LGN Lodgian

 

 

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 quarterly period ended September 30, 2009

OR

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

For the transition period from            to           

Commission file no. 1-14537

Lodgian, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o      No  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o      No  þ

     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 1, 2009
Common		21,685,094

 

 

LODGIAN, INC. AND SUBSIDIARIES

INDEX

				Page
		PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 (unaudited)			3
		Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2009 and September 30, 2008 (unaudited)			4
		Condensed Consolidated Statement of Stockholders’ Equity for the Nine months ended September 30, 2009 (unaudited)			5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine months ended September 30, 2009 and September 30, 2008 (unaudited)			6
		Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2009 and September 30, 2008 (unaudited)			7
		Notes to Condensed Consolidated Financial Statements (unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			46
Item 4.		Controls and Procedures			46
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			47
Item 1A.		Risk Factors			47
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 6.		Exhibits			47
Signatures					48
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30, 2009				December 31, 2008
		(Unaudited in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	24,647			$	20,454
Cash, restricted			9,419				8,179
Accounts receivable (net of allowances: 2009 - $257; 2008 - $263)			7,035				7,115
Inventories			3,100				2,983
Prepaid expenses and other current assets			15,342				21,257
Assets held for sale			4,554				33,021
Total current assets			64,097				93,009
Property and equipment, net			403,815				447,366
Deposits for capital expenditures			5,586				11,408
Other assets			4,893				3,631
		$	478,391			$	555,414
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	5,152			$	7,897
Other accrued liabilities			23,674				22,897
Advance deposits			1,619				1,293
Current portion of long-term liabilities			102,614				124,955
Liabilities related to assets held for sale			607				16,167
Total current liabilities			133, 666				173,209
Long-term liabilities			208,935				194,800
Total liabilities			342,601				368,009
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $.01 par value, 60,000,000 shares authorized; 25,148,819 and 25,075,837 issued at September 30, 2009 and December 31, 2008, respectively			252				251
Additional paid-in capital			331,601				330,785
Accumulated deficit			(155,344	)			(105,246	)
Accumulated other comprehensive income			64				1,262
Treasury stock, at cost, 3,827,603 and 3,806,000 shares at September 30, 2009 and December 31, 2008, respectively			(39,692	)			(39,647	)
Total stockholders’ equity attributable to common stock			136,881				187,405
Noncontrolling interest			(1,091	)			—
Total stockholders’ equity			135,790				187,405
		$	478,391			$	555,414

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(Unaudited in thousands, except per share data)
Revenues:
Rooms		$	38,095			$	46,679			$	114,415			$	139,891
Food and beverage			10,469				12,545				33,852				40,011
Other			2,028				2,176				5,689				6,376
Total revenues			50,592				61,400				153,956				186,278
Direct operating expenses:
Rooms			10,952				12,200				31,818				35,562
Food and beverage			7,784				9,070				23,706				27,740
Other			1,264				1,548				3,881				4,473
Total direct operating expenses			20,000				22,818				59,405				67,775
			30,592				38,582				94,551				118,503
Other operating expenses:
Other hotel operating costs			15,670				18,287				46,229				53,885
Property and other taxes, insurance, and leases			4,147				4,226				12,829				12,338
Corporate and other			4,289				4,373				11,458				13,742
Casualty losses (gains), net			38				(57	)			133				(57	)
Depreciation and amortization			8,774				8,120				26,067				23,578
Impairment of long-lived assets			34,165				1,393				35,349				9,114
Total other operating expenses			67,083				36,342				132,065				112,600
Operating (loss) income			(36,491	)			2,240				(37,514	)			5,903
Other income (expenses):
Interest income and other			16				241				98				907
Interest expense			(3,304	)			(4,821	)			(10,598	)			(14,768	)
Loss before income taxes and noncontrolling interest			(39,779	)			(2,340	)			(48,014	)			(7,958	)
(Provision) benefit for income taxes — continuing operations			(10	)			81				(29	)			(6	)
Loss from continuing operations			(39,789	)			(2,259	)			(48,043	)			(7,964	)
Discontinued operations:
Income (loss) from discontinued operations before income taxes			2,841				(3,870	)			(3,342	)			759
Benefit (provision) for income taxes — discontinued operations			158				(54	)			196				(129	)
Income (loss) from discontinued operations			2,999				(3,924	)			(3,146	)			630
Net loss			(36,790	)			(6,183	)			(51,189	)			(7,334	)
Less: Net loss attributable to noncontrolling interest			589				—				1,091				—
Net loss attributable to common stock		$	(36,201	)		$	(6,183	)		$	(50,098	)		$	(7,334	)
Basic and diluted net loss per share attributable to common stock		$	(1.70	)		$	(0.29	)		$	(2.35	)		$	(0.33	)

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

		Attributable to Common Stock
																		Accumulated												Total
										Additional								Other												Attributable								Total
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury Stock								to Common				Noncontrolling				Stockholders’
		Shares				Amount				Capital				Deficit				Income				Shares				Amount				Stock				Interest				Equity
		(Unaudited in thousands, except share data)
Balance, December 31, 2008			25,075,837			$	251			$	330,785			$	(105,246	)		$	1,262				3,806,000			$	(39,647	)		$	187,405			$	—			$	187,405
Amortization of unearned stock compensation			—				—				817				—				—				—				—				817				—				817
Issuance and vesting of nonvested shares			72,982				1				(1	)			—				—				—				—				—				—				—
Repurchases of treasury stock			—				—				—				—				—				21,603				(45	)			(45	)			—				(45	)
Net loss			—				—				—				(50,098	)			—				—				—				(50,098	)			(1,091	)			(51,189	)
Currency translation adjustments (related taxes estimated at nil)			—				—				—				—				(1,198	)			—				—				(1,198	)			—				(1,198	)
Balance, September 30, 2009			25,148,819			$	252			$	331,601			$	(155,344	)		$	64				3,827,603			$	(39,692	)		$	136,881			$	(1,091	)		$	135,790

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

		For the three months ended September 30,								For the nine months ended September 30,
		2009				2008				2009				2008
		(unaudited in thousands)
Net loss attributable to common stock		$	(36,201	)		$	(6,183	)		$	(50,098	)		$	(7,334	)
Currency translation adjustments (estimated taxes nil)			31				(557	)			(1,198	)			(1,032	)
Less: reclassification adjustment for losses included in net income (estimated taxes nil)			—				—				1,156				—
Comprehensive loss		$	(36,170	)		$	(6,740	)		$	(50,140	)		$	(8,366	)

The reclassification adjustment for losses included in net income represents the realization of currency translation adjustments upon the sale of the Holiday Inn Windsor, Ontario, Canada.

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		September 30, 2009				September 30, 2008
		(unaudited in thousands)
Operating activities:
Net loss		$	(51,189	)		$	(7,334	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			26,099				23,598
Impairment of long-lived assets			44,119				16,917
Stock compensation expense			817				845
Casualty loss (gain), net			134				(5,640	)
Gain on asset dispositions			(1,824	)			(2,303	)
(Gain) loss on extinguishment of debt			(174	)			537
Gain on deconsolidation			(4,236	)			—
Amortization of deferred financing costs			845				1,120
Changes in operating assets and liabilities:
Accounts receivable, net of allowances			44				(2,232	)
Inventories			(130	)			(566	)
Prepaid expenses and other assets			1,664				(1,910	)
Accounts payable			1,941				(1,585	)
Other accrued liabilities			1,216				(373	)
Advance deposits			291				179
Net cash provided by operating activities			19,617				21,253
Investing activities:
Capital improvements			(19,528	)			(35,758	)
Proceeds from sale of assets, net of related selling costs and note receivable from buyer			12,641				10,873
Withdrawals for capital expenditures			5,747				4,195
Insurance proceeds related to casualty claims, net			—				5,244
Payments related to casualty damage, net			(134	)			—
Net increase in restricted cash			(1,240	)			(1,133	)
Other			(20	)			(25	)
Net cash used in investing activities			(2,534	)			(16,604	)
Financing activities:
Proceeds from exercise of stock options			—				23
Principal payments on long-term debt			(13,052	)			(18,004	)
Purchases of treasury stock			(45	)			(19,834	)
Payments of deferred financing costs			(61	)			—
Defeasance proceeds (payments), net			224				(487	)
Net cash used in financing activities			(12,934	)			(38,302	)
Effect of exchange rate changes on cash			44				(184	)
Net increase (decrease) in cash and cash equivalents			4,193				(33,837	)
Cash and cash equivalents at beginning of year			20,454				54,389
Cash and cash equivalents at end of year		$	24,647			$	20,552
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest, net of the amounts capitalized shown below		$	10,248			$	15,463
Interest capitalized			291				251
Income tax (refunds) payments, net			(201	)			157
Supplemental disclosure of non-cash investing and financing activities:
Treasury stock repurchases traded, but not settled			—				73
Purchases of property and equipment on account			702				2,622
Note receivable from buyer of sold hotel			1,850				—

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($ amounts in thousands unless otherwise noted, except per share data)

1. Business Summary

Lodgian, Inc. (“Lodgian” or the “Company”) is one of the largest independent hotel owners and operators in the United States in terms of the number of guest rooms according to Hotel Business. The Company is considered an independent owner and operator because the Company does not operate its hotels under its own name. The Company operates substantially all of its hotels under nationally recognized brands, such as “Crowne Plaza”, “Four Points by Sheraton”, “Hilton”, “Holiday Inn”, “Marriott” and “Wyndham”. The Company’s hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale, upscale and upper upscale market segments of the lodging industry. Management believes that these strong national brands provide many benefits such as guest loyalty and market share premiums.

As of September 30, 2009, the Company operated 37 hotels with an aggregate of 6,934 rooms, located in 22 states. Of the 37 hotels, 35 hotels, with an aggregate of 6,644 rooms, were held for use, while 2 hotels with an aggregate of 290 rooms, were held for sale.

As of September 30, 2009, the Company operated all but one of its hotels under franchises obtained from nationally recognized hospitality franchisors. The Company operated 17 hotels under franchises obtained from InterContinental Hotels Group (“IHG”) as franchisor of the Crowne Plaza, Holiday Inn and Holiday Inn Express brands. The Company operated 12 hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, SpringHill Suites by Marriott and Residence Inn by Marriott brands. The Company operated an additional seven hotels under other nationally recognized brands.

2. General

The condensed consolidated financial statements include the accounts of Lodgian, its wholly-owned subsidiaries and a joint venture in which Lodgian has a controlling financial interest and exercises control. Lodgian believes it has control of a joint venture when it manages and has control of the joint venture’s assets and operations. The joint venture in which the Company exercises control and is consolidated in the financial statements relates to the Crowne Plaza West Palm Beach, Florida. This joint venture is in the form of a limited partnership, in which a Lodgian subsidiary serves as the general partner and has a 51% voting interest and exercises control.

The accounting policies which the Company follows for quarterly financial reporting are the same as those that were disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (“Form 10-K”), except as discussed in Note 10.

In management’s opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2009, the results of operations for the three and nine months ended September 30, 2009 and September 30, 2008 and cash flows for the nine months ended September 30, 2009 and September 30, 2008. The Company’s results for interim periods are not necessarily indicative of the results for the entire year. You should read these financial statements in conjunction with the consolidated financial statements and related notes included in the Form 10-K.

These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as discussed in Note 7, approximately $120 million of the Company’s outstanding mortgage debt was scheduled to mature in July 2009 and the current severe economic recession has negatively impacted the Company’s operating results, which affects operating cash flows as well as the ability to refinance the maturing indebtedness. The $120 million of mortgage indebtedness, which was originated in June 2004 by Merrill Lynch and securitized in the collateralized mortgage-backed securities market, was divided into three pools of indebtedness referred to by the Company as the Merrill Lynch Fixed Rate Pools 1, 3 and 4 (“Pool 1”, “Pool 3” and “Pool 4”, respectively). The Company has reached agreements with the special servicers of Pools 1 and 4 to extend the maturity dates to July 1, 2010 and July 1, 2012, respectively, and the Company is seeking to refinance Pool 1 in anticipation of the 2010 maturity date. However, management can provide no assurance that the Company will be able to refinance Pool 1.

Pool 3, with a principal balance of $45.5 million as of September 30, 2009, matured on October 1, 2009, following two short-term extensions. The extensions were intended to provide time for the Company to reach an agreement with the special servicer to modify Pool 3. No agreement has been reached and Pool 3 is now in default. Since no agreement has been reached, the Company expects to convey the six hotels which secure Pool 3 to the lender in full satisfaction of the debt. The Company believes that the anticipated cash flow from the hotels securing Pool 3 will not be sufficient to meet the related debt service obligations in the near-term.

In addition, the Company is in default on a loan secured by the Crowne Plaza Worcester, MA which had a balance of $16.3 million as of September 30, 2009. The cash flow from the hotel was not sufficient to service the debt. As a result, the Company did not make the required debt service payment in September 2009 or October 2009. On October 23, 2009, the Company received notice from the lender that the mortgage had been accelerated, as anticipated. The Company does not expect further negotiation with the special servicer and intends to convey the hotel to the lender in full satisfaction of the debt.

Both Pool 3 and the Crowne Plaza Worcester, MA loan are non-recourse, except in certain limited circumstances which the Company believes are remote and are not cross-collateralized with any other of the Company’s mortgage debt. Because of the anticipated cash flow shortfall, management does not believe that surrendering the hotels to the lenders will have an adverse effect on the Company’s cash flows.

Conveying these hotels to the lenders, the severe economic recession and the tight credit markets could also have an adverse effect on the Company’s ability to extend or refinance Pool 1 on or prior to its maturity in July 2010. These factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities or any other adjustments that may be necessary if the Company is unable to continue as a going concern.

In the preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), the Company makes 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 the financial statements.

Actual results could differ from those estimates.

3. Stock-Based Compensation

The Company has a Stock Incentive Plan which permits awards to be made to directors, officers, other key employees and consultants. The Stock Incentive Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”). The Stock Incentive Plan provides that 3,301,058 shares are available for issuance as stock options, stock appreciation rights, stock awards, performance share awards or other awards as determined by the Committee, including awards intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).

The following schedule summarizes the activity for the nine months ended September 30, 2009:

		Issued Under the Stock
		Incentive Plan
Available under the plan, less previously issued as of December 31, 2008			2,499,921
Nonvested stock issued February 4, 2009			(286,503	)
Nonvested stock issued February 12, 2009			(20,000	)
Nonvested stock issued June 11, 2009			(15,000	)
Shares of nonvested stock withheld from awards to satisfy tax withholding obligations			21,603
Nonvested shares forfeited in 2009			18,117
Stock options forfeited in 2009			6,666
Available for issuance, September 30, 2009			2,224,804

Stock Options

The outstanding stock options generally vest in three equal annual installments and expire ten years from the grant date. As of September 30, 2009, all outstanding stock options were fully vested. The exercise price of the awards is the average of the high and low market prices on the date of the grant. The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes-Merton option pricing model. There was no stock option activity during the nine months ended September 30, 2009, other than 6,666 forfeitures.

A summary of options outstanding and exercisable (vested) at September 30, 2009 is as follows:

		Options Outstanding and Exercisable
						Weighted Average				Weighted
						Remaining Life				Average
Range of prices		Number				(In Years)				Exercise Price
$7.83 to $9.39			71,080				5.6			$	9.05
$9.40 to $10.96			70,003				4.8			$	10.51
$10.97 to $15.66			27,162				3.9			$	15.21
			168,245				5.0			$	10.65

The aggregate intrinsic value of stock options outstanding and exercisable at September 30, 2009 was nil.

Nonvested Stock

On February 4, 2009, the Company awarded 286,503 shares of nonvested stock awards for the 2008 calendar year pursuant to the terms of the Lodgian, Inc. Amended and Restated Executive Incentive Plan. The shares vest over two years. The shares were valued at $2.64, the closing price of the Company’s common stock on the date of the award.

On February 12, 2009, the Company granted 20,000 shares of nonvested stock awards to non-employee members of the Board of Directors. The shares vest in three equal annual installments commencing on January 30, 2010. The shares were valued at $2.38, the closing price of the Company’s common stock on the date of the grant.

On June 11, 2009, the Company granted 15,000 shares of nonvested stock awards to Daniel E. Ellis upon his appointment to the position of President and Chief Executive Officer. The shares vest in two equal annual installments commencing on June 11, 2010. The shares were valued at $2.01, the closing price of the Company’s common stock on the date of the award.

A summary of nonvested stock activity during the nine months ended September 30, 2009 is as follows:

						Weighted
						Average
		Nonvested				Grant Date
		Stock				Fair Value
Balance, December 31, 2008			133,474			$	10.41
Granted			321,503				2.59
Forfeited			(18,117	)			3.84
Vested			(72,982	)			10.28
Balance, September 30, 2009			363,878			$	3.86

The aggregate fair value of nonvested stock awards that vested during the nine months ended September 30, 2009 was $0.1 million.

On March 16, 2009, the Committee approved the Lodgian, Inc. Executive Incentive Plan (the “Revised Plan”), which supersedes and replaces the Lodgian, Inc. Amended and Restated Executive Incentive Plan adopted by the Company on April 11, 2008 (the “Previous Plan”). The Revised Plan provides for potential nonvested stock awards to certain of the Company’s key employees, as determined by the Committee. The potential awards for the 2009 calendar year will be awarded on or before March 15, 2010 and vest in two equal annual installments. The potential awards are divided into three categories. The first category of awards will be awarded upon the employee satisfying certain service conditions. The second category will be awarded dependent upon the Company’s stock price performance in relation to a peer group of selected companies. The third category will be awarded dependent upon the Company’s achievement of certain performance conditions. The Company recorded compensation expense of $85,000 during the nine months ended September 30, 2009 based upon the assumed issuance of 330,840 shares of nonvested stock, with an estimated grant-date fair value of $1.65 per share.

A summary of unrecognized compensation expense and the remaining weighted-average amortization period as of September 30, 2009 is as follows:

		Unrecognized				Weighted-Average
		Compensation				Amortization
Type of Award		Expense ($000’s)				Period (in years)
Nonvested Stock		$	647				1.08
Revised Plan Nonvested Stock Awards		$	397				2.46
Total		$	1,044				1.61

In accordance with U.S. GAAP, the Company records compensation expense based on estimated forfeitures and revises compensation expense, if necessary, in subsequent periods if actual forfeitures differ from those estimates. During the nine months ended September 30, 2009, the Company determined that the actual forfeiture rate was lower than previously estimated for certain stock awards and higher than previously estimated for certain other stock awards. As a result, the Company recorded a net $43,000 adjustment to increase compensation expense related to those stock awards.

Compensation expense for the three months ended September 30, 2009 and 2008 is summarized below:

		Three Months Ended September 30, 2009								Three Months Ended September 30, 2008
		Compensation				Income Tax				Compensation				Income Tax
Type of Award		Expense				Benefit				Expense				Benefit
Nonvested Stock		$	229			$	89			$	224			$	87
Revised Plan Nonvested Stock Awards			53				21				72				28
Total		$	282			$	110			$	296			$	115

Compensation expense for the nine months ended September 30, 2009 and 2008 is summarized below:

		Nine Months Ended September 30, 2009								Nine Months Ended September 30, 2008
		Compensation				Income Tax				Compensation				Income Tax
Type of Award		Expense				Benefit				Expense				Benefit
Stock Options		$	—			$	—			$	(51	)		$	(20	)
Nonvested Stock			732				284				777				302
Revised Plan Nonvested Stock Awards			85				33				119				46
Total		$	817			$	317			$	845			$	328

4. Treasury Stock

During the nine months ended September 30, 2009, 72,982 shares of nonvested stock awards vested, of which 21,603 shares were withheld to satisfy tax obligations and were included in the treasury stock balance of the Company’s balance sheet. The aggregate cost of these shares was approximately $45,000.

The Company may use its treasury stock for the issuance of future stock-based compensation awards or for acquisitions.

5. Dispositions and Discontinued Operations

Dispositions

On March 4, 2009, the Company sold the Holiday Inn East Hartford, CT for a gross sales price of $3.5 million. In accordance with the terms of the agreement, the Company extended seller financing totaling $1.9 million to the purchaser and paid $1.6 million to acquire the land from the lessor. On April 21, 2009, the Company sold the Holiday Inn Windsor, Ontario, Canada for a gross sales price of $5.6 million. On May 28, 2009, the Company sold the Holiday Inn Cromwell Bridge, MD for a gross sales price of $8.3 million. The net proceeds, after debt paydown and settlement costs, were used for general corporate purposes.

Assets Held for Sale and Discontinued Operations

Management considers an asset to be held for sale when the following criteria are met in accordance with U.S. GAAP:

	a)		Management commits to a plan to sell the asset;
	b)		The asset is available for immediate sale in its present condition;

	c)		An active marketing plan to sell the asset at a reasonable price has been initiated;
	d)		The sale of the asset is probable within one year; and
	e)		It is unlikely that significant changes to the plan to sell the asset will be made.

Upon designation of a property as an asset held for sale, the Company records the carrying value of the property at the lower of its carrying value or its estimated fair value, less estimated selling costs, and the Company ceases depreciation of the asset.

In accordance with U.S. GAAP, the Company has included the hotel assets sold as well as the hotel assets held for sale (including any related impairment charges) in Discontinued Operations in the related Condensed Consolidated Statements of Operations. The assets held for sale at September 30, 2009 and December 31, 2008 and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheets. All losses and gains on assets sold and held for sale (including any related impairment charges) are included in “Income (loss) from discontinued operations before income taxes” in the Condensed Consolidated Statement of Operations. The amount the Company will ultimately realize on these asset sales could differ from the amount recorded in the financial statements.

Consistent with the accounting policy on asset impairment, and in accordance with U.S. GAAP, the reclassification of assets from held for use to held for sale requires a determination of fair value less costs of sale. The fair value of the held for sale asset is based on the estimated selling price less estimated costs to sell. Management’s estimate of the fair value of an asset is generally based on a number of factors, including letters of intent or other indications of value from prospective buyers, or, in the absence of such, the opinions of third-party brokers or appraisers. While management may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, the estimate is ultimately based on management’s determination, and management remains responsible for the impact of the estimate on the financial statements. The estimated selling costs are generally based on the Company’s experience with similar asset sales. The Company records impairment charges and writes down respective hotel assets if their carrying values exceed the estimated selling prices less costs to sell.

The impairment of long-lived assets held for sale of $1.2 million recorded during the three months ended September 30, 2009 included the following:

	•		$1.0 million on the Ramada Plaza Northfield, MI to reflect the current estimated selling price, net of selling costs; and
	•		$0.2 million on the French Quarter Suites Memphis, TN (a closed hotel) to reflect the current estimated selling price, net of selling costs.

The impairment of long-lived assets held for sale of $8.8 million recorded during the nine months ended September 30, 2009 included the following:

	•		$4.3 million on the Ramada Plaza Northfield, MI to reflect the current estimated selling price, net of selling costs;
	•		$3.1 million on the Holiday Inn Phoenix, AZ to reflect the property’s estimated fair value;
	•		$0.8 million on the Holiday Inn in Windsor, Ontario, Canada to reflect the final selling price, net of selling costs;
	•		$0.5 million on the French Quarter Suites Memphis, TN (a closed hotel) to reflect the current estimated selling price, net of selling costs; and
	•		$0.1 million to record the disposal of replaced assets at various hotels.

The impairment of long-lived assets held for sale of $6.3 million recorded during the three months ended September 30, 2008 included the following:

	•		$3.9 million on the Holiday Inn Select in Windsor, Ontario, Canada to reflect the then current estimated selling price, net of selling costs;
	•		$1.2 million on the Holiday Inn East Hartford, CT to reflect the then current estimated selling price, net of selling costs;
	•		$1.0 million on the Ramada Plaza Northfield, MI to reflect the then current estimated selling price, net of selling costs; and

•

$0.2 million on the French Quarter Suites Memphis, TN (a closed hotel) to reflect the then current estimated selling price, net of selling costs.

The impairment of long-lived assets held for sale of $7.8 million recorded during the nine months ended September 30, 2008 included the following:

	•		$3.9 million on the Holiday Inn Select in Windsor, Ontario, Canada to reflect the then current estimated selling price, net of selling costs;
	•		$1.9 million on the Ramada Plaza Northfield, MI to reflect the then current estimated selling price, net of selling costs;
	•		$1.6 million on the Holiday Inn East Hartford, CT to reflect the then current estimated selling price, net of selling costs;
	•		$0.2 million on the French Quarter Suites Memphis, TN (a closed hotel) to reflect the then current estimated selling price, net of selling costs;
	•		$0.1 million on the former Holiday Inn St. Paul, MN to record the final disposition of the hotel; and
	•		$0.1 million to record the final disposition of the Holiday Inn Frederick, MD as well as the disposal of replaced assets at various hotels.

Assets held for sale consist primarily of property and equipment, net of accumulated depreciation. Liabilities related to assets held for sale consist primarily of accounts payable, other accrued liabilities, and, as of December 31, 2008, long-term debt. In June 2009, the Company reclassified the Holiday Inn Phoenix, AZ from held for sale to held for use because the Company no longer intended to sell the hotel. Rather, the Company notified the lender that it intended to surrender the hotel in full satisfaction of the debt. The Company recorded a $3.1 million impairment charge upon reclassification to write down the book value of the hotel to its estimated fair value. The Company surrendered control of the hotel to a court-appointed receiver in July 2009. The hotel was deconsolidated upon surrender of control and, as a result, was excluded from the Company’s Condensed Consolidated Balance Sheet as of September 30, 2009. The results of operations up to the date of deconsolidation, including a $4.2 million gain on deconsolidation, were included in discontinued operations in the Company’s Condensed Consolidated Statements of Operations. At September 30, 2009, the held for sale portfolio consisted of the following 2 hotels:

	•		French Quarter Suites Memphis, TN
	•		Ramada Plaza Northfield, MI

Summary balance sheet information for assets held for sale is as follows:

		September 30, 2009				December 31, 2008
Property and equipment, net		$	3,723			$	31,351
Other assets			831				1,670
Assets held for sale		$	4,554			$	33,021
Other liabilities		$	607			$	6,886
Long-term debt			—				9,281
Liabilities related to assets held for sale		$	607			$	16,167

Summary statement of operations information for discontinued operations is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Total revenues			774				7,703				7,101				25,792
Total expenses			(970	)			(6,670	)			(7,537	)			(23,937	)
Impairment of long-lived assets			(1,218	)			(6,306	)			(8,770	)			(7,803	)
Business interruption proceeds			—				—				—				672
Interest income and other			75				9				76				25
Interest expense			(56	)			(401	)			(445	)			(1,339	)
Casualty (losses) gains, net			—				—				(1	)			5,583
Gain on asset disposition			—				2,303				1,824				2,303
Gain on deconsolidation			4,236				—				4,236				—
(Loss) gain on extinguishment of debt			—				(508	)			174				(537	)
Benefit (provision) for income taxes			158				(54	)			196				(129	)
Income (loss) from discontinued operations		$	2,999			$	(3,924	)		$	(3,146	)		$	630

In addition to the assets held for sale listed above, the hotels that were sold prior to September 30, 2009 were included in the statement of operations for discontinued operations for 2008.

Discontinued operations are not segregated in the condensed consolidated statements of cash flows.

6. Income (Loss) Per Share

The computation of basic and diluted loss per share is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Numerator:
Loss from continuing operations		$	(39,789	)		$	(2,259	)		$	(48,043	)		$	(7,964	)
Less: Net loss attributable to noncontrolling interest			589				—				1,091				—
Loss from continuing operations attributable to common stock			(39,200	)			(2,259	)			(46,952	)			(7,964	)
Income (loss) from discontinued operations			2,999				(3,924	)			(3,146	)			630
Net loss attributable to common stock		$	(36,201	)		$	(6,183	)		$	(50,098	)		$	(7,334	)
Denominator:
Basic and diluted weighted average shares			21,321				21,412				21,313				21,944
Basic and diluted (loss) income per common share:
Loss from continuing operations attributable to common stock		$	(1.84	)		$	(0.11	)		$	(2.20	)		$	(0.36	)
Income (loss) from discontinued operations			0.14				(0.18	)			(0.15	)			0.03
Net loss attributable to common stock		$	(1.70	)		$	(0.29	)		$	(2.35	)		$	(0.33	)

For the three and nine months ended September 30, 2009, the Company did not include the shares associated with the assumed exercise of stock options (options to acquire 168,245 shares of common stock), the assumed vesting of 363,878 shares of nonvested stock, the assumed issuance of 330,840 shares of Revised Plan nonvested stock awards, and the assumed conversion of Class B warrants (rights to acquire 343,122 shares of common stock) because their inclusion would have been antidilutive.

For the three and nine months ended September 30, 2008, the Company did not include the shares associated with the assumed exercise of stock options (options to acquire 177,244 shares of common stock), the assumed vesting of 146,141 shares of nonvested stock, the assumed issuance of 108,089 shares of Revised Plan nonvested stock awards, and the assumed conversion of Class B warrants (rights to acquire 343,122 shares of common stock) because their inclusion would have been antidilutive.

7. Long-Term Liabilities

As of September 30, 2009, 33 of the Company’s 37 hotels are pledged as collateral for long-term obligations. Certain mortgage notes are subject to prepayment, yield maintenance or defeasance obligations if the Company repays them prior to their maturity. Approximately 46% of the mortgage debt bears interest at fixed rates and approximately 54% of the mortgage debt is subject to floating rates of interest.

The mortgage notes also subject the Company to certain financial covenants, including leverage and coverage ratios. As of September 30, 2009, the Company believes it was in compliance with all of its financial debt covenants, except for the debt yield ratios related to Pool 3 and Pool 4, with outstanding principal balances of $45.5 million and $34.9 million, respectively. The breach of these covenants, if not cured or waived by the lender, could lead to the declaration of a “cash trap” by the lender whereby excess cash flows produced by the mortgaged hotels securing the applicable loans (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) could be placed in a restricted cash account. The funds held in the restricted cash account may be used for capital expenditures reasonably approved by the loan servicer. As of September 30, 2009, Pool 4 was operating under the provisions of the cash trap and approximately $27,000 was held in a restricted cash account. The Company expects to convey to the Pool 3 lenders the hotels that serve as collateral in full satisfaction of Pool 3.

The Company’s continued compliance with the financial debt covenants for the remaining loans depends substantially upon the financial results of the Company’s hotels. Given the severe economic recession, the Company could breach certain other financial covenants during 2009. The breach of these covenants, if not cured or waived by the lenders, could lead, under the Merrill Lynch Fixed Rate loans and the Goldman Sachs loan, to the declaration of a “cash trap” by the lender whereby excess cash flows produced by the mortgaged hotels securing the applicable loans (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) could be placed in a restricted cash account. For the Merrill Lynch loans only, funds held in the restricted cash account may be used for capital expenditures reasonably approved by the loan servicer.

A summary of the Company’s long-term debt by debt pool, along with the applicable interest rates and the related carrying values of the property and equipment which collateralize the debt, is below:

		September 30, 2009												December 31, 2008
						Property,
						plant and
		Number of				equipment,				Long-term				Long-term
		Hotels				net				obligations				obligations				Interest rates at September 30, 2009
Mortgage Debt
Goldman Sachs (1)			10			$	121,661			$	130,000			$	130,000			LIBOR plus 1.50%; capped at 6.50%
Merrill Lynch Fixed Rate Pool 1 (2)			4				64,689				36,125				39,372			6.58%
Merrill Lynch Fixed Rate Pool 3 (3)			6				46,408				45,500				53,031			6.58%
Merrill Lynch Fixed Rate Pool 4 (4)			6				80,154				34,868				35,984			6.58%
IXIS (5)			3				17,966				20,753				20,977			LIBOR plus 2.95%; capped at 7.45%
IXIS — Holiday Inn Hilton Head, SC			1				16,202				18,353				18,530			LIBOR plus 2.90%; capped at 7.90%
Wachovia — Crowne Plaza Worcester, MA			1				9,627				16,270				16,501			6.04%
Wachovia — Holiday Inn Phoenix, AZ (6)			—				—				—				9,478			n/a
Wachovia — Holiday Inn Express Palm Desert, CA			1				5,404				5,676				5,767			6.04%
Wachovia — SpringHill Suites by Marriott Pinehurst, NC			1				5,701				2,937				2,988			5.78%
Total			33				367,812				310,482				332,628			4.08% (7)
Long-term liabilities — other
Tax notes issued pursuant to our Joint Plan of Reorganization			—				—				—				42
Other			—				—				1,067				1,342
			—				—				1,067				1,384
Property, plant and equipment — Unencumbered			4				39,726				—				—
			37				407,538				311,549				334,012
Held for sale			(2	)			(3,723	)			—				(14,257	)
Held for use (8)			35			$	403,815			$	311,549			$	319,755

In May 2009, the Company defeased $6.7 million of the $52.7 million balance of one of the Merrill Lynch fixed rate loans, which was secured by seven hotels. We purchased $6.8 million of US Government treasury securities (“Treasury Securities”) to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the hotel that

originally served as collateral for the defeased portion of the loan. The hotel was then sold. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because we continue to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Consolidated Balance Sheet. As a result of the defeasance, the Company recorded a $0.2 million Loss on Debt Extinguishment in discontinued operations.

In April 2009, the Company notified the lender for the Holiday Inn Phoenix, AZ that it intended to surrender the hotel to the lender as it was the Company’s belief that the hotel was worth substantially less than the $9.4 million of mortgage debt encumbering the hotel. The Company believed that it was unlikely that the value of the hotel would increase in the near or intermediate term and the hotel’s operating performance continued to decline. The Company ceased making mortgage payments in May 2009 and began discussions with the lender to return the hotel on a consensual basis. In July 2009, the Company surrendered control of the hotel to a court-appointed receiver. The hotel was deconsolidated upon surrender of control and, as a result, all assets and liabilities, including the related loan balance, were excluded from the Company’s Condensed Consolidated Balance Sheet as of September 30, 2009. The mortgage debt is non-recourse to Lodgian, except in certain limited circumstances which the Company believes are remote and is not cross-collateralized with any other of the Company’s mortgage debt. In accordance with the terms of the franchise agreement for this hotel, the franchisor could require the Company to pay liquidated damages as a result of the transfer of the hotel to the lender. The estimated potential liquidated damages totaled $0.9 million as of September 30, 2009. This amount is not reflected in the Company’s Condensed Consolidated financial statements since the recognition criteria for contingencies as established by U.S. GAAP had not been met.

The Merrill Lynch loans, with an aggregate principal balance of $116.5 million as of September 30, 2009, matured on July 1, 2009. The Company and the special servicer for Pool 1 have agreed to two six-month extensions of the maturity date for this indebtedness. The principal balance of Pool 1 was $36.1 million as of September 30, 2009. Assuming that the second six-month extension is exercised by the Company, the maturity date of Pool 1 will be July 1, 2010. The Company is seeking to refinance Pool 1 in anticipation of the 2010 maturity date. The interest rate on Pool 1 will remain fixed at 6.58% during the term of the extension. In July 2009, the Company paid the special servicer an extension fee of approximately $0.2 million and will pay an additional extension fee of approximately $0.3 million if the Company chooses to exercise the second six-month extension. Additionally, in July 2009, the Company made a principal reduction payment of $2.0 million. The Company will make an additional $1.0 million principal reduction payment on or before December 30, 2009 if the second six-month extension is exercised. The Company also has agreed to make additional principal reduction payments of approximately $0.1 million per month during the first six-month extension and approximately $0.2 million per month during the second six-month extension, if exercised. The Company has classified this loan as current in the Condensed Consolidated Balance Sheet as of September 30, 2009. Pool 1 is secured by four hotels.

Pool 3, with a principal balance of $45.5 million as of September 30, 2009, matured on October 1, 2009, following two short-term extensions. The extensions were intended to provide time for the Company to reach an agreement with the special servicer to modify Pool 3. No agreement has been reached and Pool 3 is now in default. The revenues generated by the six hotels which secure Pool 3 are deposited into a restricted cash account which is controlled by the special servicer. The Company is currently funding operating expenses in advance and then seeking reimbursement from the special servicer. As of September 30, 2009, operating expenses totaling $1.6 million were pending reimbursement from the special servicer, all of which were subsequently released from the restricted cash account. The Company believes that the anticipated cash flow from the hotels securing Pool 3 will not be sufficient to meet the related debt service obligations in the near-term. Since a modification agreement has not been reached, the Company expects to convey the six hotels securing Pool 3 to the lender in full satisfaction of the loan. Pool 3 is non-recourse to the Company, except in limited circumstances which the Company believes are remote and is not cross-collateralized with any other mortgage debt. The Company has classified Pool 3 as current in the Condensed Consolidated Balance Sheet as of September 30, 2009. In accordance with the terms of the franchise agreements associated with the Pool 3 hotels, the Company could be required to pay liquidated damages to the franchisors upon transfer of the hotels to the lender. The estimated potential liquidated damages totaled $6.1 million as of September 30, 2009. This amount is not reflected in the Company’s Condensed Consolidated financial statements since the recognition criteria for contingencies as established by U.S. GAAP had not been met.

The Company and the special servicer for Pool 4 have agreed to extend the maturity date to July 1, 2012. The principal balance of Pool 4 was $34.9 million as of September 30, 2009. The interest rate on Pool 4 will remain fixed at 6.58%. In connection with this agreement, the Company paid an extension fee of approximately $0.2 million and made a principal reduction payment of $0.5 million in July 2009. The parties also have agreed to revise the allocated loan amounts for each property serving as collateral for Pool 4 and to allow partial prepayments of the indebtedness. Pursuant to this agreement, the Company may release individual assets from Pool 4 by paying the lender specified amounts (in excess of the allocated loan amounts) in connection with a property sale or refinancing. The Company also agreed to pay the lender an “exit fee” upon a full or partial repayment of Pool 4. The amount of this fee will increase each year but, assuming Pool 4 is held for the full three year term, the fee will effectively increase the current interest rate by 100 basis points per annum. The Company also has issued a full recourse guaranty of Pool 4 in connection with this amendment. The Company has classified Pool 4 as long-term in the Condensed Consolidated Balance Sheet as of September 30, 2009. Pool 4 is secured by six hotels.

The Goldman Sachs loan, with a principal balance of $130.0 million as of September 30, 2009, matured in May 2009. However, the loan agreement provides the Company with the option to extend the loan for three additional one-year periods, based upon certain conditions. The Company exercised the first option to extend the loan, which extended the term to May 2010. The Company has the ability and the intent to exercise the second option on the loan, which will extend the term to May 2011 and, as a result, has classified this loan as long-term in the Condensed Consolidated Balance Sheet as of September 30, 2009. This mortgage loan is secured by 10 hotels.

The Company has two mortgage loans with IXIS. One of these loans, with a principal balance of $18.4 million as of September 30, 2009, matured in December 2007. The Company exercised the first two one-year extensions, which extended the maturity date of the loan to December 9, 2009. In addition, the Company notified the lender of its intent to exercise the third one-year extension option, which will extend the maturity to December 9, 2010. As a result, the Company has classified this loan as long-term in the Condensed Consolidated Balance Sheets as of September 30, 2009. This mortgage loan is secured by one hotel. The second mortgage loan with IXIS, with a principal balance of $20.8 million as of September 30, 2009, matured in March 2008. The Company exercised the first and second of three available one-year extensions, which extended the maturity date of the loan to March 2010. The Company has the ability and intent to exercise the remaining extension option, which would extend the maturity date to March 2011. As a result, the Company has classified this loan as long-term in the Condensed Consolidated Balance Sheet as of September 30, 2009. This mortgage loan is secured by three hotels.

In September 2009, the Company ceased making mortgage payments on a loan secured by the Crowne Plaza Worcester, MA, which had a balance of $16.3 million as of September 30, 2009, because the hotel’s cash flow was not sufficient to service the debt. As a result, the loan is in default. On October 23, 2009, the Company received notice from the lender that the mortgage had been accelerated, as anticipated. The Company does not expect further negotiation with the special servicer and intends to convey the hotel to the lender in full satisfaction of the debt. The loan is non-recourse, except in certain limited circumstances which the Company believes are remote and is not cross-collateralized with any other mortgage debt. The Company classified the loan as current in the Condensed Consolidated Balance Sheet as of September 30, 2009. In accordance with the terms of the franchise agreement associated with the Crowne Plaza Worcester, MA, the Company could be required to pay liquidated damages to the franchisor upon transfer of the hotel to the lender. The estimated potential liquidated damages totaled $1.3 million as of September 30, 2009. This amount is not reflected in the Company’s Condensed Consolidated financial statements since the recognition criteria for contingencies as established by U.S. GAAP had not been met.

One single-asset mortgage loan, which is secured by the SpringHill Suites Pinehurst, NC, matures in June 2010 with no extension options. As of September 30, 2009, the outstanding balance of $2.9 million was classified as current in the Condensed Consolidated Balance Sheet.

All other mortgage loans have scheduled maturity dates beyond 2010.

The fair value of the fixed rate mortgage debt at September 30, 2009 and December 31, 2008 (book value of $141.4 million and $163.1 million, respectively) is estimated at $144.1 million and $166.4 million, respectively. The fair value of the variable rate mortgage debt at September 30, 2009 and December 31, 2008 (book value of $169.1 and $169.5 million, respectively) is estimated at $145.6 million and $136.3 million, respectively.

Interest Rate Cap Agreements

The Company entered into three interest rate cap agreements to manage its exposure to fluctuations in the interest rate on its variable rate debt. These derivative financial instruments are viewed as risk management tools and are entered into for hedging purposes only. The Company does not use derivative financial instruments for trading or speculative purposes. The Company has not elected to follow the hedge accounting rules of U.S. GAAP.

The aggregate fair value of the interest rate caps as of September 30, 2009 was approximately $0.1 million. The fair values of the interest rate caps are recognized in the accompanying balance sheet in other assets. Adjustments to the carrying values of the interest rate caps are reflected in interest expense.

8. Commitments and Contingencies

Franchise Agreements and Capital Expenditures

The Company benefits from the superior brand qualities of Crowne Plaza, Four Points by Sheraton, Hilton, Holiday Inn, Marriott and other brands. Included in the benefits of these brands are their reputations 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.

To obtain these franchise affiliations, the Company has entered into franchise agreements with various hotel chains which require annual payments for license fees, reservation services and advertising fees. The license agreements generally have original terms of 10 to 20 years. As part of the franchise agreements, the Company is 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. These costs vary with revenues and are not fixed commitments. Franchise fees incurred (which are reported in other hotel operating costs in the Condensed Consolidated Statement of Operations) for the three and nine months ended September 30, 2009 and 2008 were as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Continuing operations		$	4,000			$	4,459			$	11,686			$	13,235
Discontinued operations			32				609				535				2,015
		$	4,032			$	5,068			$	12,221			$	15,250

During the terms of the franchise agreements, the franchisors may require the Company to upgrade facilities to comply with current standards. The Company’s franchise agreements terminate at various times and have differing remaining terms. For example, the terms of three, two and one of the franchise agreements for the held for use hotels are scheduled to expire in each of 2010, 2011, and 2012, respectively. 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 gross room revenues.

When a hotel does not meet the terms of its franchise license agreement, a franchisor reserves the right to issue a notice of non-compliance to the licensee. This notice of non-compliance provides the franchisee with a cure period which typically ranges from three to 24 months. At the end of the cure period, the franchisor will review the criteria for which the non-compliance notice was issued and either acknowledge a cure under the franchise agreement, returning the hotel to good standing, or issue a notice of default and termination, giving the franchisee another opportunity to cure the non-compliant issue. At the end of the default and termination period, the franchisor will review the criteria for which the non-compliance notice was issued and either acknowledge a cure of the default under the franchise agreement, issue an extension which will grant the franchisee additional time to cure, or terminate the franchise agreement.

As of November 1, 2009, the Company has been or expects to be notified that it is in default and/or noncompliance with respect to two franchise agreements and is anticipating cure letters with respect to two franchise agreements as summarized below:

	•		One hotel is in default of the franchise agreement for substandard guest satisfaction scores because the Company did not achieve scores above the required thresholds by July 2009. The hotel could be subject to termination of the franchise agreement if it does not achieve the required thresholds by the November 2009 cure date. However, since the Company recently completed some renovations at the hotel and is following an action plan for improvement, the Company anticipates that it will cure the default by the required date. This hotel is one of six hotels that serve as collateral for Pool 3. The Company expects to convey the six hotels to the lender in full satisfaction of Pool 3.
	•		One hotel is in default of the franchise agreement for failure to complete a Property Improvement Plan (“PIP”). The Company did not cure the default by September 2009 and the hotel’s franchise agreement could be terminated by the franchisor. This hotel is also in default of the franchise agreement because of substandard guest satisfaction scores. A December 2009 cure date was established and the hotel could be subject to termination of the franchise agreement if it does not achieve the required thresholds by that date. The Company intends to convey this hotel to the lender in full satisfaction of the Crowne Plaza Worcester, MA loan. As a result, the franchisor has decided to forego extending the cure date regarding the failure to complete the PIP in anticipation of this transaction.
	•		The Company is anticipating cure letters for two hotels to be delivered no later than February 2010.

The corporate operations team, as well as each property’s general manager and associates, have focused their efforts to cure each of these non-compliance or default issues through enhanced service by the required cure dates. The Company believes that it will cure the non-compliance and defaults before the applicable termination dates, except for one hotel which is in default for failure to complete a Property Improvement Plan. The Company spent approximately $2.8 million for capital improvements related to the action plans as of September 30, 2009. The Company cannot provide assurance that it will be able to cure the alleged instances of noncompliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or noncompliance.

Also, the Company’s loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more such agreements. The two hotels that are in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of $61.8 million of mortgage debt as of September 30, 2009.

A single franchise agreement termination could materially and adversely affect the Company’s revenues, cash flow and liquidity. If a franchise agreement is terminated, the Company will select an alternative franchisor, operate the hotel independently of any franchisor or sell the hotel. However, terminating or changing the franchise affiliation of a hotel could require the Company to incur significant costs, including franchise termination payments and capital expenditures associated with the change of a brand. Moreover, the loss of a franchise agreement could have a material adverse effect upon the operations or the underlying value of the hotel covered by the franchise because of the loss of associated guest loyalty, name recognition, marketing support and centralized reservation systems provided by the franchisor. Loss of a franchise agreement may result in a default under, and acceleration of, the related mortgage debt. This could materially and adversely affect the Company and its financial condition and results of operations. See “Item 1A. Risk Factors” in the Company’s Form 10-K for additional information.

Letters of Credit

As of September 30, 2009, the Company had three irrevocable letters of credit totaling $4.5 million which were fully collateralized by cash. The cash is classified as restricted cash in the accompanying Condensed Consolidated Balance Sheets. The letters of credit serve as guarantees for self-insured losses and certain utility and liquor bonds and will expire in November 2009, January 2010 and September 2010, but may be renewed beyond those dates.

Self-insurance

The Company is self-insured up to certain limits with respect to employee medical, employee dental, general liability insurance, personal injury claims, workers’ compensation and auto liability. The Company establishes liabilities for these self-insured obligations annually, based on actuarial valuations and its history of claims. If these claims escalate beyond the Company’s expectations, this could have a negative impact on its future financial condition and results of operations. At September 30, 2009 and December 31, 2008, the Company had accrued $8.7 million and $10.4 million, respectively, for these liabilities.

There are other types of losses for which the Company 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 the Company’s insurance limits were to occur, the Company could lose both the revenues generated from the affected hotel and the capital that it has invested. The Company also could be liable for any outstanding mortgage indebtedness or other obligations related to the hotel. Any such loss could materially and adversely affect the financial condition and results of operations.

The Company believes it maintains sufficient insurance coverage for the operation of its business.

Casualty gains (losses) and business interruption insurance

All of the Company’s hotels are covered by property, casualty and business interruption insurance. The business interruption coverage begins on the date of closure and continues for nine months following the opening date of the hotel, to cover the revenue ramp-up period. Management believes the Company has sufficient coverage for business interruption and to pay claims that may be asserted against the Company by guests or others.

Litigation

From time to time, as the Company conducts its business, legal actions and claims are brought against it. The outcome of these matters is uncertain.

Management believes that the Company has adequate insurance protection to cover all pending litigation matters and that the resolution of these claims will not have a material adverse effect on the Company’s results of operations or financial condition.

9. Income Taxes

For the year ended December 31, 2008, the Company had an estimated taxable loss of $3.4 million. Because the Company had net operating losses available for federal income tax purposes and preference item deductions related to the sale of properties, no federal income taxes or alternative minimum taxes were due for the year ended December 31, 2008. A net loss was reported for federal income tax purposes for the year ended December 31, 2007 and no federal income taxes were paid. At December 31, 2008, net operating loss carryforwards of $377.7 million were available for federal income tax purposes of which $223.0 million were available for use. The net operating losses will expire in years 2018 through 2028. The 2002 reorganization under Chapter 11 and 2004

secondary stock offering resulted in “ownership changes,” as defined in Section 382 of the Internal Revenue Code. As a result of the most recent Section 382 ownership change, the Company’s ability to utilize net operating loss carryforwards generated prior to June 24, 2004 is subject to an annual limitation of $8.3 million. Net operating loss carryforwards generated during the 2004 calendar year after June 24, 2004 as well as those generated during the 2005 calendar year, are generally not subject to Section 382 limitations to the extent the losses generated are not recognized built in losses. At the June 24, 2004 ownership change date, the Company had a Net Unrealized Built in Loss “NUBIL” of $150 million. As of December 31, 2008, $95.7 million of the NUBIL has been recognized. The amount of losses subject to Section 382 limitations is $171.5 million; losses not subject to 382 limitations are $51.5 million. No ownership changes have occurred during the period June 25, 2004 through December 31, 2008.

Furthermore, at December 31, 2008, a valuation allowance of $64.1 million fully offset the Company’s net deferred tax asset. At September 30, 2009, net operating loss carryforwards of $223.0 million were reported for federal income tax purposes. Only those losses available for use are reflected; these losses will expire in the years 2018 through 2028.

The Company was required to adopt the provisions of new FASB guidance with respect to all the Company’s tax positions as of January 1, 2007. While the new FASB guidance was effective on January 1, 2007, the new guidance applies to all open tax years. The only major tax jurisdiction in which the Company files income taxes is Federal. The tax years which are open for examination are calendar years ended 1992, 1998, 1999, 2000, 2001 and 2003, due to losses generated that may be utilized in current or future filings. Additionally, the statutes of limitation for calendar years ended 2004, 2005, 2006 and 2007 remain open. The Company has no significant unrecognized tax benefits; therefore, the adoption of the guidance had no impact on the Company’s financial statements. Additionally, no increases in unrecognized tax benefits are expected in the year 2009. Interest and penalties on unrecognized tax benefits will be classified as income tax expense if recorded in a future period. In December 2007, the FASB issued guidance which significantly changes the accounting for business combinations as described in Note 10. The Company has $64.1 million of deferred tax assets fully offset by a valuation allowance. The balance of the $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the effective date for the guidance, such reduction will affect the income tax provision in the period of release.

10. Recent Accounting Pronouncements

Recently Adopted Pronouncements

In June 2009, the FASB issued “Accounting Standards Codification” (the “Codification”) effective for financial statements issued for interim and annual periods ending after September 15, 2009. The FASB made the Codification the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. In the FASB’s view, the Codification did not change U.S. GAAP for public entities. Therefore, other than the manner in which accounting guidance is referenced, the adoption of the Codification did not have a material impact on the Company’s results of operations and financial condition.

In September 2006, the FASB issued guidance to define fair value, establish a framework for measuring fair value and expand disclosure of fair value measurements. The fair value guidance does not require any new fair value measurements. The fair value guidance was effective in financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB delayed the effective date of the fair value guidance for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted the provisions of the fair value guidance for financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements at least annually. Since the Company’s existing fair value measurements are consistent with the provisions of the fair value guidance, and are not significant, the partial adoption did not have a material impact on the Company’s financial statements.

The three-level fair value hierarchy for disclosure of fair value measurements defined by the FASB is as follows:

Level 1		Quoted prices for identical instruments in active markets at the measurement date.
Level 2		Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3		Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The Company adopted the deferred portion of the fair value guidance for nonfinancial assets and nonfinancial liabilities on January 1, 2009. The adoption did not have a material impact on the Company’s financial statements.

The following table outlines, for each major category of assets and liabilities measured at fair value on a nonrecurring basis, the fair value as of September 30, 2009, as defined by the FASB hierarchy:

		Fair Value Measurements at Reporting Date Using
										Significant
						Quoted Prices in				Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs				Total Gains
Description		September 30, 2009				(Level 1)				(Level 2)				(Level 3)				(Losses)
Real Estate Assets — Held for Use Hotels		$	56,475			$	—			$	—			$	56,475			$	(32,314	)
Real Estate Assets — Held for Sale Hotels			4,000				—				4,000				—				(1,186	)
		$	60,475			$	—			$	4,000			$	56,475			$	(33,500	)

The Company recorded fair value measurement losses of $32.3 million during the nine months ended September 30, 2009, to reflect the current fair market value of certain held for use assets which the Company expects to surrender to the lenders in full satisfaction of the related debt obligations. The Company’s estimate of the fair value of an asset is based on a number of factors, including the opinions of third-party brokers or appraisers or internally derived values (Level 3 inputs). While management may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, the estimate is ultimately based on management’s determination, and management remains responsible for the impact of the estimate on the financial statements. The adjustments included the following (amounts below are individually rounded):

	•		$17.1 million on the Holiday Inn Inner Harbor, MD;
	•		$5.2 million on the Crowne Plaza Houston, TX;
	•		$4.5 million on the Crowne Plaza Worcester, MD;
	•		$2.5 million on the Fairfield Inn Merrimack, NH;
	•		$1.6 million on the Courtyard by Marriott Bentonville, AR;
	•		$1.2 million on the Courtyard by Marriott Florence, KY; and
	•		$0.1 million on the Courtyard by Marriott Abilene, TX.

The Company recorded fair value measurement losses of $1.2 million during the nine months ended September 30, 2009, to reflect the current fair market value of its held for sale assets. Refer to Note 5 for further discussion.

The Company’s estimate of the fair value of an asset is based on a number of factors, including letters of intent or other indications of value from prospective buyers (Level 2 inputs), or, in the absence of such, the opinions of third-party brokers or appraisers or internally derived values (Level 3 inputs). While management may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, the estimate is ultimately based on management’s determination, and management remains responsible for the impact of the estimate on the financial statements. Consistent with the accounting policy on asset impairment, and in accordance with U.S. GAAP, the held for sale assets are evaluated for impairment by comparing the carrying value to fair value less estimated selling costs. The estimated selling costs are based on the Company’s experience with similar asset sales. The Company records an impairment charge and writes down a held for sale hotel asset’s carrying value if the carrying value exceeds the estimated selling price less estimated selling costs.

In December 2007, the FASB issued guidance that significantly changes the accounting for business combinations. Under this guidance, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Additionally, the new guidance includes a substantial number of new disclosure requirements. The new guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the guidance on January 1, 2009. The adoption did not have a material impact on the results of operations and financial condition. As discussed in

Note 9, the Company has $64.1 million of deferred tax assets fully offset by a valuation allowance. The balance of the $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the effective date for the business combination guidance, such reduction will affect the income tax provision in the period of release.

In December 2007, the FASB issued guidance establishing new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. The new guidance clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The guidance also included expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company adopted the provisions of the noncontrolling interest guidance on January 1, 2009. As a result of the adoption, the Company recorded noncontrolling interest as a component of equity in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Stockholders’ Equity, and the net loss attributable to noncontrolling interests has been separately recorded in the Condensed Consolidated Statement of Operations.

The following table illustrates the effect on net income and earnings per share for the three and nine months ended September 30, 2008 as if the provisions of the noncontrolling interest guidance were applied:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2008
Loss from continuing operations		$	(2,259	)		$	(7,964	)
Less: Net loss attributable to noncontrolling interest			384				428
Loss from continuing operations attributable to common stock			(1,875	)			(7,536	)
(Loss) income from discontinued operations			(3,924	)			630
Net loss attributable to common stock		$	(5,799	)		$	(6,906	)
Denominator
Basic and diluted weighted average shares			21,412				21,944
Basic and diluted (loss) income per common share:
Loss from continuing operations attributable to common stock		$	(0.09	)		$	(0.34	)
(Loss) income from discontinued operations			(0.18	)			0.03
Net loss attributable to common stock		$	(0.27	)		$	(0.31	)

In March 2008, the FASB issued guidance requiring enhanced disclosures about an entity’s derivative and hedging activities. The guidance is effective for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the provisions of the guidance on January 1, 2009. The adoption did not have a material impact on the results of operations and financial condition.

In June 2008, the FASB issued guidance to address whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as specified by the FASB . The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company adopted the provisions of the guidance on January 1, 2009. The adoption did not have a material impact on its results of operations and financial condition.

In June 2008, the FASB issued guidance to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This guidance clarifies the FASB’s intent that the disclosures required by the guidance should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008. The guidance is effective for financial statements issued for fiscal years ending after November 15, 2008. The Company adopted the provisions of the guidance on January 1, 2009. The adoption did not have a material impact on its disclosures, results of operations and financial condition.

In April 2009, the FASB issued guidance about business combinations, which amends previously issued guidance, to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB guidelines. The guidance is effective for assets or liabilities arising from

contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the provisions of the guidance as of January 1, 2009. The adoption did not have a material impact on its results of operations and financial condition.

In April 2009, the FASB issued guidance which provides additional guidance for estimating fair value in accordance with previously issued fair value guidance, when the volume and level of activity for the asset or liability have significantly decreased. The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the guidance as of April 1, 2009. The adoption did not have a material impact on its results of operations and financial condition.

In April 2009, the FASB issued guidance which changes existing guidance for determining whether an impairment is other than temporary to debt securities. The guidance amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of the guidance as of April 1, 2009. The adoption did not have a material impact on its results of operations and financial condition.

In April 2009, the FASB issued guidance which amends previously issued guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The guidance also amends guidance related to interim financial reporting to require those disclosures in summarized financial information at interim reporting periods. The guidance is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the provisions of the guidance as of April 1, 2009. The adoption did not have a material impact on its results of operations and financial condition.

On May 28, 2009, the FASB issued guidance to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance requires the Company to disclose the date through which it evaluated subsequent events. The guidance is effective for interim or annual financial periods after June 15, 2009. The Company adopted the provisions of the guidance as of June 30, 2009. The adoption did not have a material impact on its results of operations and financial condition.

Recently Issued Pronouncements

In June 2009, the FASB issued guidance to require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The guidance is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The Company is in the process of evaluating the impact that the adoption of the guidance will have on its results of operations and financial condition.

In June 2009, the FASB issued guidance to change how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The guidance will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The guidance is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The Company is in the process of evaluating the impact that the adoption of the guidance will have on its results of operations and financial condition.

In August 2009, the FASB issued an accounting standards update to amend the guidance surrounding the fair value measurement of liabilities. The guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using the following alternative valuation techniques: a valuation technique that uses the quoted price of either the identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of U.S. GAAP guidance on fair value. Two examples would be an income approach or a market approach. The guidance is effective for the first reporting period beginning after issuance (the fourth quarter of 2009 for the Company). The Company is in the process of evaluating the impact that the adoption of the guidance will have on its results of operations and financial condition.

In October 2009, the FASB issued an accounting standards update to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is in the process of evaluating the impact that the adoption of the guidance will have on its results of operations and financial condition.

11. Subsequent Events

In accordance with SFAS No. 165, the Company has evaluated subsequent events through November 5, 2009, the date the financial statements were issued.

On October 21, 2009, the Company sold the Ramada Plaza Northfield, MI for a gross sales price of $3.0 million. In accordance with the terms of the agreement, the Company extended seller financing totaling $1.8 million to the purchaser. The net proceeds were used for general corporate purposes. Certain employees at the hotel were covered by one of two collective bargaining agreements, each of which required contributions to a multiemployer pension plan. The transaction was structured to comply with the asset purchase exemption under the Employee Retirement Income Security Act of 1974 (ERISA) and thereby avoid the occurrence of a withdrawal from either of the multiemployer pension plans. In the sale-purchase agreement, the purchaser agreed to continue to make contributions to each of the multiemployer pension plans. If the purchaser were to withdraw from one of the multiemployer pension plans during the five-year period that begins as of the pension plan’s first plan year following the date of sale, and the purchaser fails to pay the withdrawal liability assessed against it, the Company is secondarily liable for any withdrawal liability that the Company would otherwise have had to pay to such multiemployer pension plan but for the asset sale exemption. The Company has been advised that its potential withdrawal liability under the Unite Here National Retirement Fund is approximately $1,225,000. Its potential withdrawal liability under the Central Pension Fund of the International Union of Operating Engineers is not yet available. The purchaser has agreed to indemnify and hold the Company harmless for any secondary withdrawal liability as finally established and payable pursuant to ERISA to the extent the Company is required to pay any such withdrawal liability to either of the Pension Plans.

As of November 5, 2009, there were no additional subsequent events that required disclosure other than those that were disclosed in Notes 2 and 7.

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 this Form 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 our Form 10-K for the year ended December 31, 2008. The terms “Company”, “we”, “us” and “our” mean Lodgian and its wholly owned subsidiaries.

Executive Overview

We are one of the largest independent hotel owners and operators in the United States in terms of our number of guest rooms, according to Hotel Business. 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”, “Four Points by Sheraton”, “Hilton”, “Holiday Inn”, “Marriott” and “Wyndham”. Our hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale, upscale and upper upscale market segments of the lodging industry. We believe that these strong national brands afford us many benefits such as guest loyalty and market share premiums.

As of September 30, 2009, we operated 37 hotels with an aggregate of 6,934 rooms, located in 22 states. Of the 37 hotels, 35 hotels, with an aggregate of 6,644 rooms, were held for use, while 2 hotels with an aggregate of 290 rooms, were held for sale. We consolidated all of these hotels in our financial statements. All of our hotels were wholly-owned and operated through subsidiaries, except for one hotel that we operated in a joint venture in the form of a limited partnership, in which a Lodgian subsidiary served as the general partner, had a 51% voting interest and exercised significant control.

As of September 30, 2009, we operated all but one of our hotels under franchises obtained from nationally recognized hospitality franchisors. We operated 17 hotels under franchises obtained from InterContinental Hotels Group (“IHG”) as franchisor of the Crowne Plaza, Holiday Inn and Holiday Inn Express brands. We operated 12 hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, Springhill Suites by Marriott, and Residence Inn by Marriott brands. We operated an additional seven hotels under other nationally recognized brands.

The severe economic recession has continued to put downward pressure on revenue per available room, or RevPAR, and profit margins in the lodging industry. The decline in RevPAR, occupancy and average daily rate, is driven by oversupply in certain markets, a significant decrease in demand as companies and individuals reduce their travel costs, and increased competition as many luxury and upper-upscale hotels are substantially discounting rates to attract customers in downstream segments. Costs in the lodging industry are largely fixed, thus declining revenues result in margin erosion. To partially mitigate margin erosion and to better position the company for the future, we remain focused on preserving market share, lowering costs and strengthening our balance sheet.

Our RevPAR declined 18.3% in the third quarter of 2009 and 17.8% year-to-date compared to the prior year periods. This compares to RevPAR declines of 16.9% in the third quarter of 2009 and 18.1% year-to-date compared to the prior year periods for the U.S. Lodging industry as a whole according to Smith Travel Research. We recognize the need to protect market share in these difficult economic conditions, especially given the intensely competitive environment, and our sales and revenue management teams are focused on retaining our existing customers and attracting new business.

This year, we have significantly reduced our cost structure, and we anticipate that these initiatives will result in estimated annualized savings of $3.7 million and $1.5 million in hotel and corporate costs, respectively. We have reduced headcount, implemented a freeze on merit increases, reduced or eliminated certain employee benefits, reduced cash bonuses at the corporate level, restructured the bonus program at the hotel level, and eliminated discretionary spending in several areas. We will continue to look for opportunities to lower costs in the future.

To strengthen our balance sheet, we are conducting a portfolio analysis. In July 2009, we surrendered control of the Holiday Inn Phoenix, AZ to a court-appointed receiver. We believed that the hotel was worth substantially less than the $9.4 million of mortgage debt encumbering the hotel and that it was unlikely that the value of the hotel would increase in the near or intermediate term. The hotel was deconsolidated upon surrender of control and, as a result, the assets and liabilities, including the related loan balance were excluded from our balance sheet as of September 30, 2009. We have also determined that the cash flow generated by the hotels that secure two additional loans are not sufficient to fund their debt service requirements. One loan, Merrill Lynch Fixed Rate Pool 3, matured on October 1, 2009, following two short-term extensions. The extensions were intended to provide time for us to reach an agreement with the special servicer to modify the loan. Since we were unable to reach a modification agreement, we expect to surrender the six hotels that secure Pool 3 to the lender in full satisfaction of the debt. The second loan is secured by the Crowne Plaza in Worcester, MA and we ceased servicing the loan in September 2009. We do not expect further negotiation with the special servicer and intend to convey the hotel to the lender in full satisfaction of the debt. Both loans are non-recourse, except in certain

limited circumstances (which we believe are remote) and are not cross-collateralized with any other mortgage debt. Because we expect to surrender these seven hotels, we were required to perform a fair value assessment of the seven hotels during the third quarter of 2009 in accordance with U.S. GAAP. We concluded that the book value of the seven hotels exceeded fair value and recorded impairment charges totaling $32.3 million. Refer to “Liquidity and Capital Resources” for additional information.

Overview of Continuing Operations

Below is an overview of our results of operations for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008, which are presented in more detail in “Results of Operations — Continuing Operations”:

	•		Third quarter revenues decreased $10.8 million or 17.6%. Rooms revenues decreased $8.6 million, or 18.4%, as occupancy and average daily rate decreased 9.3% and 9.9%, respectively. Food and beverage revenues declined $2.1 million. Lower occupancy and fewer events held by our corporate customers contributed to the decrease.
	•		As previously discussed, we are conducting a portfolio analysis to strengthen our balance sheet. At this time, we expect to convey seven hotels that secure two loans to the respective lenders in full satisfaction of the debt because the cash flows generated by these hotels are not sufficient to fund the debt service requirements. Because we expect to surrender the hotels, we were required to perform a fair value assessment of the seven hotels during the third quarter of 2009. We concluded that the book value of the seven hotels exceeded fair value and recorded impairment charges totaling $32.3 million.
	•		Excluding impairment, operating income decreased $6.0 million to a loss of $2.3 million. We realized the benefits of several cost containment initiatives as total operating expenses excluding impairment decreased $4.8 million, or 8.4%. However, these initiatives did not fully offset the $10.8 million decline in revenues, since many of our operating costs are fixed in nature.

Overview of Discontinued Operations

The Condensed Consolidated Statements of Operations for discontinued operations for the nine months ended September 30, 2009 and 2008 include the results of operations for the two hotels classified as held for sale at September 30, 2009, as well as all properties that have been sold in accordance with U.S. GAAP.

The assets held for sale at September 30, 2009 and December 31, 2008 and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. 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, 2009 remain properly classified in accordance with U.S. GAAP.

As discussed in Notes 5 and 7, we surrendered control of the Holiday Inn Phoenix, AZ to a court-appointed receiver in July 2009. The hotel was deconsolidated upon surrender of control and, as a result, was excluded from the Company’s Condensed Consolidated Balance Sheet as of September 30, 2009. The results of operations up to the date of deconsolidation, including a $4.2 million gain on deconsolidation, were included in discontinued operations in the Company’s Condensed Consolidated Statements of Operations.

Our continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future, as well as those assets which do not currently meet the held for sale criteria as defined by U.S. GAAP. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.

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. During the three months ended September 30, 2009, we recorded impairment charges of $1.2 million on assets held for sale.

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 revenues and expenses during the reporting period. Actual results could differ from our estimates. These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, approximately $120 million of outstanding mortgage debt matured in July 2009 and the current severe economic recession has negatively impacted our operating results, which affects operating cash flows as well as our ability to refinance the maturing indebtedness. The $120 million of mortgage indebtedness, which

was originated in June 2004 by Merrill Lynch and securitized in the collateralized mortgage-backed securities market, was divided into three pools of indebtedness referred by the Company as the Merrill Lynch Fixed Rate Pools 1, 3 and 4 (“Pool 1”, “Pool 3” and “Pool 4”, respectively). We have reached agreements with the special servicers of Pools 1 and 4 to extend the maturity dates to July 1, 2010 and July 1, 2012, respectively, and we are seeking to refinance Pool 1 in anticipation of the 2010 maturity date. However, we can provide no assurance that we will be able to refinance Pool 1.

Pool 3, with a principal balance of $45.5 million as of September 30, 2009, matured on October 1, 2009, following two short-term extensions. The extensions were intended to provide time for us to reach an agreement with the special servicer to modify Pool 3. No agreement has been reached and Pool 3 is now in default. Since we were unable to reach an agreement, we expect to convey the six hotels which secure Pool 3 to the lender in full satisfaction of the debt. We believe that the anticipated cash flow from the hotels securing Pool 3 will not be sufficient to meet the related debt service obligations in the near-term.

In addition, we are in default on a loan secured by the Crowne Plaza Worcester, MA which had a balance of $16.3 million as of September 30, 2009. The cash flow from the hotel was not sufficient to service the debt on the property. As a result, we did not make the required debt service payment in September 2009 and October 2009. On October 23, 2009, the Company received notice from the lender that the mortgage had been accelerated, as anticipated. We do not expect further negotiation with the special servicer and intend to convey the hotel to the lender in full satisfaction of the debt.

Both the Pool 3 and the Crowne Plaza Worcester, MA loans are non-recourse, except in certain limited circumstances which we believe are remote and are not cross-collateralized with any other of our mortgage debt. Because of the anticipated cash flow shortfall, management does not believe that surrendering the hotels to the lenders will have an adverse effect on cash flows.

Conveying these hotels to the lenders, the severe economic recession and the tight credit markets could also have an adverse effect on our ability to extend or refinance Pool 1 on or prior to its maturity in July 2010. These factors raise substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities or any other adjustments that may be necessary if we are unable to continue as a going concern.

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, 2008 (“Form 10-K”). In addition, our critical accounting policies and estimates are discussed in Item 7 of our Form 10-K, and we believe no material changes have occurred, except as discussed below.

In December 2007, the FASB issued guidance establishing new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. The new guidance clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The guidance also included expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We adopted the provisions of the noncontrolling interest guidance on January 1, 2009. As a result of the adoption, we recorded noncontrolling interest as a component of equity in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Stockholders’ Equity, and the net loss attributable to noncontrolling interests has been separately recorded in our Condensed Consolidated Statement of Operations.

The following table illustrates the effect on net income and earnings per share for the three and nine months ended September 30, 2008 as if the provisions of the noncontrolling interest guidance were applied:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2008
		(unaudited in thousands, except per share data)
Loss from continuing operations		$	(2,259	)		$	(7,964	)
Less: Net loss attributable to noncontrolling interest			384				428
Loss from continuing operations attributable to common stock			(1,875	)			(7,536	)
(Loss) income from discontinued operations			(3,924	)			630
Net loss attributable to common stock		$	(5,799	)		$	(6,906	)
Denominator
Basic and diluted weighted average shares			21,412				21,944
Basic and diluted (loss) income per common share:
Loss from continuing operations attributable to common stock		$	(0.09	)		$	(0.34	)
(Loss) income from discontinued operations			(0.18	)			0.03
Net loss attributable to common stock		$	(0.27	)		$	(0.31	)