
    
    
    572
    
    
    
    (46
    )
    
    
    (1,836
    )
    
    
    (3,243
    )Income tax benefit (provision)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from discontinued operations
    
    
    2,807
    
    
    
    4,601
    
    
    
    (702
    )
    
    
    572
    
    
    
    (46
    )
    
    
    (1,836
    )
    
    
    (3,243
    )Net loss
    
    
    (3,737
    )
    
    
    (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
    
    $
    (3,737
    )
    
    $
    (7,247
    )
    
    $
    (7,086
    )
    
    $
    (16,506
    )
    
    $
    (3,646
    )
    
    $
    (6,259
    )
    
    $
    (12,860
    )
 Loss from continuing operations is after deducting the
following items: September 30, 2004
    
    June 30, 2004
    
    March 31, 2004
    
    December 31, 2003
    
    September 30, 2003
    
    June 30, 2003
    
    March 31, 2003Post-emergence Chapter 11 expenses, included
in corporate and other on our consolidated
statement of operations
    
    $
    67
    
    
    $
    135
    
    
    $
    195
    
    
    $
    642
    
    
    $
    320
    
    
    $
    1,013
    
    
    $
    2,178Reorganization expenses
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    808
    
    
    $
    1,237Casualty losses for damage caused to our
properties by the hurricanes that hit the
southeastern United States in the third quarter
    
    $
    2,019
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 EBITDA Reconciliation of Continuing Operations The following table is a reconciliation of the quarterly EBITDA for the
hotels classified as continuing operations as of September 30, 2004, reflecting
the reclassification of certain hotels from continuing operations to
discontinued operations as discussed in connection with the preceding table: 31




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##### Table of Contents



Three Months EndedSeptember 30, 2004
    
    June 30, 2004
    
    March 31, 2004
    
    December 31, 2003
    
    September 30, 2003
    
    June 30, 2003
    
    March 31, 2003Continuing operations:Loss from continuing operations
    
    
    (6,544
    )
    
    $
    (11,848
    )
    
    $
    (6,384
    )
    
    $
    (17,078
    )
    
    $
    (3,600
    )
    
    $
    (605
    )
    
    $
    (5,841
    )Depreciation and amortization
    
    
    7,066
    
    
    
    6,870
    
    
    
    6,805
    
    
    
    7,156
    
    
    
    7,572
    
    
    
    7,573
    
    
    
    7,422Impairment of long-lived assets
    
    
    607
    
    
    
    
    
    
    
    
    
    
    
    11,286
    
    
    
    2
    
    
    
    1,378
    
    
    
    Interest income and other
    
    
    (212
    )
    
    
    (66
    )
    
    
    (43
    )
    
    
    (366
    )
    
    
    (114
    )
    
    
    (124
    )
    
    
    (83
    )Interest expense and other
financing costs
    
    
    7,350
    
    
    
    19,920
    
    
    
    8,159
    
    
    
    7,756
    
    
    
    7,665
    
    
    
    6,919
    
    
    
    6,279Preferred stock dividends
    
    
    865
    
    
    
    4,233
    
    
    
    4,285
    
    
    
    4,065
    
    
    
    4,027
    
    
    
    
    
    
    
    Gain on asset dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (444
    )
    
    
    
    
    
    
    
    
    
    
    Loss on preferred stock redemption
    
    
    4,471
    
    
    
    1,592
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision (benefit) for income
taxescontinuing operations
    
    
    337
    
    
    
    75
    
    
    
    76
    
    
    
    (48
    )
    
    
    75
    
    
    
    75
    
    
    
    76EBITDA
    
    $
    13,940
    
    
   $
    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
September 30, 2004, by market segment for the third quarter 2004 and the third
quarter 2003 and the nine months ended September 30, 2004 and September 30,
2003. Combined Continuing and Discontinued Operations  87 hotels Quarter Ended
    
    Nine Months EndedCapital expendituresNine Months Ended
    
    September 30, 2004
    
    September 30, 2004
    
    September 30, 2004
    
    September 30, 2004September 30, 2004(in thousands $)Upper UpscaleNumber of properties
    
    $
    748
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Number of rooms
    
    
    
    
    
    
    825
    
    
    
    825
    
    
    
    825
    
    
    
    825Occupancy
    
    
    
    
    
    
    72.1
    %
    
    
    62.9
    %
    
    
    69.4
    %
    
    
    60.7
    %Average daily rate
    
    
    
    
    
    $
    97.95
    
    
    $
    90.69
    
    
    $
    95.94
    
    
    $
    90.74RevPAR
    
    
    
    
    
    $
    70.59
    
    
    $
    57.01
    
    
    $
    66.56
    
    
    $
    55.09UpscaleNumber of properties
    
    
    9,059
    
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    17Number of rooms
    
    
    
    
    
    
    3,002
    
    
    
    3,002
    
    
    
    3,002
    
    
    
    3,002Occupancy
    
    
    
    
    
    
    66.7
    %
    
    
    67.0
    %
    
    
    68.2
    %
    
    
    67.1
    %Average daily rate
    
    
    
    
    
    $
    84.43
    
    
    $
    80.83
    
    
    $
    85.97
    
    
    $
    84.10RevPAR
    
    
    
    
    
    $
    56.33
    
    
    $
    54.18
    
    
    $
    58.62
    
    
    $
    56.39Midscale with Food &
BeverageNumber of properties
    
    
    11,031
    
    
    
    54
    
    
    
    54
    
    
    
    54
    
    
    
    54Number of rooms
    
    
    
    
    
    
    10,939
    
    
    
    10,939
    
    
    
    10,939
    
    
    
    10,939Occupancy
    
    
    
    
    
    
    64.3
    %
    
    
    65.3
    %
    
    
    60.0
    %
    
    
    59.7
    %Average daily rate
    
    
    
    
    
    $
    73.41
    
    
    $
    73.25
    
    
    $
    72.51
    
    
    $
    71.64RevPAR
    
    
    
    
    
    $
    47.22
    
    
    $
    47.80
    
    
    $
    43.50
    
    
    $
    42.80Midscale without Food
& BeverageNumber of properties
    
    
    813
    
    
    
    9
    
    
    
    9
    
    
    
    9
    
    
    
    9Number of rooms
    
    
    
    
    
    
    1,067
    
    
    
    1,067
    
    
    
    1,067
    
    
    
    1,067Occupancy
    
    
    
    
    
    
    63.6
    %
    
    
    58.9
    %
    
    
    61.4
    %
    
    
    54.7
    %Average daily rate
    
    
    
    
    
    $
    59.06
    
    
    $
    57.97
    
    
    $
    60.41
    
    
    $
    58.96RevPAR
    
    
    
    
    
    $
    37.56
    
    
    $
    34.15
    
    
    $
    37.09
    
    
    $
    32.27Independent HotelsNumber of properties
    
    
    244
    
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    3Number of rooms
    
    
    
    
    
    
    535
    
    
    
    535
    
    
    
    535
    
    
    
    535Occupancy
    
    
    
    
    
    
    38.9
    %
    
    
    42.2
    %
    
    
    39.0
    %
    
    
    43.9
    %Average daily rate
    
    
    
    
    
    $
    61.99
    
    
    $
    62.87
    
    
    $
    62.78
    
    
    $
    60.90RevPAR
    
    
    
    
    
    $
    24.11
    
    
    $
    26.51
    
    
    $
    24.51
    
    
    $
    26.72All HotelsNumber of properties
    
    
    21,895
    
    
    
    87
    
    
    
    87
    
    
    
    87
    
    
    
    87Number of rooms
    
    
    
    
    
    
    16,368
    
    
    
    16,368
    
    
    
    16,368
    
    
    
    16,368Occupancy
    
    
    
    
    
    
    64.3
    %
    
    
    64.3
    %
    
    
    61.4
    %
    
    
    60.3
    %Average daily rate
    
    
    
    
    
    $
    75.75
    
    
    $
    74.42
    
    
    $
    75.60
    
    
    $
    74.14RevPAR
    
    
    
    
    
    $
    48.69
    
    
    $
    47.85
    
    
    $
    46.40
    
    
    $
    44.70
 Continuing Operations  78 hotels 32




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##### Table of Contents



Quarter Ended
    
    Nine Months EndedCapital expendituresNine Months Ended
    
    September 30, 2004
    
    September 30, 2004
    
    September 30, 2004
    
    September 30, 2004September 30, 2004(in thousands $)Upper UpscaleNumber of properties
    
    $
    748
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Number of rooms
    
    
    
    
    
    
    825
    
    
    
    825
    
    
    
    825
    
    
    
    825Occupancy
    
    
    
    
    
    
    72.1
    %
    
    
    62.9
    %
    
    
    69.4
    %
    
    
    60.7
    %Average daily rate
    
    
    
    
    
    $
    97.95
    
    
    $
    90.69
    
    
    $
    95.94
    
    
    $
    90.74RevPAR
    
    
    
    
    
    $
    70.59
    
    
    $
    57.01
    
    
    $
    66.56
    
    
    $
    55.09UpscaleNumber of properties
    
    
    9,059
    
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    17Number of rooms
    
    
    
    
    
    
    3,002
    
    
    
    3,002
    
    
    
    3,002
    
    
    
    3,002Occupancy
    
    
    
    
    
    
    66.7
    %
    
    
    67.0
    %
    
    
    68.2
    %
    
    
    67.1
    %Average daily rate
    
    
    
    
    
    $
    84.43
    
    
    $
    80.83
    
    
    $
    85.97
    
    
    $
    84.10RevPAR
    
    
    
    
    
    $
    56.33
    
    
    $
    54.18
    
    
    $
    58.62
    
    
    $
    56.39Midscale with Food & BeverageNumber of properties
    
    
    10,307
    
    
    
    45
    
    
    
    44
    
    
    
    44
    
    
    
    44Number of rooms
    
    
    
    
    
    
    8,921
    
    
    
    8,528
    
    
    
    8,528
    
    
    
    8,528Occupancy
    
    
    
    
    
    
    65.8
    %
    
    
    67.1
    %
    
    
    61.9
    %
    
    
    62.9
    %Average daily rate
    
    
    
    
    
    $
    74.13
    
    
    $
    73.37
    
    
    $
    73.62
    
    
    $
    72.11RevPAR
    
    
    
    
    
    $
    48.78
    
    
    $
    49.25
    
    
    $
    45.54
    
    
    $
    45.33Midscale without Food & BeverageNumber of properties
    
    
    813
    
    
    
    9
    
    
    
    7
    
    
    
    7
    
    
    
    7Number of rooms
    
    
    
    
    
    
    1,067
    
    
    
    833
    
    
    
    833
    
    
    
    833Occupancy
    
    
    
    
    
    
    63.6
    %
    
    
    56.4
    %
    
    
    61.4
    %
    
    
    53.3
    %Average daily rate
    
    
    
    
    
    $
    59.06
    
    
    $
    58.10
    
    
    $
    60.41
    
    
    $
    59.76RevPAR
    
    
    
    
    
    $
    37.56
    
    
    $
    32.79
    
    
    $
    37.09
    
    
    $
    31.83Independent HotelsNumber of properties
    
    
    244
    
    
    
    3
    
    
    
    6
    
    
    
    6
    
    
    
    6Number of rooms
    
    
    
    
    
    
    535
    
    
    
    1,162
    
    
    
    1,162
    
    
    
    1,162Occupancy
    
    
    
    
    
    
    38.9
    %
    
    
    45.4
    %
    
    
    39.0
    %
    
    
    42.6
    %Average daily rate
    
    
    
    
    
    $
    61.99
    
    
    $
    59.90
    
    
    $
    62.78
    
    
    $
    60.56RevPAR
    
    
    
    
    
    $
    24.11
    
    
    $
    27.22
    
    
    $
    24.51
    
    
    $
    25.82All HotelsNumber of properties
    
    
    21,171
    
    
    
    78
    
    
    
    78
    
    
    
    78
    
    
    
    78Number of rooms
    
    
    
    
    
    
    14,350
    
    
    
    14,350
    
    
    
    14,350
    
    
    
    14,350Occupancy
    
    
    
    
    
    
    65.2
    %
    
    
    64.5
    %
    
    
    62.7
    %
    
    
    61.4
    %Average daily rate
    
    
    
    
    
    $
    76.49
    
    
    $
    74.42
    
    
    $
    76.64
    
    
    $
    74.63RevPAR
    
    
    
    
    
    $
    49.86
    
    
    $
    47.99
    
    
    $
    48.08
    
    
    $
    45.84
 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
    
    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
September 30, 2004, by region for the third quarter 2004 and the third quarter
2003 and the nine months ended September 30, 2004 and September 30, 2003. 33




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##### Table of Contents



Combined Continuing and Discontinued Operations  87 hotels Quarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,Capital expendituresNine Months Ended
    
    2004
    
    2004
    
    2004
    
    2004September 30, 2004(in thousands $)Northeast RegionNumber of properties
    
    $
    5,297
    
    
    
    32
    
    
    
    32
    
    
    
    32
    
    
    
    32Number of rooms
    
    
    
    
    
    
    6,065
    
    
    
    6,065
    
    
    
    6,065
    
    
    
    6,065Occupancy
    
    
    
    
    
    
    71.3
    %
    
    
    72.9
    %
    
    
    64.7
    %
    
    
    64.4
    %Average daily rate
    
    
    
    
    
    $
    84.53
    
    
    $
    83.41
    
    
    $
    82.58
    
    
    $
    81.32RevPAR
    
    
    
    
    
    $
    60.23
    
    
    $
    60.76
    
    
    $
    53.46
    
    
    $
    52.36Southeast RegionNumber of properties
    
    
    7,064
    
    
    
    30
    
    
    
    30
    
    
    
    30
    
    
    
    30Number of rooms
    
    
    
    
    
    
    5,089
    
    
    
    5,089
    
    
    
    5,089
    
    
    
    5,089Occupancy
    
    
    
    
    
    
    59.8
    %
    
    
    59.7
    %
    
    
    59.5
    %
    
    
    58.9
    %Average daily rate
    
    
    
    
    
    $
    69.02
    
    
    $
    67.35
    
    
    $
    69.58
    
    
    $
    67.17RevPAR
    
    
    
    
    
    $
    41.24
    
    
    $
    40.20
    
    
    $
    41.38
    
    
    $
    39.53Midwest RegionNumber of properties
    
    
    2,860
    
    
    
    18
    
    
    
    18
    
    
    
    18
    
    
    
    18Number of rooms
    
    
    
    
    
    
    3,895
    
    
    
    3,895
    
    
    
    3,895
    
    
    
    3,895Occupancy
    
    
    
    
    
    
    60.3
    %
    
    
    57.6
    %
    
    
    57.5
    %
    
    
    54.8
    %Average daily rate
    
    
    
    
    
    $
    67.96
    
    
    $
    68.06
    
    
    $
    69.22
    
    
    $
    69.20RevPAR
    
    
    
    
    
    $
    40.98
    
    
    $
    39.21
    
    
    $
    39.77
    
    
    $
    37.92West RegionNumber of properties
    
    
    6,674
    
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    7Number of rooms
    
    
    
    
    
    
    1,319
    
    
    
    1,319
    
    
    
    1,319
    
    
    
    1,319Occupancy
    
    
    
    
    
    
    61.0
    %
    
    
    62.4
    %
    
    
    64.8
    %
    
    
    63.2
    %Average daily rate
    
    
    
    
    
    $
    76.44
    
    
    $
    69.66
    
    
    $
    81.49
    
    
    $
    78.25RevPAR
    
    
    
    
    
    $
    46.66
    
    
    $
    43.47
    
    
    $
    52.80
    
    
    $
    49.45All HotelsNumber of properties
    
    
    21,895
    
    
    
    87
    
    
    
    87
    
    
    
    87
    
    
    
    87Number of rooms
    
    
    
    
    
    
    16,368
    
    
    
    16,368
    
    
    
    16,368
    
    
    
    16,368Occupancy
    
    
    
    
    
    
    64.3
    %
    
    
    64.3
    %
    
    
    61.4
    %
    
    
    60.3
    %Average daily rate
    
    
    
    
    
    $
    75.75
    
    
    $
    74.42
    
    
    $
    75.60
    
    
    $
    74.14RevPAR
    
    
    
    
    
    $
    48.69
    
    
    $
    47.85
    
    
    $
    46.40
    
    
    $
    44.70
 Continuing Operations  78 hotels 34




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##### Table of Contents



Quarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,Capital expendituresNine Months Ended
    
    2004
    
    2004
    
    2004
    
    2004September 30, 2004(in thousands $)Northeast RegionNumber of properties
    
    $
    4,715
    
    
    
    28
    
    
    
    28
    
    
    
    28
    
    
    
    28Number of rooms
    
    
    
    
    
    
    5,155
    
    
    
    5,155
    
    
    
    5,155
    
    
    
    5,155Occupancy
    
    
    
    
    
    
    72.4
    %
    
    
    72.3
    %
    
    
    66.8
    %
    
    
    65.8
    %Average daily rate
    
    
    
    
    
    $
    85.61
    
    
    $
    83.09
    
    
    $
    84.14
    
    
    $
    82.01RevPAR
    
    
    
    
    
    $
    61.98
    
    
    $
    60.05
    
    
    $
    56.25
    
    
    $
    53.96Southeast RegionNumber of properties
    
    
    6,983
    
    
    
    27
    
    
    
    27
    
    
    
    27
    
    
    
    27Number of rooms
    
    
    
    
    
    
    4,613
    
    
    
    4,613
    
    
    
    4,613
    
    
    
    4,613Occupancy
    
    
    
    
    
    
    60.1
    %
    
    
    59.6
    %
    
    
    59.9
    %
    
    
    59.4
    %Average daily rate
    
    
    
    
    
    $
    69.69
    
    
    $
    68.22
    
    
    $
    70.31
    
    
    $
    67.97RevPAR
    
    
    
    
    
    $
    41.90
    
    
    $
    40.67
    
    
    $
    42.11
    
    
    $
    40.38Midwest RegionNumber of properties
    
    
    2,799
    
    
    
    16
    
    
    
    16
    
    
    
    16
    
    
    
    16Number of rooms
    
    
    
    
    
    
    3,263
    
    
    
    3,263
    
    
    
    3,263
    
    
    
    3,263Occupancy
    
    
    
    
    
    
    62.5
    %
    
    
    59.9
    %
    
    
    59.4
    %
    
    
    56.6
    %Average daily rate
    
    
    
    
    
    $
    68.93
    
    
    $
    68.60
    
    
    $
    70.14
    
    
    $
    69.34RevPAR
    
    
    
    
    
    $
    43.09
    
    
    $
    41.10
    
    
    $
    41.65
    
    
    $
    39.28West RegionNumber of properties
    
    
    6,674
    
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    7Number of rooms
    
    
    
    
    
    
    1,319
    
    
    
    1,319
    
    
    
    1,319
    
    
    
    1,319Occupancy
    
    
    
    
    
    
    61.0
    %
    
    
    62.4
    %
    
    
    64.8
    %
    
    
    63.2
    %Average daily rate
    
    
    
    
    
    $
    76.44
    
    
    $
    69.66
    
    
    $
    81.49
    
    
    $
    78.25RevPAR
    
    
    
    
    
    $
    46.66
    
    
    $
    43.47
    
    
    $
    52.80
    
    
    $
    49.45All HotelsNumber of properties
    
    
    21,171
    
    
    
    78
    
    
    
    78
    
    
    
    78
    
    
    
    78Number of rooms
    
    
    
    
    
    
    14,350
    
    
    
    14,350
    
    
    
    14,350
    
    
    
    14,350Occupancy
    
    
    
    
    
    
    65.2
    %
    
    
    64.5
    %
    
    
    62.7
    %
    
    
    61.4
    %Average daily rate
    
    
    
    
    
    $
    76.49
    
    
    $
    74.42
    
    
    $
    76.64
    
    
    $
    74.63RevPAR
    
    
    
    
    
    $
    49.86
    
    
    $
    47.99
    
    
    $
    48.08
    
    
    $
    45.84
 The 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. A further downturn in the airline industry could also
affect revenues by decreasing the aggregate levels of demand for our hotels by
airline industry employees. At September 30, 2004, airline receivables
represented approximately 15.2% of our accounts receivable net of allowances. Between November 1, 2003 and November 8, 2004, we sold ten hotels, one
office building, and two land parcels with another nine hotels and one land
parcel classified as assets held for sale. The aggregate sales price from the
sale of the ten hotels, the office building and two land parcels sold between
November 1, 2003 and November 8, 2004, 35




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was $53.6 million, $38.7 million of which was used to pay down debt and
$11.2 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 closed on the $370 million
Merrill Lynch Mortgage Lending, Inc. refinance 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 an accrual for allowed
claims from which these 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 September 30, 2004, we had working capital (current assets less current
liabilities) of $41.3 million compared to $2.4 million at December 31, 2003.
The increase in working capital was primarily due to an increase in cash and
cash equivalents resulting from the cash proceeds received from the June 2004
common stock offering. The net proceeds to us from the common stock offering
approximated $175.9 million, of which approximately $25.7 million was used to
fund reserve accounts with Merrill Lynch Mortgage pursuant to requirements in
our June 2004 Refinancing Debt agreements. A reserve of $22.7 million was
funded for capital expenditures and a reserve of $3.0 million was funded for
requirements related to a hotel ground lease that was ultimately resolved at
approximately $1.8 million. 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 third quarter 2004 and the nine months ended September 30,
2004, we spent approximately $9.4 million and $22.3 million, respectively, on
capital expenditures. We expect to spend an additional $21.4 million, which
includes committed hurricane repair capital expenditures, during the remainder
of 2004, and an additional $38.4 million in the first half of 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 36




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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
$25.3 million and $27.6 million for the nine months ended September 30, 2004 and 2003, respectively.
Although EBITDA of $47.6 million for nine months ended September 30, 2004 was
$8.9 million higher than nine months ended September 30, 2003, net cash
provided by operating activities was $2.3 million lower in the nine months
ended September 30, 2004 primarily because the 2003 period benefited from the
release of bankruptcy-related restricted cash. During the nine months ended September 30, 2003, $11.8 million of
restricted cash was released and made available for our operations. Investing Activities Investing activities provided a net cash outflow of $4.9 million for the
nine months ended September 30, 2004 and $23.6 million for the first nine
months of 2003. The $18.7 million decrease in the net cash used in investing
activities in the nine months ended September 30, 2004 as compared to the nine
months ended September 30, 2003 is a result of $38.9 million of net proceeds
generated from asset sales, offset by $21.0 million deposited into lender
controlled escrows and $22.3 million spent on capital improvements. In the
nine months ended September 30, 2003, $6.5 million was reimbursed from lender
controlled escrows and $29.7 million was spent on capital improvements. Financing activities The $26.1 million in net cash provided by financing activities in the nine
months ended September 30, 2004 was primarily due to the proceeds received from
the equity offering of our common stock in June 2004 of $175.9 million, net of
the underwriting discount and approximately $4.1 million of other expenses we
incurred related to the equity offering. Principal payments on long term debt were the result of our debt refinance
with Merrill Lynch and the sale of nine hotels in the nine months ended
September 30, 2004. Principal payments, including scheduled principal payments,
were approximately $400.2 million for the nine months ended September 30, 2004
compared with principal payments and the refinance of 18 of our hotels upon
their emergence from Chapter 11 of $81.6 million in the nine months ended
September 30, 2003. Financing activities also consisted of payments of
financing costs of $5.4 million and $4.7 million for the nine months ended
September 30, 2004 and September 30, 2003, respectively. On July 26, 2004, all of our remaining outstanding Preferred Stock was
redeemed for $114.0 million in cash. 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. 37




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##### Table of Contents



Debt and Contractual Obligations The following table sets forth our debt and contractual obligations: Contractual Obligations Due by Year (5)Total
    
    Year 1
    
    Year 2
    
    Year 3
    
    Year 4
    
    Year 5
    
    Thereafter(Unaudited in thousands)Continuing OperationsRefinancing Debt (1)Merrill Lynch Mortgage Lending, Inc.
Floating
    
    $
    75,385
    
    
    $
    873
    
    
    $
    74,512
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Merrill Lynch Mortgage Lending, Inc.
Fixed
    
    
    259,407
    
    
    
    4,042
    
    
    
    4,320
    
    
    
    4,618
    
    
    
    4,889
    
    
    
    241,538
    
    
    
    Other financingComputershare Trust Company of Canada
    
    
    7,498
    
    
    
    240
    
    
    
    259
    
    
    
    280
    
    
    
    6,719
    
    
    
    
    
    
    
    Column Financial, Inc.
    
    
    25,641
    
    
    
    2,426
    
    
    
    2,696
    
    
    
    2,996
    
    
    
    3,329
    
    
    
    4,025
    
    
    
    10,169Lehman Brothers Holdings, Inc.
    
    
    23,051
    
    
    
    517
    
    
    
    567
    
    
    
    21,967
    
    
    
    
    
    
    
    
    
    
    
    JP Morgan Chase Bank
    
    
    10,248
    
    
    
    563
    
    
    
    607
    
    
    
    657
    
    
    
    710
    
    
    
    770
    
    
    
    6,941DDL Kinser
    
    
    2,311
    
    
    
    2,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Column Financial, Inc.
    
    
    8,648
    
    
    
    427
    
    
    
    469
    
    
    
    516
    
    
    
    566
    
    
    
    677
    
    
    
    5,993Column Financial, Inc.
    
    
    3,105
    
    
    
    3,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other financing
    
    
    80,502
    
    
    
    9,589
    
    
    
    4,598
    
    
    
    26,416
    
    
    
    11,324
    
    
    
    5,472
    
    
    
    23,103415,294
    
    
    
    14,504
    
    
    
    83,430
    
    
    
    31,034
    
    
    
    16,213
    
    
    
    247,010
    
    
    
    23,103Long-term debt  other (2)
    
    
    5,244
    
    
    
    1,066
    
    
    
    965
    
    
    
    1,359
    
    
    
    930
    
    
    
    304
    
    
    
    620420,538
    
    
    
    15,570
    
    
    
    84,395
    
    
    
    32,393
    
    
    
    17,143
    
    
    
    247,314
    
    
    
    23,723Interest expense (3)
    
    
    113,582
    
    
    
    28,136
    
    
    
    26,446
    
    
    
    21,565
    
    
    
    19,193
    
    
    
    15,674
    
    
    
    2,568Ground and parking lease obligations
    
    
    117,458
    
    
    
    2,880
    
    
    
    2,890
    
    
    
    2,927
    
    
    
    2,995
    
    
    
    3,032
    
    
    
    102,734Purchase Obligations (4)
    
    
    2,205
    
    
    
    84
    
    
    
    84
    
    
    
    84
    
    
    
    84
    
    
    
    84
    
    
    
    1,785Total continuing obligations
    
    
    653,783
    
    
    
    46,670
    
    
    
    113,815
    
    
    
    56,969
    
    
    
    39,415
    
    
    
    266,104
    
    
    
    130,810Obligations related to assets held
for saleRefinancing DebtMerrill Lynch Mortgage Lending, Inc.
Floating
    
    
    31,240
    
    
    
    362
    
    
    
    30,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt  other (2)
    
    
    143
    
    
    
    26
    
    
    
    26
    
    
    
    26
    
    
    
    26
    
    
    
    26
    
    
    
    13Interest expense (3)
    
    
    3,081
    
    
    
    1,681
    
    
    
    1,400Ground and parking lease obligations
    
    
    2,496
    
    
    
    290
    
    
    
    302
    
    
    
    290
    
    
    
    252
    
    
    
    252
    
    
    
    1,110Total obligations related to assets
held for sale
    
    
    36,960
    
    
    
    2,359
    
    
    
    32,606
    
    
    
    316
    
    
    
    278
    
    
    
    278
    
    
    
    1,123$
    690,743
    
    
    $
    49,029
    
    
    $
    146,421
    
    
    $
    57,285
    
    
    $
    39,693
    
    
    $
    266,382
    
    
    $
    131,933
   (1)
    
    Discussed in Note 7, Debt in the notes to our unaudited condensed
financial statements.(2)
    
    Comprised of unsecured notes payable of $3.6 million for
pre-petition bankruptcy-related tax obligations and $1.8 million for
other obligations.(3)
    
    LIBOR rate of 1.99% was used for all periods.(4)
    
    Purchase obligation is for a management fee agreement expiring
December 2030.(5)
    
    Year 1 through Year 5 represents the 12 months ending September 30
starting with 2005 and ending in 2009. We do not include the following information in the table above:  
    
    Franchise fees  Substantially all of our franchise fees vary with
our revenues. Franchise fees expense for the three and nine months
ended September 30, 2004 and September 30, 2003 relating to our
continuing operations and discontinued operations are shown in Note 8.
Commitments and Contingencies, Franchise Agreements and Capital
Expenditures;
    
    Equipment rentals and costs relating to our maintenance contracts -
These items are of a short term nature and are cancelable by us. For
the three and nine months ended September 30, 2004, costs relating to
equipment rentals and maintenance contracts for our continuing
operations were approximately $1.1 million and $3.6 million,
respectively; and
    
    Other purchase obligations  As of September 30, 2004, we had no
other material purchase obligations. Off Balance Sheet Arrangements We have no off balance sheet arrangements. 38




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##### Table of Contents



Market Risk We are exposed to interest rate risks on our variable rate debt. At
September 30, 2004 and December 31, 2003, we had outstanding variable rate debt
of approximately $106.6 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 and repaid on June 25, 2004), 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 September
30, 2004 was 1.84%. 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 which was
repaid on June 25, 2004. 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. 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 September 30, 2004. The fair value of the interest rate cap related to Refinanced Debt as of
September 30, 2004 was approximately $52,000. 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 September 30, 2004 and December 31, 2003
were approximately nil and $15,000, 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 September 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 September 30,
2004 would be a reduction in net income of approximately $48,000. 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 September 30, 2004 and December 31, 2003
would be approximately $12.9 million and $3.0 million, respectively. 39




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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 September 30, 2004, approximately 23.6% 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 $451.9
million at September 30, 2004, including current maturities and long-term debt
related to assets held for sale. At September 30, 2004, approximately $106.6 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 mortgage debt (book value $339.9 million) at September
30, 2004 is estimated at $354.4 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:  
    
    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; 40




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
    
    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;
    
    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; and
    
    Our ability to collect insurance proceeds for both property damage
and business interruption claims related to damage caused by hurricanes
to certain hotels.
    
    If we are not able to implement the requirements of Section 404 in a
timely manner or with adequate compliance, we and our auditors may not
be able to render the required attestation concerning our assessment and
the effectiveness of the internal controls over financial reporting, we
may be subject to investigation and/or sanctions by regulatory
authorities, such as the Securities Exchange Commission or the American
Stock Exchange, and our reputation may be harmed. Any such action could
adversely affect our financial results and the market price of our
common stock. 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
September 30, 2004 have
been included in
interest expense.
All Preferred Stock was
exchanged or redeemed as
of July 26, 2004.
 Implementation of Section 404 of the Sarbanes-Oxley Act of 2002 We are in the process of implementing the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002, with respect to which we are devoting
substantial time and resources and are incurring substantial costs. For the
nine months ended September 30, 2004, we have incurred $0.7 million on services
related to Sarbanes-Oxley compliance. Section 404 requires our management to
assess the effectiveness of our internal controls over financial reporting and
include an assertion in our annual report as to the effectiveness of our
controls. The Sarbanes-Oxley Act of 2002 imposes new duties on us and our
executives, directors, attorneys and independent registered public accountants.
In order to comply with the Sarbanes-Oxley Act, we are evaluating our internal
controls systems to allow management to report on, and our independent auditors
to attest to, our internal controls. We are currently performing the system
and process evaluation and testing (and any necessary remediation) required in
an effort to comply with the management certification and auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act. During the course of
this work we identified internal control activities which we believe needed
improvement. However, we do not believe that any of the deficiencies noted to
date constitute material weaknesses in internal control as defined by the
Public Company Accounting Oversight Board. We are taking the necessary steps
to appropriately remediate the deficiencies noted in our internal controls over
financial reporting, including documentation of new and existing policies and
procedures and implementation of additional monitoring controls. While we
anticipate being able to fully implement the requirements relating to internal
controls and all other aspects of Section 404 in a timely fashion, we cannot be
certain as to the outcome of our testing and resulting remediation actions or
the impact of the same on our operations since there is no precedent 42




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available by which to measure compliance adequacy. If we are not able to
implement the requirements of Section 404 in a timely manner or with adequate
compliance, our auditors may not be able to render the required attestation
concerning our assessment and the effectiveness of the internal controls over
financial reporting, we may be subject to investigation and/or sanctions by
regulatory authorities, such as the Securities Exchange Commission or the
American Stock Exchange, and our reputation may be harmed. Any such action
could adversely affect our financial results and the market price of our common
stock. (See further discussion of the Companys efforts surrounding compliance
with Sarbanes-Oxley at Item 4. Controls and Procedures.) 
 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 September 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 September 30, 2004, there were no changes in
our internal control over financial reporting which materially affected, or are
likely to materially affect, our internal control over financial reporting.
After the end of that quarter, we determined we had a significant deficiency in
our disclosure controls over contracts. As a result, we revised our
internal control over financial reporting to assure that the
accounting for significant or unusual agreements is
reviewed and approved, prior to the posting of any general ledger entries, by
one of the following finance employees: our Director of Financial Reporting,
our Chief Accounting Officer or our Chief Financial Officer. (See further
discussion of the Companys efforts surrounding compliance with Sarbanes-Oxley
at Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations  Implementation of Section 404 of the Sarbanes-Oxley Act
of 2002.) 
 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 reserve for allowed claims established on our balance
sheet, which as of September 30, 2004 has a balance of $2.2 million. We have
reserved for all claims approved by the Bankruptcy Court which have not yet
been paid. 
 Item 6.Exhibits (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. 43




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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.Date: November 19, 2004
    
    By:           /s/ W. THOMAS PARRINGTON
W. Thomas ParringtonPresident and Chief Executive OfficerDate: November 19, 2004
    
    By:           /s/ MANUEL ARTIME
Manuel ArtimeExecutive Vice President andChief Financial Officer
 44




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INDEX TO EXHIBITS ExhibitNo.
    
    
    
    Description31.1
    
    -
    
    Sarbanes  Oxley Section 302 certification by the CEO31.2
    
    -
    
    Sarbanes  Oxley Section 302 certification by the CFO32
    
    -
    
    Sarbanes  Oxley Section 906 certification by the CEO and
CFO
 45