LGN Lodgian

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ   Preliminary Proxy Statement

o   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o   Definitive Proxy Statement

o   Definitive Additional Materials

o   Soliciting Material under § 240.14a-12

 

LODGIAN, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

The maximum aggregate value of the transaction was determined based on multiplying 21,661,264 shares of Lodgian, Inc. common stock by $2.50 per share. The filing fee was determined by multiplying $0.00007130 by the maximum aggregate value of the transaction as determined in accordance with the preceding sentence.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRELIMINARY PROXY STATEMENT, SUBJECT TO COMPLETION

 

 

LODGIAN, INC.

3445 Peachtree Road, N.E., Suite 700

Atlanta, GA 30326

 

[ • ], 2010

 

To Our Stockholders:

 

On behalf of the board of directors and management of Lodgian, Inc. ( “Lodgian” ), I cordially invite you to attend a special meeting of the stockholders of Lodgian, to be held on [ • ], [ • ], 2010, at [ • ]a.m. local time, at the offices of King & Spalding LLP, 1180 Peachtree Street, N.E., Atlanta, GA 30309.

 

At the special meeting, we will ask you to consider and vote on a proposal to adopt the Agreement and Plan of Merger, dated as of January 22, 2010, which we refer to in this proxy statement as the “merger agreement” , by and among Lodgian, LSREF Lodging Investments, LLC ( “LSREF Investments” ), and LSREF Lodging Merger Co., Inc. ( “Merger Sub” ), and to approve the merger of Merger Sub with and into Lodgian, which we refer to in this proxy statement as the “merger” , and the other transactions contemplated by the merger agreement. If the merger is completed, Lodgian will be a wholly owned subsidiary of LSREF Investments, and you will receive $2.50 in cash, without interest and less any applicable withholding taxes, for each share of our common stock that you own, subject to decrease only if we have more than 21,675,040 shares of common stock issued and outstanding at the time of the merger, and you will cease to have ownership interest in the continuing business of Lodgian. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement and you are encouraged to read it in its entirety.

 

After careful consideration, our board of directors has unanimously approved the merger, the merger agreement and the other transactions contemplated by the merger agreement and determined that the merger and the merger agreement are advisable and in the best interests of Lodgian and its stockholders. OUR BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT AND THE APPROVAL OF THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.

 

The proxy statement attached to this letter provides you with information about the merger and the special meeting. Please read the entire proxy statement carefully. You may also obtain additional information on us from documents we filed with the Securities and Exchange Commission, who we refer to in this proxy statement as the “SEC” .

 

Your Vote is Very Important.   The merger cannot be completed unless Lodgian’s stockholders holding a majority of the outstanding shares entitled to vote at the special meeting of stockholders vote to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement. If you do not vote, or fail to instruct your broker on how to vote, it will have the same effect as a vote against the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement.

 

Whether or not you plan to attend the special meeting in person, please complete, sign, date and return promptly the enclosed proxy card or submit your proxy or voting instructions by telephone or Internet. If you hold shares through a broker or other nominee, you should follow the procedures provided by your broker or

nominee. These actions will not limit your right to vote in person if you wish to attend the special meeting and vote in person.

 

If you have any questions or need assistance voting your shares, please call Innisfree M&A, Incorporated, our proxy solicitor, who is assisting us, toll-free at: (888) 750-5834 (banks and brokers may call collect at: (212) 750-5833).

 

On behalf of our board of directors, I thank you in advance for your cooperation and continued support.

 

Sincerely yours,

 

Daniel E. Ellis

President and Chief Executive Officer

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated          , 2010 and is first being mailed,

along with the attached proxy card, to our stockholders on or about          , 2010.

 

LODGIAN, INC.
3445 Peachtree Road, N.E., Suite 700

Atlanta, Georgia 30326

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON [ • ], [ • ], 2010

 

To Our Stockholders:

 

Notice is hereby given that a Special Meeting of Stockholders of Lodgian, Inc. (“Lodgian,” “we”, “us” or “our”) will be held at [ • ] a.m. local time, on [ • ], [ • ], 2010, at the offices of King & Spalding LLP, 1180 Peachtree Street, N.E., Atlanta, GA 30309, for the following purposes:

 

1. To consider and vote on a proposal, which we refer to in this proxy statement as the “merger proposal” , to adopt the Agreement and Plan of Merger, dated as of January 22, 2010, which we refer to in this proxy statement as the “merger agreement” , by and among Lodgian, LSREF Lodging Investments, LLC ( “LSREF Investments” ), and LSREF Lodging Merger Co., Inc. ( “Merger Sub” ), and to approve the merger of Merger Sub with and into Lodgian, which we refer to in this proxy statement as the “merger” , and the other transactions contemplated by the merger agreement. The merger agreement provides that, upon completion of the merger, each holder of shares of the Company’s common stock will be entitled to receive $2.50 in cash, without interest, in exchange for each share held (subject to decrease only if we have more than 21,675,040 shares of common stock issued and outstanding at the time of the merger).

 

2. To approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement.

 

3. To transact such other business as may properly come before the meeting or any adjournment thereof.

 

The board of directors has fixed the close of business on [ • ], [ • ], 2010 as the record date for the determination of stockholders entitled to notice of and to vote at, the special meeting and any adjournment or postponement of the special meeting. Holders of Lodgian’s common stock are entitled to appraisal rights under Delaware law in connection with the merger if they meet certain conditions. See “Appraisal Rights” on page [ • ].

 

Your vote is important, regardless of the number of shares of our common stock you own. The adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote as of the record date. The approval of the proposal to adjourn or postpone the meeting, if necessary or appropriate, to permit further solicitation of proxies requires the affirmative vote of a majority of the votes cast at the special meeting. Even if you plan to attend the meeting in person, we request that you promptly complete, sign, date and return the enclosed proxy or submit your proxy or voting instructions by telephone or Internet, and thus ensure that your shares will be represented at the meeting if you are unable to attend. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote “FOR” the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement, “FOR” the proposal to adjourn or postpone the meeting, if necessary or appropriate, to permit further solicitation of proxies, and in accordance with the recommendation of the board on any matters properly brought before the meeting for a vote.

 

If you fail to vote by proxy or in person, or fail to instruct your broker on how to vote, it will have the same effect as a vote “AGAINST” the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement, but will not affect the adjournment or postponement, if necessary or appropriate, to permit further solicitation of proxies. If you are a stockholder of record and wish to vote in person at the special meeting, you may withdraw your proxy and vote in person.

After careful consideration, our board has unanimously approved the merger, the merger agreement and the other transactions contemplated by the merger agreement and determined that the merger and the merger agreement are advisable and in the best interests of Lodgian and its stockholders. OUR BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.

 

Please carefully read the proxy statement and other materials concerning our company, the merger and the other proposals enclosed with this notice for a more complete statement regarding the matters to be acted upon at the special meeting.

 

PLEASE DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME

 

By order of the Board of Directors,

 

James A. MacLennan

Executive Vice President and Chief Financial Officer

 

[ • ],[ • ], 2010

Atlanta, Georgia

 

 

IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AND VOTED AT THE MEETING WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING. PLEASE VOTE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE OR SUBMIT YOUR PROXY OR VOTING INSTRUCTIONS BY TELEPHONE OR INTERNET IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PRE-PAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. IF YOU ATTEND THE MEETING, YOU MAY REVOKE THE PROXY AND VOTE YOUR SHARES IN PERSON.

 

TABLE OF CONTENTS

 

 

References in this proxy statement to “Lodgian,” “we,” “us,” “our,” “our Company” and the “Company” refer to Lodgian, Inc. and, unless the context otherwise requires or otherwise as expressly stated, our subsidiaries.

LODGIAN, INC.

3445 Peachtree Road, N.E., Suite 700

Atlanta, Georgia 30326

 

PROXY STATEMENT

 

For the Special Meeting of Stockholders

to be held [ • ], [ • ], 2010

 

This Proxy Statement is furnished by and on behalf of the board of directors of Lodgian in connection with the solicitation of proxies for use at a Special Meeting of Stockholders of Lodgian to be held at the offices of King & Spalding LLP, 1180 Peachtree Street, N.E., Atlanta, GA 30309, on [ • ], [ • ], 2010, beginning at [ • ] a.m. local time. Pursuant to the merger agreement, the parties have agreed to merge LSREF Lodging Merger Co., Inc. with and into Lodgian. If our stockholders approve the merger proposal and the other conditions to the merger are satisfied, each stockholder will receive $2.50 in cash, without interest, per share of our common stock owned at the time of the merger, subject to decrease only if we have more than 21,675,040 shares of common stock issued and outstanding at the time of the merger.

 

The merger cannot occur unless holders of a majority of our outstanding common stock entitled to vote approve the merger proposal. A failure to vote has the same effect as voting your shares against the merger proposal.

 

This document provides you with detailed information about the merger proposal. Please see “Where You Can Find More Information” on page [ • ] for additional information about Lodgian on file with the SEC.

 

The Proxy Statement and the proxy card are first being mailed on [ • ], [ • ], 2010 to our stockholders of record on [ • ], [ • ], 2010, the record date.

 

THE BOARD OF DIRECTORS URGES YOU TO VOTE YOUR SHARES “FOR” THE PROPOSALS SET OUT IN THIS PROXY STATEMENT BY ANY OF THE AVAILABLE METHODS — BY MAIL, BY TELEPHONE OR BY INTERNET. IF YOU VOTE BY MAIL, PLEASE COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD.

 

YOUR VOTE IS IMPORTANT

 

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To understand the merger fully, and for a more complete description of the legal terms of the merger, you should carefully read this entire proxy statement, the annexes attached to this proxy statement and the documents to which we refer. The Agreement and Plan of Merger, which we refer to in this proxy statement as the “merger agreement” , dated as of January 22, 2010, by and among Lodgian, LSREF Lodging Investments, LLC, and LSREF Lodging Merger Co., Inc., is attached as Annex A to this proxy statement. We have included page references in parentheses to direct you to the appropriate place in this proxy statement for a more complete description of the topics presented in this summary.

 

The Parties to the Merger Agreement (Page [ • ])

 

Lodgian

 

Lodgian 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 December 31, 2009, the Company operated 34 hotels with an aggregate of 6,401 rooms, located in 20 states. Of the 34 hotels, 33 hotels, with an aggregate of 6,272 rooms, were held for use, while one hotel with an aggregate of 129 rooms, was held for sale.

 

As of December 31, 2009, the Company operated 16 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, Residence Inn by Marriott and SpringHill Suites by Marriott brands. The Company operated an additional six hotels under other nationally recognized brands.

 

LSREF Investments

 

LSREF Lodging Investments, LLC, a Delaware limited liability company, which we refer to in this proxy statement as “LSREF Investments” , was formed by an affiliate of Lone Star Real Estate Fund (U.S.), L.P., a Delaware limited partnership which is one of the Lone Star Funds, and which we refer to in this proxy statement as “Lone Star Guarantor” , for the purpose of entering into the merger agreement with Lodgian and completing the merger. LSREF Investments has not conducted any activities to date, other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

 

Lone Star Funds is a global investment firm that acquires debt and equity assets including corporate, commercial real estate, single family residential and consumer debt products as well as banks and asset rich operating companies requiring rationalization. Since the establishment of its first fund in 1995, the principals of Lone Star Funds have organized private equity funds totaling approximately $24 billion of capital that has been invested globally through Lone Star Funds’ worldwide network of affiliate offices.

 

Merger Sub

 

LSREF Lodging Merger Co., Inc., a Delaware corporation, which we refer to in this proxy statement as “Merger Sub” , was formed by LSREF Investments for the purpose of entering into the merger agreement with Lodgian and completing the merger. Merger Sub has not conducted any activities to date, other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

The Merger (Page [ • ])

 

You are being asked to vote to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement. Upon the terms and subject to the conditions contained in the merger agreement, Merger Sub shall be merged with and into Lodgian. As a result of the merger, we will cease to be a publicly traded company and will become a wholly owned subsidiary of LSREF Investments.

 

Merger Consideration (Page [ • ])

 

If the merger is completed, each holder of shares of our common stock outstanding immediately prior to the merger (other than shares owned by us, LSREF Investments or Merger Sub and other than shares owned by stockholders properly demanding appraisal rights) will be entitled to receive $2.50 per share in cash, without interest and less applicable withholding taxes, subject to decrease only if we have more than 21,675,040 shares of common stock issued and outstanding at the time of the merger.

 

Effective Time of the Merger (Page [ • ])

 

The closing of the merger will occur on the second business day after the conditions to the merger set forth in the merger agreement have been satisfied or waived or at such other time agreed to by us and LSREF Investments. Although we expect to complete the merger shortly after the special meeting of our stockholders, we cannot specify when, or assure you that, we and LSREF Investments will satisfy or waive all the conditions to the merger.

 

Effect on Option Plans (Page [ • ])

 

Each outstanding option to purchase shares of our common stock, whether or not vested, will be cancelled and all such holder’s rights under such options or under any option plan of Lodgian shall terminate at the time of the merger.

 

Recommendation of Our Board of Directors (Page [ • ])

 

After careful consideration, our board of directors has unanimously approved the merger, the merger agreement and the other transactions contemplated by the merger agreement and determined that the merger and the merger agreement are advisable and in the best interests of Lodgian and its stockholders. Accordingly, our board of directors recommends that you vote “FOR” the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement and “FOR” the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement.

 

Opinion of Houlihan Lokey (Page [ • ] and Annex B)

 

On January 20, 2010, at a meeting of our board of directors held to evaluate the proposed merger, our financial advisor, Houlihan Lokey Howard & Zukin Financial Advisors, Inc. who we refer to in this proxy statement as “Houlihan Lokey” , delivered to the board an oral opinion, which was subsequently confirmed by delivery of a written opinion, dated January 20, 2010, to the effect that, as of the date of the opinion and based on and subject to the various qualifications, factors, assumptions and limitations described in its opinion, the per share merger consideration to be received by the holders of shares of our common stock in the proposed merger pursuant to the merger agreement was fair to such holders from a financial point of view.

 

Houlihan Lokey’s opinion was directed to the board of directors of Lodgian and only addressed the fairness, from a financial point of view, of the per share merger consideration to be received by the holders of shares of Lodgian’s common stock in the merger pursuant to the merger agreement, and did not address any other aspect or implication of the proposed merger. The summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex B to this proxy statement and sets forth the procedures followed,

assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. However, neither Houlihan Lokey’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect to any matter relating to the proposed merger.

 

Conditions to the Merger (Page [ • ])

 

We, LSREF Investments and Merger Sub will not be required to complete the merger unless a number of conditions are satisfied or waived, as applicable, including the approval and adoption by our stockholders of the merger agreement.

 

Termination of the Merger Agreement (Page [ • ])

 

Either we or LSREF Investments can terminate the merger agreement under certain circumstances, including if the other party breaches any of its representations, warranties, covenants or agreements in a manner that would result in the failure of closing conditions set forth in the merger agreement.

 

In addition to certain other circumstances, LSREF Investments may also terminate the merger agreement if our board of directors elects to withdraw or adversely modify its recommendation of the merger. We may also terminate the merger agreement, after complying with certain procedures, in order to enter into a definitive acquisition agreement with a third party that our board of directors has determined is a company superior offer. If the merger agreement is terminated as described in this paragraph, we will be required to pay LSREF Investments a $3.25 million termination fee.

 

Further, on January 22, 2010, Hospitality Mortgage Investments, LLC, an affiliate of LSREF Investments, who we refer to in this proxy statement as “Hospitality” , purchased the lender’s interest in Lodgian’s $130 million mortgage loan facility originally made in 2007 by Goldman Sachs Commercial Mortgage Capital II, L.P, which we refer to in this proxy statement as the “Mortgage Loan” . An amendment to the Mortgage Loan was also concurrently entered into by Hospitality and Lodgian’s subsidiary borrowing entities which own the hotels securing the Mortgage Loan. Pursuant to such amendment, amongst other things, if the merger agreement is validly terminated for any reason other than as a result of a breach by LSREF Investments of any of its representations, warranties, covenants or agreements contained in the merger agreement such that certain of the Company’s closing conditions in the merger agreement would not be met, Lodgian’s subsidiary borrowing entities on the Mortgage Loan will be required, in their sole discretion, to either pay down the principal balance of such loan by $5.0 million, or to cause the Holiday Inn Monroeville, Pennsylvania property to be pledged as additional security for the Mortgage Loan. If the Holiday Inn Monroeville, Pennsylvania property is pledged as additional security for the Mortgage Loan, it may be subsequently released from the Mortgage Loan upon payment of a cash release price of $5.0 million.

 

Acquisition Proposals (Page [ • ])

 

The merger agreement contains non-solicitation provisions that prohibit us from soliciting or engaging in discussions or negotiations regarding a competing proposal to the merger. There are exceptions to these prohibitions if we receive an unsolicited company superior offer from a third party under certain circumstances set forth in the merger agreement.

 

Reasons for the Merger (Page [ • ])

 

In making its recommendation that you vote “FOR” the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement, our board carefully considered a number of factors. Please refer to the more detailed information contained in “The Merger — Reasons for the Merger” on page [ • ].

Special Meeting; Quorum; Merger Vote (Page [ • ])

 

We will hold the special meeting at the offices of King & Spalding LLP, 1180 Peachtree Street, N.E., Atlanta, GA 30309, on [ • ], [ • ], 2010, beginning at [ • ] a.m. local time. The holders of a majority of the outstanding shares of our common stock, entitled to vote, must be present, either in person or by proxy, to constitute a quorum at the special meeting. The vote required to approve Proposal 1, the merger proposal, is the affirmative vote of the holders of a majority of the shares of our common stock issued and outstanding on the record date for the special meeting and the vote required to approve Proposal 2, approval of the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies, is the affirmative vote of a majority of the votes cast at the special meeting.

 

Certain Material United States Federal Income Tax Consequences of the Merger (Page [ • ])

 

For U.S. federal income tax purposes, the merger will be treated as a sale of the shares of our common stock for cash by each of our stockholders. As a result, in general, each stockholder will recognize gain or loss equal to the difference, if any, between the amount of cash received in the merger and such stockholder’s adjusted tax basis in the shares surrendered. Such gain or loss will be capital gain or loss if the shares of common stock surrendered are held as a capital asset in the hands of the stockholder, and will be long-term capital gain or loss if the shares of common stock have a holding period of more than one year at the time of the merger. Stockholders are urged to consult their own tax advisors as to the particular tax consequences to them as a result of the merger.

 

Interests of Our Directors and Executive Officers in the Merger (Page [ • ])

 

Members of our board of directors and certain of our executive officers have various interests in the merger that may be in addition to, or different from, the interests of our stockholders, including the following:

 

 

Our board of directors was aware of these interests and considered them, among other matters, in making its decisions.

 

Financing of the Merger (Page [ • ])

 

The merger agreement does not contain a financing condition or a “market MAC” condition and the merger is not conditioned upon any financing arrangements. LSREF Investments estimates that the total amount of funds required to complete the merger, and the payment of any related fees and expenses, will be approximately $ [          ] .

 

Guaranty (Page [ • ])

 

Lone Star Guarantor provided us with a direct guarantee of the full and prompt payment and performance of all of the obligations of LSREF Investments and Merger Sub arising under the merger agreement (including, without limitation, payment of the merger consideration and any damages payable by LSREF Investments and/or Merger Sub as a result of its and/or their breach of the merger agreement) as limited pursuant to the terms of the merger agreement. The guaranty is a guaranty of payment and performance and not of collection, and Lone Star Guarantor agreed that its obligations under the guaranty are primary, absolute and unconditional.

Regulatory Approvals (Page [ • ])

 

Except for the filing of a certificate of merger with the Secretary of State of the State of Delaware and the filing with the SEC of this proxy statement and any other filings and reports that may be required in connection with the merger agreement and the transactions contemplated by the merger agreement under the Exchange Act, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or the consummation of the merger.

 

Voting Agreements (Page [ • ])

 

Concurrently with the execution and delivery of the merger agreement, Key Colony Fund, L.P., who we refer to in this proxy statement as “Key Colony” , and OCM Real Estate Opportunities Fund II, L.P., and certain of its affiliates, who we refer to in this proxy statement as “Oaktree” , which hold in the aggregate 26.8% as of the date of the merger agreement of our total outstanding common shares, entered into voting agreements whereby Key Colony and Oaktree committed to vote their shares for the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement.

 

Appraisal Rights (Page [ • ])

 

If the merger is consummated, holders of shares of Lodgian’s common stock who do not vote in favor of the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement will have the right to seek appraisal of the fair value of their shares of Lodgian’s common stock as determined by the Delaware Court of Chancery, but only if they submit a written demand for appraisal to Lodgian before the vote is taken on the merger agreement and they comply with all other requirements of Delaware law, which are summarized in this proxy statement beginning on page [ • ]. This appraisal amount could be more than, the same as or less than the amount a stockholder would be entitled to received under the terms of the merger agreement. Any holder of shares of Lodgian’s common stock intending to exercise such holder’s appraisal rights, among other things, must submit a written demand for an appraisal to Lodgian prior to the vote on the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement and must not vote or otherwise submit a proxy in favor of the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement.

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the special meeting and the proposed merger. These questions and answers may not address all questions that may be important to you as our stockholder. Please refer to the more detailed information contained elsewhere in this proxy statement, the Annexes to this proxy statement and the documents referred to in this proxy statement.

 

 

 

This proxy statement, and the documents to which we refer to in this proxy statement, contain forward-looking statements about our plans, objectives, expectations and intentions. Forward-looking statements include information concerning possible or assumed future results of operations of our company, the expected completion and timing of the merger and other information relating to the merger. Generally these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “may,” “should,” “plan,” “intend,” “project” and similar expressions. You should read statements that contain these words carefully. They discuss our future expectations or state other forward-looking information, and may involve known and unknown risks over which we have no control. Those risks include, without limitation:

 

 

We believe that the assumptions on which our forward-looking statements are based are reasonable. However, we cannot assure you that the actual results or developments we anticipate will be realized or, if realized, that they will have the expected effects on our business or operations. All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Forward-looking statements speak only as of the date of this proxy statement or the date of any document incorporated by reference in this document. Except as required by applicable law or regulation, we do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

The proxy statement is furnished in connection with the solicitation of proxies in connection with a special meeting of our stockholders.

 

We will hold the special meeting at the offices of King & Spalding LLP, 1180 Peachtree Street, N.E., Atlanta, GA 30309, on [ • ], [ • ], 2010, beginning at [ • ] a.m. local time.

 

At the special meeting, we will ask you to (1) adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement and (2) approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement. In addition, you will be asked to transact any other business that is properly brought before the special meeting. We are not aware of any additional business that may come before the special meeting.

 

Our board of directors unanimously (1) approved and adopted the merger agreement and approved the merger and the transactions contemplated by the merger agreement and (2) determined that the merger is advisable and in the best interests of Lodgian and our stockholders. Accordingly, our board of directors unanimously recommends that you vote “FOR” the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement and “FOR” the proposal to adjourn or postpone the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement.

 

Only holders of record of our common stock at the close of business on [ • ], [ • ], 2010, the record date, are entitled to receive notice of and to vote at the special meeting. On the record date, [ • ] shares of our common stock, were issued and outstanding. Each holder of record of our common stock will be entitled to one vote per share at the special meeting on the merger proposal, the proposal to adjourn or postpone the special meeting, if necessary or appropriate, and any other business that may come before the special meeting.

 

The holders of a majority of the outstanding shares of our common stock entitled to vote must be present, either in person or by proxy, to constitute a quorum at the special meeting. We will count abstentions, either in person or by proxy, and broker non-votes (discussed below) for the purpose of establishing a quorum. If a quorum is not present at the special meeting, the holders of a majority of the common stock represented at the special meeting will be adjourned or postponed to solicit additional proxies.

 

If you hold shares beneficially in street name and do not provide your broker with voting instructions, your shares may constitute “broker non-votes.” Broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. A broker non-vote will be a vote against Proposal 1 because approval of Proposal 1 requires the affirmative vote of a majority of all outstanding shares of our common stock. A broker non-vote will not count as a vote cast on Proposal 2 and will not affect the outcome of the vote.

 

The adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement requires the affirmative vote of the shares representing a majority of

the outstanding shares entitled to vote on the merger agreement at the special meeting. If you abstain from voting, either in person or by proxy, or do not instruct your broker or other nominee how to vote your shares, it will effectively count as a vote “AGAINST” the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement. The affirmative vote of a majority of the votes cast is required for approval of the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement.

 

To vote your shares, you should follow the instructions as indicated on your proxy card if you vote over the Internet or by telephone, or you should mark, sign, date and return the enclosed proxy card in the enclosed envelope. Voting your proxy does not limit your right to vote in person should you decide to attend the special meeting. If your shares are held in the name of a bank, broker or other nominee, you will be provided voting instructions from the nominee and, in order to vote at the special meeting, you must obtain a legal proxy, executed in your name, from the nominee.

 

If you return your proxy card and it is completed, signed and dated, your shares will be voted at the special meeting in accordance with your instructions. If you return your proxy card and it is unsigned, then your vote cannot be counted. If you return your proxy card and it is signed and dated, but you do not fill out the voting instructions on the proxy card, the shares represented by your proxy will be voted “FOR” the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement, “FOR” the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement and in accordance with the recommendation of our board on any other matters properly brought before the special meeting for a vote.

 

Stockholders who hold their shares of our common stock in “street name,” meaning in the name of a bank, broker or other nominee who is the record holder, should follow the directions provided by their bank, broker or other nominee regarding how to instruct such entity to vote their shares.

 

We do not expect that any matter other than the ones discussed in this proxy will be brought before the special meeting. If, however, any other matters are properly presented, the persons named as proxies will vote in accordance with their judgment as to matters that they believe to be in the best interests of our stockholders.

 

DO NOT SEND YOUR STOCK CERTIFICATES WITH YOUR PROXY. A LETTER OF TRANSMITTAL WITH INSTRUCTIONS FOR THE SURRENDER OF YOUR STOCK CERTIFICATES WILL BE MAILED TO YOU AS SOON AS PRACTICABLE AFTER COMPLETION OF THE MERGER.

 

If you hold your shares in your name, you have the unconditional right to revoke your proxy at any time prior to its exercise by employing any of the following three methods:

 

 

Any written notice of revocation should be delivered to our Corporate Secretary at or before the taking of the vote at the special meeting. Revocation of your proxy, without any further action, will mean your shares will not be voted at the special meeting or counted towards satisfying the quorum requirements. Your attendance at the special meeting will not revoke your proxy unless you specifically request to vote at the special meeting.

 

If you have instructed your broker to vote your shares, you must follow directions received from your broker to change your vote. You cannot vote shares held in “street name” by returning a proxy card directly to us or by voting in person at the special meeting, unless you obtain a legal proxy from your bank or broker.

 

The board of directors of Lodgian is soliciting your proxy. In addition to the solicitation of proxies by use of the mail, officers and other employees of Lodgian may solicit the return of proxies by personal interview, telephone, e-mail or facsimile. We will not pay additional compensation to our officers and employees for their solicitation efforts, but we will reimburse them for any out-of-pocket expenses they incur in their solicitation efforts. We will request that brokerage houses and other custodians, nominees and fiduciaries forward solicitation material to the beneficial owners of stock registered in their names. We will bear all costs of preparing, assembling, printing and mailing the notice of special meeting of stockholders, this proxy statement, the enclosed proxy and any additional materials, as well as the cost of forwarding solicitation materials to the beneficial owners of stock and all other costs of solicitation.

 

We have retained Innisfree to solicit proxies in connection with the special meeting at a cost of approximately $25,000, of which $12,500 is payable upon the execution of the proxy solicitation agreement, and the remaining $12,500 is payable on the date of the special meeting plus reimbursement of out-of-pocket fees and expenses.

 

Stockholders who have questions regarding the materials, need assistance voting their shares or require additional copies of the proxy statement or proxy card, should contact or call (toll-free):

 

Innisfree M&A, Incorporated

501 Madison Avenue, 20 ^th Floor

New York, NY 10022

Stockholders May Call Toll-Free: (888) 750-5834

Banks and Brokers May Call Collect: (212) 750-5833

 

We are not currently aware of any business to be acted upon at the special meeting other than the matters discussed in this proxy statement. Under the DGCL, business transacted at the special meeting is limited to matters specifically designated in the notice of special meeting, we intend that shares of our common stock represented by properly submitted proxies will be voted by the persons named as proxies on the proxy card in accordance with the recommendation of our board of directors.

 

In addition, the grant of a proxy will confer discretionary authority on the persons named as proxies on the proxy card to vote in accordance with their best judgment on procedural matters incident to the conduct of the special meeting. If the persons named as proxies on the proxy card are asked to vote for one or more adjournments or postponements of the meeting for matters incidental to the conduct of the meeting, such persons will have the authority to vote in their discretion on such matters. However, if the persons named as proxies on the proxy card are asked to vote for one or more adjournments or postponements of the meeting to permit further solicitation of proxies if there are not sufficient votes at the time of the meeting to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement, they will only have the authority to vote on such matter as instructed by you or your proxy or, if no instructions are provided, in favor of such adjournment or postponement. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow our stockholders who have already granted their proxies to revoke them at any time prior to their use.

 

Lodgian

 

Lodgian 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 December 31, 2009, the Company operated 34 hotels with an aggregate of 6,401 rooms, located in 20 states. Of the 34 hotels, 33 hotels, with an aggregate of 6,272 rooms, were held for use, while one hotel with an aggregate of 129 rooms, was held for sale.

 

As of December 31, 2009, the Company operated 16 hotels under franchises obtained from 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, Residence Inn by Marriott and SpringHill Suites by Marriott brands. The Company operated an additional six hotels under other nationally recognized brands.

 

LSREF Investments

 

LSREF Investments was formed by an affiliate of Lone Star Guarantor for the purpose of entering into the merger agreement with Lodgian and completing the merger. LSREF Investments has not conducted any activities to date, other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

 

Lone Star Funds is a global investment firm that acquires debt and equity assets including corporate, commercial real estate, single family residential and consumer debt products as well as banks and asset rich operating companies requiring rationalization. Since the establishment of its first fund in 1995, the principals of Lone Star Funds have organized private equity funds totaling approximately $24 billion of capital that has been invested globally through Lone Star Funds’ worldwide network of affiliate offices.

 

Merger Sub

 

Merger Sub was formed by LSREF Investments for the purpose of entering into the merger agreement with Lodgian and completing the merger. Merger Sub has not conducted any activities to date, other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

 

Introduction

 

Our board, with the assistance of our management and advisors, has considered a wide variety of strategic alternatives to enhance stockholder value over the past several years, including:

 

 

Since November 1, 2006, our financial advisors and/or our management have had contact with over 140 third parties to determine their interest in potentially entering into a strategic transaction with us. Over 40 parties entered into confidentiality agreements with us and received non-public information regarding our business. Seventeen parties submitted non-binding indications of interest. We subsequently engaged in negotiations with 11 parties regarding a potential strategic transaction, only to have each of these negotiations fail, except for our negotiations with LSREF Investments and its affiliate Lone Star U.S. Acquisitions, LLC, which we refer to in this proxy statement as “Lone Star Acquisitions” . In addition, during this time period, we sold 35 hotels for aggregate gross sales proceeds of $139.1 million, and gave back two hotels to their respective lenders. We are also in the process of surrendering six additional hotels to the lender.

 

2006

 

On November 2, 2006, we issued a press release announcing a major strategic initiative to reconfigure our hotel portfolio. As a result of a detailed review undertaken by our board and management, we redefined our core portfolio to be comprised of 43 hotels. We also announced our intention to sell 27 hotels, including 14 hotels that were currently held for sale at the time.

 

In December 2006, we engaged Goldman, Sachs & Co., who we refer to in this proxy statement as “GS&Co”, and Genesis Capital, L.L.C., who we refer to in this proxy statement as “Genesis Capital”, as our financial advisors. At that time, we also asked our outside counsel, Morris, Manning & Martin, LLP, who we refer to in this proxy statement as “Morris Manning”, to advise us on legal issues in connection with the discussions regarding our strategic alternatives.

 

2007

 

In January 2007, we issued a press release announcing that we had initiated a review of strategic alternatives to enhance stockholder value as well as the engagement of GS&Co and Genesis Capital to assist us in the review.

 

Following the issuance of our January 2007 press release and in accordance with our board’s directives, our financial advisors had discussions with third parties in February 2007 to gauge their interest in potentially entering into a strategic transaction with us. Over 140 parties, comprised of strategic companies, financial entities and real estate investment trusts were either contacted or had contact with us or our financial advisors.

Of those parties, over 40 ultimately executed confidentiality agreements with us and the remainder indicated that they were not interested in pursuing a transaction with us or failed to respond to the inquiry of our financial advisors. Lone Star Acquisitions was one of the parties contacted during this process but they did not pursue or show interest in a potential transaction with us at that time.

 

Each of the parties who executed a confidentiality agreement with us received a confidential information memorandum and a bid process letter. In response to our bid process letter, we received initial indications of interest from nine parties. At a meeting of our board on April 9, 2007, the board discussed the strengths and weaknesses of the proposals that we had received from the potential bidders. Of these nine parties, six were invited to move forward in the process, with the next step being a meeting with our management, property tours and access to an online data room containing non-public information about the Company. At this time, one of the six parties elected not to move forward in the process and we decided to dismiss another party from the process after they failed to produce evidence that they had sufficient access to the capital required to consummate a transaction.

 

During the second quarter of 2007, the four remaining parties participated in management meetings with our executive team and property tours of key properties. Following these tours, one of the four parties indicated that it was no longer interested in exploring a strategic transaction with us.

 

In late April 2007, second round bid process letters were distributed to the three remaining parties, which we refer to in this proxy statement as “Company A”, “Company B”, and “Company C” . The bid process letters stated that a draft merger agreement would be posted to an online data room and requested the three bidders submit second round indications of interest and comments regarding the merger agreement by no later than mid-May, 2007. During this time, all three parties continued to conduct due diligence.

 

In May 2007, we received second round indications of interest and comments regarding the merger agreement from all three parties. The revised bid from Company A contained a small upward adjustment to the per share purchase price originally proposed by Company A. The revised bid from Company C was at the lower end of the per share range that had been originally proposed by Company C. Company B sent a letter expressing concerns regarding certain tax issues related to structuring the transaction and complications associated with their bid, as well as concerns regarding year-to-date operating performance and the potential capital expenditures that would be required on our properties. Following receipt of the second round indications of interest, we continued to negotiate with each of the three potential parties regarding various issues contained in their indications of interest.

 

In June 2007, third round bid process letters were distributed to the three remaining parties. The letters asked the bidders to submit a “best and final” offer and any additional comments to the draft merger agreement.

 

At board meetings on June 8, 2007 and June 20, 2007, our board, with the assistance of our management and financial advisors, engaged in extensive discussions regarding the merits of each revised bid, including an examination of pricing, timing, transaction certainty and other proposed terms from each bidder. Following these discussions, our board determined not to pursue a transaction with Company A or Company B at that time. Company A’s offer contemplated a corporate restructuring that would be costly and uncertain with regard to time and process and was subject to a closing contingency to obtain franchisor consents. Company B’s bid was the lowest of the three bidders and required payment of the highest termination fee and reimbursement of transaction-related expenses. Given the terms of Company C’s bid and other relevant considerations, our board authorized management to enter into exclusive negotiations with Company C.

 

Consistent with our previously announced process to sell non-core assets of the Company, we issued a press release on June 14, 2007 announcing that we had completed the sale of sixteen hotels to Kronos Hotels & Resorts for an aggregate sales price of $64.9 million.

 

During the second half of 2007, conditions in the credit markets continued to deteriorate with increasing velocity and economic conditions became increasingly challenging. Despite the volatility in the markets, our board, together with members of our management and representatives of Morris Manning, Genesis Capital and GS&Co, continued to explore potential strategic alternatives for the Company.

During the third quarter of 2007, we continued to receive ongoing inquiries from Company B as well as another of the first round bidders; however, these inquiries were at substantially lower valuation ranges than originally proposed.

 

On August 24, 2007, we issued a press release to update investors regarding our previously announced review of strategic alternatives to enhance stockholder value. We announced that we had entered into confidentiality agreements with certain interested parties, made substantial amounts of detailed information available to these parties, engaged in management presentations with selected parties, solicited and received several indications of interest, and in several cases engaged in substantive discussions with regard to the sale of the Company. We further stated that, although we had received indications of interest to purchase the Company, we had not received any proposals that our board judged appropriate to present to our stockholders. At that time, we also announced that our board had authorized plans to implement a cost-reduction initiative and had authorized repurchases of up to $30 million of our common stock over a period of time ending no later than August 22, 2009.

 

In September 2007, negotiations regarding a potential strategic transaction with Company C were terminated. Several factors contributed to the termination of negotiations, including an inability to reach an agreement upon price, the turmoil in the credit markets that prevented Company C from obtaining the debt financing it required to finance a transaction, and the inability to reach a definitive agreement on material issues in the merger agreement, particularly with respect to the conditions to close the transaction.

 

In the Fall of 2007, we received an unsolicited, non-binding indication of interest from a company, who we refer to in this proxy statement as “Company D”, in which Company D expressed an interest in acquiring a substantial number of our hotels. We also received two more non-binding indications of interest from companies, who we refer to in this proxy statement as “Company E” and “Company F”, in which they expressed an interest in acquiring the Company. All three indications of interest were subject to further diligence. At the time, our board determined that it was in the best interest of our stockholders to pursue a sale of our entire company rather than the sale of a portfolio of a substantial number of our assets. Also, our board decided not to pursue a transaction with Company F due to Company F’s inability to obtain financing and likely inability to close a transaction. Therefore, we began negotiations with Company E, including providing access to the online data room, management meetings, and site visits of our properties.

 

At a meeting on November 14, 2007, the executive committee of our board discussed a status letter received from Company E, which detailed certain issues raised by Company E and Company E’s agreement to eliminate a condition to the closing of the transaction related to financing. Our executive committee also discussed Company E’s proposed equity structure, and proposed expense reimbursement provision if Company E determined during the due diligence period that there would be tax liability triggered by a transaction. The executive committee instructed Genesis Capital and GS&Co to continue negotiations with Company E in an attempt to remove as many contingencies from their offer as possible and to shorten the due diligence period.

 

On December 2, 2007, we received a revised draft indication of interest from Company E. At a board meeting on December 4, 2007, our board discussed the progress of discussions with Company E, including attempts to finalize an indication of interest. The board noted that numerous drafts of the letter of intent had been circulated back and forth between the parties; however, certain provisions remained unacceptable, including Company E’s demand for an extended due diligence period, expense reimbursement if Company E determined during the due diligence period that there would be tax liability triggered by a transaction, and Company E’s lack of equity capital. Following this discussion, the board determined that we should not enter into a letter of intent with Company E as it was currently drafted and directed GS&Co and Genesis Capital to continue negotiations to remove contingencies from closing and shorten the due diligence period. Ultimately, the proposed transaction with Company E did not move forward as a result of issues discussed by our board in the December 4th meeting.

 

On December 27, 2007, we issued a press release to update investors regarding our previously announced review of strategic alternatives to enhance stockholder value. We announced that in light of the volatility in the credit markets, we had suspended discussions with interested parties regarding a strategic transaction. Also, we

announced that we would continue with our share repurchase program and our plan to sell certain assets, having already sold 24 hotels since November 1, 2006 for aggregate gross proceeds of approximately $92 million. Finally, in addition to the board meetings detailed above, our board discussed various strategic alternatives at 12 other board meetings in 2007.

 

2008

 

During 2008, our board continued to review our strategic alternatives, including a potential sale of all or a portion of our assets. In 2008, three parties, which we refer to as “Company G”, “Company H” and “Company I”, made unsolicited offers to pursue a potential transaction with us. Each of these parties executed confidentiality agreements, received due diligence materials, and attended meetings with management. All three of these parties eventually indicated that they were not interested in entering into a strategic transaction with us at that time. One or more of the following issues were cited by these parties that prevented them from moving forward with a transaction with us: (1) a belief that we were over-leveraged, (2) the risk of refinancing or restructuring our existing indebtedness, (3) a lack of available acquisition financing, (4) the product improvement plan expenses and capital expenditures that would be required on our properties, including capital upgrades, (5) franchise renewal risks, and (6) our deteriorating operating and financial performance.

 

In the first quarter of 2008, we engaged King & Spalding LLP, who we refer to in this proxy statement as “King & Spalding”, as outside corporate counsel.

 

As the conditions in the financial markets worsened in the fall of 2008, the turmoil in the economy continued to have a profound impact on our industry in general and on us in particular as corporate and leisure travelers significantly reduced their travel budgets. We also faced a looming problem with approximately $128 million of our mortgage debt scheduled to mature in July 2009. During this period, our stock price declined from $9.67 on September 19, 2008 to $1.25 on December 5, 2008.

 

In late 2008, we engaged Jones Lang LaSalle to assist us with the refinancing of our debt held by Merrill Lynch Fixed Mortgage Lending, Inc., who we refer to in this proxy statement as “Merrill Lynch” . The engagement of Jones Lang LaSalle was in direct response to the impending maturity on July 1, 2009 of approximately $128 million of our debt held by Merrill Lynch. The Merrill Lynch debt is comprised of three individual pools. Merrill Lynch Fixed Pool 1, which we refer to in this proxy statement as “ML Pool 1” , is secured by four hotels and had a principal balance of $34.5 million as of December 31, 2009. Merrill Lynch Fixed Pool 3, which we refer to in this proxy statement as “ML Pool 3” , is secured by six hotels and had a principal balance of $45.5 million as of December 31, 2009. Merrill Lynch Fixed Pool 4, which we refer to in this proxy statement as “ML Pool 4” , is secured by six hotels and had a principal balance of $34.6 million as of December 31, 2009. We also asked Jones Lang LaSalle to explore the possibility of obtaining financing on or sale of unencumbered properties in Monroeville, Pennsylvania and Melbourne, Florida. In total, Jones Lang LaSalle contacted over 300 parties to seek refinancing and/or financing of these 18 properties.

 

At a board meeting on December 9, 2008, representatives from King & Spalding discussed their recommendations concerning the appropriate steps that could be taken regarding renegotiation of our debt held by Merrill Lynch that was scheduled to mature on July 1, 2009.

 

Throughout 2008, our board, with the help of our management, Genesis Capital and GS&Co, continued to explore a wide range of strategic alternatives, including the evaluation and marketing of individual assets for sale. In furtherance of our plan to sell non-core assets, we sold five hotels in 2008 for aggregate gross sales proceeds of $25 million. Also, by the end of 2008, a total of six properties remained classified as held for sale and were in varying stages of the sale process. In addition to the board meetings detailed above, our board discussed strategic alternatives at meetings on January 29, 2008 and August 14, 2008.

 

2009

 

At a board meeting on February 4, 2009, our board discussed the status of each of the Company’s held-for-sale assets, our cash flow forecast and the possibility of outsourcing management of our hotels to a

third party. After the discussion, our board resolved to form a special committee comprised of certain directors for purposes of evaluating the potential outsourcing of management of our hotels. In addition, with the assistance of Genesis Capital and GS&Co, our board discussed a potential recapitalization of the Company and our impending debt maturities and capital expenditure requirements.

 

Into 2009, our management continued to work on refinancing our mortgage debt that was scheduled to mature in the near future. In the course of this work, our management identified matters which raised substantial doubt about our ability to continue as a going concern because approximately $128 million of our mortgage debt was scheduled to mature in July 2009. The mortgage debt could not be extended without the approval of the loan servicers, which extension had been requested by us, but not yet granted. On March 11, 2009, the audit report of Deloitte & Touche, LLP, our independent registered public accounting firm, contained in our Form 10-K filed with the SEC, addressed these matters identified by our management and qualified their audit report with a “going concern” qualification. To address the pending maturities, we announced that we were pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. In addition, during that time, the credit markets generally and the real estate credit markets specifically, continued to deteriorate and affect our ability to refinance our mortgage debt and acquire new mortgage debt. Thus, in early 2009, we engaged Jones Lang LaSalle to sell our two unencumbered properties in Monroeville, Pennsylvania and Melbourne, Florida in an attempt to raise cash in anticipation of these maturities.

 

At a board meeting on April 9, 2009, our board and management discussed a memorandum from King & Spalding regarding fiduciary duties of boards of financially troubled companies. After substantial discussion, our board directed management to hire an outside advisor that specialized in debt restructuring to further assist the Company with its July 1, 2009 debt maturities and plan for all possible contingencies, including for a Chapter 11 bankruptcy filing for one or more pools of assets securing the maturing debt and the Company as a whole. In addition, the board discussed the status of the investigation into the possibility of hiring a third party management firm to take over day-to-day operations of our hotels. The special committee reported that it had narrowed the list of potential management companies from six to three. Our board agreed that the special committee should continue to pursue the outsourcing issue, but that no decision should be reached until after resolution of the July 1, 2009 debt maturity issues.

 

On May 11, 2009, we received an unsolicited, non-binding indication of interest from a company, who we refer to in this proxy statement as “Company J” . Company J proposed a strategic transaction pursuant to which: (1) our stock would be valued at approximately $3.00 per share (which was approximately a 43% premium at the time), (2) Company J would contribute certain of its assets to the Company in exchange for shares in our Company, and (3) a third party investment fund would simultaneously make a $150 million equity investment in the Company in exchange for 50 million newly issued shares of our common stock at $3.00 per share. Other terms proposed by Company J included a required restructuring of the Mortgage Loan. Company J informed us that they had been independently negotiating for the purchase of this debt at a substantial discount to the principal amount prior to proposing the strategic transaction. The terms of the proposal were subject to further due diligence.

 

At a board meeting on May 13, 2009, our board and management, with the assistance of Genesis Capital, reviewed and discussed the terms of Company J’s proposal. After discussion, the board authorized management to continue discussions with Company J and to determine its source of financing as soon as possible.

 

On May 26, 2009, we entered into a confidentiality agreement with Company J and we continued to engage in negotiations with Company J while Company J conducted due diligence.

 

On June 3, 2009, we engaged Morgan Joseph & Co. Inc., who we refer to in this proxy statement as “Morgan Joseph”, to act as our financial advisor with respect to (1) negotiating with our special servicers regarding refinancing and/or extending our debt, (2) assisting with analysis of our debt maturities, and (3) reviewing the possibility of the Company or some of its subsidiaries entering into Chapter 11 bankruptcy.

 

At a board meeting on June 11, 2009 and an executive committee meeting on June 19, 2009, our management provided an update regarding extension negotiations with the special servicers for our

Merrill Lynch loans. In addition, our management discussed the recent work with representatives from Morgan Joseph to address the maturing Merrill Lynch loans so that they would be able to assist us with negotiations related to the loan maturities. At each of these meetings, our management, board and/or executive committee also discussed the status of negotiations with Company J.

 

Throughout the summer and fall of 2009, we engaged in discussions with Goldman Sachs’ Mortgage Company, who we refer to in this proxy statement as “ GSCMC ”, regarding a potential restructuring of the Mortgage Loan. Through the restructuring, we were seeking to obtain an extension of the maturity date, a waiver of certain release provisions, an extension of the completion date for renovation work required at the Albany, New York property, and the removal of the cash trap provision. Our continued compliance with the financial debt covenant in the Mortgage Loan depended upon the financial results of our hotels and, given the severe economic crisis, we recognized that there was a likelihood we would breach this covenant. The breach of this covenant, if not cured or waived by the lender, would lead to a 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) would be placed in a restricted cash account rather than be released to us. This cash trap would result in a current estimate of over $6 million annually being placed in a restricted cash account. These discussions resulted in various proposals from GSCMC, including principal paydown, increased interest rates, issuance of ownership warrants in our Company, and other terms which our board ultimately determined were unacceptable based on, among other concerns, the significant diminution of value to our stockholders.

 

In mid-June 2009, representatives from Lone Star Acquisitions met with a representative of Key Colony Fund, L.P., who we refer to in this proxy statement as “Key Colony”, who was also a director of the Company in Little Rock, Arkansas. In the meeting, Lone Star Acquisitions expressed its interest in pursuing a strategic transaction with us.

 

At a board meeting on June 25, 2009, our board discussed the status of negotiations with Company J. Management indicated that Company J had completed its tours of our properties and was beginning to spend more time and money in conducting its due diligence.

 

Throughout the first half of 2009, we continued to engage in discussions with the special servicers regarding the Merrill Lynch mortgage pools that were scheduled to mature on July 1, 2009. We received two successive six-month extensions on the maturity date for ML Pool 1. The first six-month period expired on January 1, 2010 and, upon the expiration, we exercised the second six-month extension. As a result, ML Pool 1 is now scheduled to mature on July 1, 2010. In exchange for the special servicer’s consent to the extensions, we paid extension fees to the special servicer and made principal reduction payments of $2 million at the time of the first extension and $1 million at the time of the second extension. We are also required to make approximately $1.5 million in increased amortization payments over the term of both extensions. After reaching agreement upon the extensions with the special servicer, we have continued our attempts to refinance ML Pool 1 in anticipation of the 2010 maturity date, but have been unsuccessful in our attempts so far.

 

ML 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 ML Pool 3, but an agreement was not reached and ML Pool 3 went into default. As a result of the default, the revenues generated by the six hotels which secure ML Pool 3 are deposited into a restricted cash account (a cash trap), that is controlled by the special servicer. Since a modification agreement has not been reached, we are in the process of surrendering the hotels securing ML Pool 3 to the lender.

 

With respect to ML Pool 4, the special servicer agreed to extend the maturity date to July 1, 2012. In connection with this agreement, we paid an extension fee and made a principal reduction payment. We also agreed to pay the lender an “exit fee” upon a full or partial repayment of ML Pool 4 and issued a full recourse guaranty of ML Pool 4 in connection with the amendment. As a result of our breach of certain financial debt covenants under ML Pool 4, the lender has declared a cash trap whereby excess cash flows produced by the mortgaged hotels (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) have been placed in a restricted cash account. The breach of this financial covenant remains uncured, and current projections do not show the loan coming into compliance with the covenant in the near term.

In July 2009, Company J indicated that it was no longer interested in entering into a strategic transaction with us at that time, citing (1) the product improvement plan expenses and capital expenditures that would be required with respect to our hotels, (2) our deteriorating financial and operating performance, (3) the inability to acquire the Mortgage Loan at a substantial discount or on terms acceptable to Company J, (4) high transaction costs and severance payments in connection with a change of control transaction, and (5) the lack of progress in extension negotiations for certain pools of our Merrill Lynch debt. Company J also indicated at that time that a transaction at even $2.00 per share would not provide acceptable returns to them as a buyer.

 

On July 15, 2009, our management met with representatives of Lone Star Acquisitions at our corporate offices in Atlanta, Georgia. In the meeting, Lone Star Acquisitions expressed its interest in pursuing a strategic transaction with us. Lone Star Acquisitions further indicated orally that it valued its proposal at $2.50 per share, subject to due diligence, and that the proposed transaction would not be subject to any financing contingency. Our management responded by indicating that they would discuss the proposal and the possibility of executing a confidentiality agreement with our board.

 

At a board meeting on July 22, 2009, our board met, together with members of our management, to discuss the status of the strategic alternatives process. Our board was updated as to the discussions that had taken place with Lone Star Acquisitions. Following this discussion, our board authorized the entry into a confidentiality agreement with Lone Star Acquisitions and instructed management, with the assistance of our financial advisors, to permit Lone Star Acquisitions to receive non-public information and continue its diligence efforts. Our board and management also discussed the status of ongoing negotiations with GSCMC related to the Company’s attempted restructuring of the Mortgage Loan. Our management informed our board that GSCMC believed they had an ability to declare a default under the Mortgage Loan relating to the delay in the completion of certain renovation work at our property in Albany, New York.

 

In July 2009, we surrendered control of the Holiday Inn Phoenix, Arizona to a court-appointed receiver. We had ceased making mortgage payments on the debt secured by the hotel and had begun discussions with the lender to surrender control of the hotel on a consensual basis in May 2009.

 

On July 31, 2009, we entered into a confidentiality and standstill agreement with Lone Star Acquisitions. Lone Star Acquisitions, in turn, sent a due diligence request list to our management and we began to send to Lone Star Acquisitions information responsive to their diligence request list.

 

Based on our cash flow projections, management determined that the Company faced a significant liquidity issue. Accordingly, from late July 2009 through September 2009, our management team worked to develop a comprehensive five-year strategic plan for our Company, which we refer to in this proxy statement as the “strategic plan” . The strategic plan set forth a restructuring of the Company so that we could continue to survive in the near and immediate term, as well as provide a foundation for potential growth going forward. The strategic plan was comprised of three phases: (1) we would surrender ten additional hotels to lenders and continue to reduce corporate and hotel operating expenses, (2) we would attempt to restructure the Mortgage Loan and refinance the ML Pool 1 loan with additional Mortgage Loan proceeds that would be paid to us in connection with the restructuring, and (3) we would refinance or sell selected assets. Even under the best case scenario for the Company, the strategic plan highlighted the serious liquidity issues that the Company would face in the near future and had significant execution risk.

 

In early August 2009, in light of the ongoing negotiations regarding the Company’s attempt to restructure the Mortgage Loan and the potential purchase of the Mortgage Loan by third-party acquirors, we discussed suspending the activities of GS&Co as our financial advisor with representatives from GS&Co. On August 12, 2009, representatives from GS&Co notified us that they would be suspending activities as our financial advisor until the Mortgage Loan was either sold or restructured.

 

On August 20, 2009, a member of our management had a conversation with a representative from Lone Star Acquisitions during which Lone Star Acquisitions updated us regarding the status of their review of the diligence materials. During this conversation, Lone Star Acquisitions indicated that its diligence had resulted in a proposed purchase price less than its initial indication of $2.50 per share. The lower valuation was driven by high expenses associated with a strategic transaction and a larger-than-anticipated capital expenditure

obligation with respect to our properties. Management indicated a view that at this time a price of less than $2.75 per share would not be acceptable to our board.

 

On September 5, 2009, an advisor of Lone Star Acquisitions contacted a member of our management and advised us that the proposed transaction with us had not received the approval of Lone Star Acquisitions. Lone Star Acquisitions indicated that their primary concern was related to our indebtedness. They also discussed the practical considerations associated with asking our lenders to restructure our debt or extend the maturity dates.

 

Throughout September 2009, we continued, however, to have conversations with representatives from Lone Star Acquisitions regarding the terms of a potential transaction. In addition, Lone Star Acquisitions continued to conduct due diligence on our Company.

 

On September 28, 2009, we received a non-binding written proposal from Lone Star Acquisitions, indicating that it was interested in acquiring us for $2.00 per share, subject to a $4 million termination fee, a restructuring of substantially all of our mortgage indebtedness and further due diligence.

 

At a board meeting on September 29, 2009, management presented the strategic plan to the board. After a lengthy discussion, our board authorized management to begin implementation of the strategic plan as presented, except for the proposed restructuring of the Mortgage Loan. The board expressed several concerns regarding the terms of the restructuring of the Mortgage Loan, including (1) a potential increase in the interest rate and fees associated with the extension of the loan beyond 2012, (2) the Company would be adding four assets as collateral that had significant equity value into a loan pool that was undersecured and (3) GSCMC’s desire to receive warrants in the Company. Our board then directed management to meet with GSCMC to attempt to deal with these concerns.

 

Later on that same day, our board met in executive session, during which time they discussed the proposal from Lone Star Acquisitions that had been received the previous day. At the meeting, our board indicated that it would not accept $2.00 per share, but gave our management authority to continue negotiations with Lone Star Acquisitions to enter into a strategic transaction at a higher per share price. Our management subsequently communicated our board’s message to representatives from Lone Star Acquisitions.

 

In September 2009, we also provided due diligence to Company E on seven properties identified by Company E for potential purchase in a single transaction. In mid-October 2009, Company E made an all-cash offer to acquire the seven properties. Our board, with the assistance of our management, analyzed the proposed transaction with Company E and concluded that the proposed purchase price was significantly less than our own internal valuations of these properties. Our management requested that Company E submit a revised offer to acquire six of the seven properties, as we felt that the transaction would be more valuable to us due to the debt balance associated with the excluded property. A revised offer was made, but this offer was also deemed insufficient upon a review by management and our board. We also provided due diligence and had discussions with Company E regarding a purchase of the entire Company rather than a select group of properties. However, these discussions stalled as Company E preferred to purchase a select group of assets.

 

On October 2, 2009, we issued a press release announcing that, in conjunction with our strategic plan to strengthen our balance sheet and better position the Company for the near- and intermediate-term, we had stopped servicing the debt secured by the Crowne Plaza in Worcester, Massachusetts. As a result, we announced that we intended to surrender control of the hotel to the lender. In addition, we announced that ML Pool 3 was in default and that we had engaged in negotiations with the lender regarding an extension and modification of the loan, with no resolution. Further, we indicated that unless an agreement was reached with the lender in the near-term, we intended to surrender control of the hotels to the lender.

 

In October 2009, we received an unsolicited non-binding indication of interest from Company D. Company D offered $1.80 to $2.40 per share, indicated that it was interested in conducting further due diligence to narrow the terms of its offer and that it would also need to secure financing. Company D’s indication of interest was predicated on several factors, including the assumption or purchase of the Mortgage

Loan at a substantial discount, and completion of due diligence particularly with respect to capital expenditures and product improvement plan expenses required with respect to our properties.

 

On October 5, 2009, we received a revised, non-binding proposal from Lone Star Acquisitions. The revised proposal was at $2.00 per share, and included a $4 million termination fee, a 30-day exclusivity period, expense reimbursement of up to $1 million and a required restructuring of substantially all of our mortgage debt.

 

The next day, October 6, 2009, our management and representatives from Lone Star Acquisitions discussed Lone Star Acquisitions’ revised proposal. Lone Star Acquisitions’ representatives advised management that the upper limit to their offer at that time was $2.25 per share, while noting the substantial premium over the recent trading price of our stock. Our management responded by stating their view that at that time $2.75 per share was likely the lower limit acceptable to our board.

 

At a board meeting on October 9, 2009, our management advised our board of the status of discussions with Lone Star Acquisitions. Our board was briefed on the material terms of the October 5, 2009 letter from Lone Star Acquisitions, including subsequent discussions with Lone Star Acquisitions regarding pricing. The board then discussed a potential strategy to allow Lone Star Acquisitions to increase its offer, and the board asked our management to continue discussions with Lone Star Acquisitions. Next, representatives from Genesis Capital reported on certain discussions with Company D concerning their interest in acquiring the Company. Finally, the board and management discussed potential revised terms of the Mortgage Loan in anticipation of an upcoming meeting with representatives from GSCMC.

 

On October 14, 2009, the executive committee of the board met and considered Lone Star Acquisitions’ offer of $2.00 per share. The executive committee authorized our management to offer to pursue a strategic transaction with Lone Star Acquisitions at $2.50 per share, which could be increased in certain circumstances. Ultimately, the purchase price was not increased.

 

Between October 14 and 27, 2009, we continued negotiations with Lone Star Acquisitions. During this time period, Lone Star Acquisitions proposed submitting a revised, non-binding indication of interest and entering into an exclusivity agreement with us.

 

On October 22, 2009, certain members of our board met with representatives from GSCMC to discuss a restructuring proposal of the Goldman Loan made by GSCMC as contemplated in the strategic plan presented to our board in September 2009. Our board requested that GSCMC reduce the interest cost and fees associated with the proposed extensions to the Loan. The representatives from GSCMC agreed to consider this request.

 

In response to our request on October 22, 2009, GSCMC proposed to us to extend and restructure the Mortgage Loan. GSCMC offered to extend the Mortgage Loan to May 2014 if we agreed to a principal paydown, we issued warrants to acquire our common stock, and paid an amendment fee. In exchange, we would have two one-year extension options that would require payment of an extension fee. Also, we would be required to begin making amortization payments on the loan during the extension periods equal to 50% of the net cash flow of the hotels securing the loan.

 

On October 26, 2009, Company D indicated that the range now being proposed for a potential transaction was $1.80 to $2.30 per share and this range of values could be achieved only by restructuring or purchasing the Mortgage Loan at a discount of between 20% and 40% of the principal amount (or a $26 million to $52 million discount). Company D reiterated the need to conduct additional due diligence and verify any product improvement plan expenses with respect to our properties. Further, Company D indicated that, while it preferred to engage an equity partner, it had sufficient funds to close a transaction at the lower end of the per share range, assuming that it could either purchase or assume the Mortgage Loan at the discounted value. To get to the upper part of the range, Company D indicated that it would need a third party equity partner in addition to a purchase or assumption of the Mortgage Loan at a discounted value. Together with Genesis

Capital, we continued to work with Company D to improve its offer up until the time we signed an exclusivity agreement with Lone Star Acquisitions on November 4, 2009.

 

At a board meeting on October 28, 2009, our board was updated as to the status of negotiations with Lone Star Acquisitions and Company D. Our board discussed drafts of the indication of interest and exclusivity agreement being negotiated with Lone Star Acquisitions. The material terms of the indication of interest were: (1) acquiring us at an acquisition price of $2.50 per share (subject to certain adjustments), (2) a $4 million termination fee would be paid to Lone Star Acquisitions if we terminated the acquisition agreement under certain circumstances, (3) the restructuring of substantially all of our mortgage debt, and (4) a requirement that Key Colony enter into a voting agreement agreeing to vote in favor of the proposed transaction. The board also reviewed and approved a thirty-day exclusivity agreement that would require us to pay up to $1 million of Lone Star Acquisitions’ out-of-pocket fees and expenses under certain circumstances. After extensive discussion, our board resolved to authorize management to enter into the proposed exclusivity agreement.

 

Between October 28, 2009 and November 4, 2009, the Company, Lone Star Acquisitions, King & Spalding and Hunton & Williams LLP, outside legal counsel to Lone Star Acquisitions and who we refer to in this proxy statement as “Hunton & Williams”, continued to negotiate the terms of the exclusivity agreement and indication of interest, including the size of the termination fee. During these negotiations, Lone Star Acquisitions insisted on coming to an understanding regarding the size of any termination fee in order for them to proceed with a potential transaction. On November 4, 2009, Lone Star Acquisitions delivered the indication of interest, and we and Lone Star Acquisitions executed the exclusivity agreement. The indication of interest provided for substantially similar terms to those terms discussed at the October 28, 2009 board meeting; however, the termination fee had been reduced to $3.25 million.

 

Upon delivery of the executed exclusivity agreement, we immediately ceased discussions with Company D. Also, on that same day, a member of our senior management, along with representatives of Lone Star Acquisitions and Genesis Capital met with representatives from GSCMC to discuss the Mortgage Loan.

 

On November 5, 2009, GSCMC informed our management of their belief that we had already triggered the cash trap provision in the Mortgage Loan. We indicated to GSCMC at that time that we disagreed with their conclusion.

 

On November 6, 2009, our management discussed GSCMC’s desire to wrap up a sale of the loan quickly with representatives from Lone Star Acquisitions. Our management and Lone Star Acquisitions began discussing a potential two-step transaction, whereby Lone Star Acquisitions would acquire the Mortgage Loan and subsequently acquire the Company, therefore satisfying GSCMC’s requirement that the Mortgage Loan sale be closed promptly.

 

Later on that same day, Lone Star Acquisitions informed our management that it would be willing to move forward with an expedited purchase of the Mortgage Loan, and would also agree to remove substantially all of the other debt restructuring requirements contained in the indication of interest letter. Lone Star Acquisitions also stated that they would work to negotiate a discounted price with GSCMC for the purchase of the Mortgage Loan.

 

Between November 7 and 11, 2009, in order to facilitate Lone Star Acquisitions’ purchase of the Mortgage Loan, we negotiated with Lone Star Acquisitions, with the assistance of our respective legal advisors, an agreement to waive the standstill provision contained in the confidentiality agreement prohibiting Lone Star Acquisitions from seeking to acquire any of our debt. Our management agreed to recommend a limited waiver to our board. The waiver would be conditioned on Lone Star Acquisitions agreeing to certain amendments to the Mortgage Loan upon its acquisition, including Lone Star Acquisitions agreeing to waive the cash trap provision in the Mortgage Loan for so long as the parties continued their negotiations concerning an acquisition of our Company. The waiver of the cash trap provision would provide a benefit to the Company of a current estimate of approximately $6 million on an annual basis. Additionally, Lone Star Acquisitions

agreed that if it acquired the Mortgage Loan, it would extend the date to May 1, 2010 for us to complete a renovation at the Crowne Plaza in Albany, New York.

 

At a meeting of the executive committee of our board on November 11, 2009, the committee approved the proposed amendments to the standstill provision in the confidentiality agreement. On November 11, 2009, the revision to the standstill provision was executed by us and Lone Star Acquisitions. Lone Star Acquisitions also delivered a revised indication of interest, which substantially reduced the restructuring of our mortgage debt required to complete the transaction.

 

On November 13, 2009, our management had a conversation with GSCMC regarding their negotiations with Lone Star Acquisitions for the sale of the Mortgage Loan. GSCMC informed us that they would prefer to continue discussing the restructuring of the Mortgage Loan with the Company in addition to discussing the sale of the loan to a third party at a deep discount. GSCMC again reiterated their belief that they could issue a default notice based on the missed renovation deadline for the Albany, New York property, and that the cash trap provision may have already been triggered. GSCMC further stated that it was comfortable owning the properties securing the Mortgage Loan if necessary.

 

During further discussions between our management and GSCMC on November 17, 2009, we stated our belief that the assets securing the Mortgage Loan were worth substantially less than the principal amount of the loan and that we were prepared to give the properties back. We advised GSCMC that Lone Star Acquisitions was still working on a two step transaction, and that we were also considering alternatives to a potential transaction with Lone Star Acquisitions, such as returning the hotels in satisfaction of the Mortgage Loan.

 

As previously announced, on November 19, 2009, we surrendered control of the Crowne Plaza hotel in Worcester, Massachusetts to a court-appointed receiver.

 

On November 24, 2009, a representative of Lone Star Acquisitions called to inform us that Lone Star Acquisitions had offered to acquire the Mortgage Loan from GSCMC at a discounted amount. At that time, Lone Star Acquisitions also proposed that in the event that Lone Star Acquisitions acquired just the Mortgage Loan and not the Company, that the parties agree to modify the Mortgage Loan such that any trapped cash would be used the reduce the principal balance of the loan. Our management rejected this proposal.

 

In late November 2009, our management and Genesis Capital continued to negotiate with Lone Star Acquisitions in an attempt to agree on an acceptable structure such that Lone Star Acquisitions would agree to acquire the Mortgage Loan and then complete an acquisition of the Company. During this period, we agreed to an arrangement with Lone Star Acquisitions where, in the event Lone Star Acquisitions acquired the Mortgage Loan, but did not complete an acquisition of our Company, Lone Star Acquisitions would agree to delete the cash trap provisions in the Mortgage Loan in exchange for an increase in the interest rate under the loan. Additionally, Lone Star Acquisitions agreed to remove substantially all of the debt restructurings required to continue with the acquisition.

 

During an executive committee meeting of our board on November 29, 2009, the committee reviewed a draft amendment to the confidentiality and standstill agreement with Lone Star Acquisitions. The material terms of the proposed amendment granted Lone Star Acquisitions the authority to acquire the Mortgage Loan. The proposed amendment also provided for certain amendments to the Mortgage Loan in the event that Lone Star Acquisitions failed to complete an acquisition of the Company, which included removing the concept of a cash trap, an increase in the interest rate and giving us additional time to complete renovation work in Albany, New York.

 

The next day, November 30, 2009, Lone Star Acquisitions delivered a revised indication of interest letter, providing for the removal of substantially all of the mortgage debt restructurings required to continue with the acquisition, and we and Lone Star Acquisitions executed the amendment to the confidentiality and standstill agreement.

 

On December 2, 2009, Lone Star Acquisitions entered into a non-binding CRE Loan Trade Confirmation with GSCMC related to the Mortgage Loan. Subsequent to December 2, 2009, Lone Star Acquisitions conducted extensive due diligence, including site visits, on the properties securing the Mortgage Loan.

On December 8, 2009, Hospitality, an affiliate of Lone Star Acquisitions, entered into an Assignment and Assumption Agreement with GSCMC to acquire the Mortgage Loan, with an agreement to close by December 31, 2009, subject to due diligence.

 

In the second week of December 2009, Lone Star Acquisitions advised a representative of our management that Lone Star Acquisitions’ underwriting of the assets that secured the Mortgage Loan only supported a purchase price that was lower than the price in the Assignment and Assumption Agreement. Because GSCMC refused to agree to a lower price for the Mortgage Loan, Lone Star Acquisitions proposed that either there be a downward adjustment to the per share merger consideration of $2.50 or that we add an unencumbered property to the collateral pool to bridge a $5 million valuation gap under the Mortgage Loan. After discussing the proposal with our board and our legal advisors, our management rejected this proposal and suggested that we structure the transaction so that the purchase by Hospitality of the Mortgage Loan and the execution of a definitive agreement to acquire our Company would occur simultaneously. Lone Star Acquisitions stated that this timing would be difficult as GSCMC required that Hospitality close on the acquisition of the Mortgage Loan by the end of 2009. Hospitality agreed to seek an extension from GSCMC so that a definitive agreement could be finalized.

 

On December 14, 2009, a representative of our management was informed by Lone Star Acquisitions that GSCMC had agreed to postpone the closing date of the purchase of the Mortgage Loan to January 22, 2010.

 

On December 15, 2009, our management discussed with Lone Star Acquisitions the potential terms upon which we would consider moving forward with a potential transaction with Lone Star Acquisitions. It was outlined that if Lone Star Acquisitions signed a definitive agreement to acquire our Company contemporaneously with Hospitality’s acquisition of the Mortgage Loan, then we would, at our option, either (1) pay the Mortgage Loan down by $5 million or (2) contribute the Holiday Inn Monroeville, Pennsylvania property as additional collateral to support the loan, with the only condition of release of this collateral being a principal reduction payment of $5 million. The parties continued to discuss the conditions under which we would be required to contribute the collateral or pay down the Mortgage Loan if the transaction to acquire our Company did not close. On December 18, 2009, we and Lone Star Acquisitions agreed to this proposal.

 

Between December 20 and 31, 2009, GS&Co reduced the investment banking fee due to it in connection with the proposed merger transaction as a result of GS&Co’s inability to render a fairness opinion in connection with the proposed transaction in light of GS&Co’s suspension of its investment banking services as described above. On January 14, 2010, we executed an amendment to the GS&Co investment banking engagement letter pursuant to which their investment banking fees in connection with the potential transaction were reduced. However, this reduction was substantially offset by fees paid to Houlihan Lokey.

 

On December 31, 2009, we received the first draft of the merger agreement from Hunton & Williams.

 

In furtherance of our plan to sell non-core assets, we sold five hotels in 2009 for aggregate gross sales proceeds of $21.9 million. We also surrendered control of two properties to their respective lenders.

 

2010

 

On January 4, 2010, representatives of King & Spalding discussed with our senior management certain key issues related to Lone Star Acquisitions’ draft merger agreement, including Lone Star Acquisitions’ right to avoid completing a transaction upon (1) Lone Star Acquisitions’ failure to close the purchase of the Mortgage Loan, (2) our failure to obtain certain third-party consents, (3) holders of more than 5% of our common stock demanding appraisal for their shares, (4) the failure to receive estoppel certificates, (5) Lone Star Acquisitions’ failure to receive certain modifications of our franchise agreements and (6) the occurrence of certain stock market trading suspensions, declines in the stock market, banking moratoriums or limitations on extensions of credit by banks or other lending institutions. In addition, King & Spalding discussed with management our right to terminate the merger agreement and pay a termination fee of $3.25 million plus expenses as liquidated damages upon such termination, the definition of a “material adverse effect”, specific performance, and certain other issues.

On January 5, 2010, King & Spalding distributed a revised draft of the merger agreement to Lone Star Acquisitions and Hunton & Williams.

 

On January 6, 2010, we engaged Houlihan Lokey as our financial advisor to render an opinion with respect to the fairness, from a financial point of view, of the per share merger consideration to be received by the holders of shares of common stock of the Company in the proposed merger pursuant to the merger agreement.

 

On January 7, 2010, Hunton & Williams distributed a memorandum to King & Spalding highlighting certain key issues with the King & Spalding draft of the merger agreement distributed on January 5, 2010. Specifically, the memorandum addressed Lone Star Acquisitions’ right to avoid completing a transaction upon the occurrence of certain events, payment of Lone Star Acquisitions’ expenses in addition to a termination fee, the restrictions on our ability to conduct our business between the signing of the merger agreement and the closing of the merger, the definition of “material adverse effect” and certain other issues. Later that day, representatives of King & Spalding discussed these key issues with Hunton & Williams.

 

Over the next week, our management and representatives from King & Spalding, Hunton & Williams and Lone Star Acquisitions continued to negotiate the terms of the merger agreement. Through those negotiations it was agreed that no expenses would be paid by the Company in those cases where a termination fee was payable by the Company and the definition of “material adverse effect” was modified to be more beneficial to the Company. Also, Lone Star Acquisitions made certain concessions that enhanced the certainty that a transaction with Lone Star Acquisitions would close. In particular, Lone Star Acquisitions agreed to relinquish its request for a right to terminate the merger agreement if (1) Lone Star Acquisitions failed to close upon the purchase of the Mortgage Loan, (2) we failed to obtain certain third-party consents, (3) Lone Star Acquisitions failed to receive estoppel certificates, (4) Lone Star Acquisitions failed to receive certain modifications of our franchise agreements, and (5) there were stock market trading suspensions, declines in the stock market, banking moratoriums or limitations on extensions of credit by banks or other lending institutions between signing and closing.

 

On January 13, 2010, our board met to discuss the status of the Lone Star Acquisitions transaction and potential alternatives to the transaction, including continuing to operate as a standalone, independent company. Among the alternatives discussed were (1) a surrender of the assets securing the Mortgage Loan, and (2) the delisting of our stock and substantially reducing corporate overhead. After extensive discussion regarding the risks and benefits of the potential transaction with Lone Star Acquisitions and the Company continuing to operate as a standalone, independent company, our board directed management to continue to pursue a potential transaction with Lone Star Acquisitions.

 

On January 13, 2010, Hunton & Williams distributed a revised draft of the merger agreement to King & Spalding, and on January 16, 2010, King & Spalding submitted a revised draft of the merger agreement to Hunton & Williams. Over the next few days that followed, King & Spalding and Hunton & Williams continued to negotiate certain key terms of the merger agreement. The parties agreed to modify the dissent condition so that Lone Star Acquisitions could terminate the merger agreement if holders of more than 25% of our common stock demanded appraisal rights. In addition, the parties agreed that if we had met all of our conditions to Lone Star Acquisitions’ obligation to close the transaction and Lone Star Acquisitions then failed to close the transaction, we would retain the ability to pursue a remedy of specific performance to force Lone Star Acquisitions to close the transaction. In certain circumstances we would be able to receive, in lieu of specific performance, money damages (capped at $20 million), which may include a claim for damages based on the merger consideration to be paid to our stockholders.

 

On January 20, 2010, our board met to review the status of the negotiations with Lone Star Acquisitions. King & Spalding discussed the board’s fiduciary duties and summarized the key terms of the proposed merger agreement, noting that the current draft resolved a number of significant issues previously discussed with the board and that, as a result of such resolution, there was more deal certainty than had been provided in earlier proposals. Genesis Capital discussed with our board a history of strategic alternatives pursued by the Company, key events that had occurred over that period, the Company’s relative stock performance during the period and other factors in the market. Also, at this meeting, Houlihan Lokey reviewed with our board its financial analysis

of the Company and the proposed merger and rendered to our board its oral opinion (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion dated the same date) with respect to the fairness from a financial point of view of the per share merger consideration to be received by the holders of shares of common stock of the Company in the proposed merger pursuant to the merger agreement. Our board also reviewed and considered the alternative of the Company continuing to operate as a stand-alone independent entity with only the ML Pool 3 assets being returned to the lender. Among other things our board noted that the As-Is Projections summarized on page [  •  ] of this proxy statement indicated that the Company would generate net losses through 2014 and negative net cash flows through 2013 and concluded that pursuing the proposed merger with LSREF Investments was in the best interests of our shareholders.

 

Following this discussion, our board unanimously determined to approve the merger agreement with LSREF Investments and Merger Sub and to recommend that our stockholders adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement. Over the next two days, the merger agreement and the related documents were finalized and executed. We and LSREF Investments and Merger Sub issued a press release announcing the execution of the merger agreement on January 22, 2010.

 

Concurrently with the execution of the merger agreement, Hospitality purchased GSCMC’s interest in the Mortgage Loan. An amendment to the loan was also concurrently entered into by Hospitality and our borrower subsidiaries that own the hotels securing the Mortgage Loan. The material terms of the loan amendment are: (1) effective upon the execution of the loan amendment, the cash lockbox provisions of the loan were amended to provide that excess cash flow from the mortgaged properties after debt service, reserves and operating expenses, would not be retained by the lender in an excess cash flow reserve account, but would instead be released to the borrowers on a monthly basis, even if the properties do not meet previously required financial ratio tests, (2) the deadline for our subsidiary which owns the Crowne Plaza Albany, New York, to complete renovation work on the hotel was extended to May 1, 2010, (3) the allocated loan amounts for each of the properties securing the Mortgage Loan were readjusted, (4) effective July 1, 2010, the margin over LIBOR used to determine the interest rate on the Mortgage Loan will be increased from 1.50% to 4.25%, and (5) if the merger agreement is validly terminated for any reason other than as a result of certain breaches by Lone Star Acquisitions’ affiliates, our subsidiary borrowing entities on the Goldman Loan will be required, in their sole discretion, to either pay down the principal balance of the Mortgage Loan by $5,000,000, or to cause the Holiday Inn Monroeville, Pennsylvania property to be pledged as additional security for the Mortgage Loan until it is released from the Mortgage Loan upon payment of principal reduction of $5,000,000.

 

In evaluating the merger agreement and the transactions contemplated thereby and recommending that our stockholders vote their shares of common stock in favor of the adoption of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement, our board of directors consulted with our senior management, legal counsel and financial advisors. Our board consulted with outside legal counsel regarding its fiduciary duties and the terms of the merger agreement and related agreements. Based on the foregoing and other factors, including the material factors discussed below, our board concluded that entering into the merger agreement with LSREF Investments and Merger Sub is in the best interests of our stockholders.

 

In the course of reaching its determination, our board of directors considered the following material factors, each of which it believes supported its decision:

 

 

 

 

 

 

 

Our board of directors also considered a variety of risks and other potentially negative factors relating to the merger in its deliberations, including:

 

 

 

The preceding discussion is not meant to be an exhaustive description of the information and factors considered by our board of directors but is believed to address the material information and factors considered. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, our board did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the various factors considered in reaching its determination. In considering the factors described above, individual members of the board may have given different weight to different factors.

 

During its consideration of the transaction with LSREF Investments described above, our board of directors was also aware that one of our directors and some of our executive officers may have interests in the merger that are different than or in addition to those of our stockholders generally, described under “The Merger — Interests of Directors and Executive Officers in the Merger” .

 

On [ • ], 2010, after evaluating a variety of business, financial and market factors and consulting with our legal and financial advisors, and after due discussion and due consideration, our board of directors unanimously determined that the merger with Merger Sub is advisable and in the best interest of Lodgian and our stockholders and unanimously approved, adopted and declared advisable the merger agreement and the transactions contemplated thereby, including the merger. ACCORDINGLY, OUR BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF LODGIAN VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT AND THE APPROVAL OF THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.

 

On January 20, 2010, Houlihan Lokey rendered its oral opinion to our board of directors (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion dated the same date) to the effect that, as of January 20, 2010, the per share merger consideration to be received by the holders of shares of Lodgian common stock in the proposed merger pursuant to the merger agreement was fair to such stockholders from a financial point of view.

 

Houlihan Lokey’s opinion was directed to our board of directors and only addressed the fairness, from a financial point of view, of the per share merger consideration to be received by the holders of shares of Lodgian common stock in the merger pursuant to the merger agreement, and did not address any other aspect or implication of the proposed merger. The summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex B to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. However, neither Houlihan Lokey’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect to any matter relating to the proposed merger.

In connection with its opinion, Houlihan Lokey made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Among other things, Houlihan Lokey:

 

1. reviewed a draft dated January 18, 2010, of the merger agreement;

 

2. reviewed certain publicly available business and financial information relating to the Company that Houlihan Lokey deemed to be relevant;

 

3. reviewed certain information relating to the historical, current and future operations, financial condition and prospects of the Company made available to Houlihan Lokey by the Company, including financial projections (and adjustments thereto) prepared by the management of the Company relating to the Company for the fiscal years ending 2009 through 2014;

 

4. spoke with certain members of the management of the Company and certain of its representatives and advisors regarding the business, properties, operations, financial condition and prospects of the Company, the proposed merger and related matters;

 

5. compared the financial and operating performance of the Company and certain of its properties with that of other companies with publicly traded securities that Houlihan Lokey deemed relevant;

 

6. reviewed the current and historical market prices and trading volume for the Company’s publicly traded securities, and the historical market prices and certain financial data of the publicly traded securities of certain other companies that Houlihan Lokey deemed to be relevant;

 

7. reviewed a liquidation analysis prepared by Company’s management as to the value, if any, that holders of common stock would be expected to receive with respect to the shares of common stock in an orderly liquidation of the Company, which we refer to in this proxy statement as the “Company Liquidation Analysis” ;

 

8. reviewed a certificate addressed to Houlihan Lokey from senior management of the Company which contains, among other things, representations regarding the accuracy of the information, data and other materials (financial or otherwise) provided to, or discussed with, Houlihan Lokey by or on behalf of the Company; and

 

9. conducted such other financial studies, analyses and inquiries and considered such other information and factors as Houlihan Lokey deemed appropriate.

 

Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to it, discussed with or reviewed by it, or publicly available, and did not assume any responsibility with respect to such data, material and other information. In addition, management of the Company advised Houlihan Lokey, and Houlihan Lokey assumed, that the projections reviewed by it had been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such management as to the future financial results and condition of the Company, and Houlihan Lokey expressed no opinion with respect to such projections or the assumptions on which they were based. Furthermore, management of the Company advised Houlihan Lokey, and Houlihan Lokey assumed, that the Company Liquidation Analysis reviewed by it had been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such management as to the value that holders of common stock would be expected to receive with respect to the shares of common stock in an orderly liquidation of the Company, and Houlihan Lokey expressed no opinion with respect to such estimates or the assumptions on which they were based. For purposes of its analyses and its opinion, management of Lodgian advised Houlihan Lokey and directed it to assume that, (i) Lodgian was experiencing issues that have adversely affected its business, assets, properties, condition (financial or otherwise), liabilities, results of operations and prospects; and (ii) Lodgian will convey 19 hotels securing three loans to the lenders whose loans are secured by those hotels, which we refer to in this proxy statement as the “Property Conveyance” . Houlihan Lokey also assumed, with Lodgian’s consent, that any adjustments to the per share merger consideration pursuant to the merger agreement or otherwise would not be material to its analyses or its opinion. Houlihan Lokey relied upon and assumed, without independent verification, that there had been no change in the business, assets, liabilities, financial condition, results of

operations, cash flows or prospects of the Company since the date of the most recent financial statements provided to Houlihan Lokey that would be material to its analyses or its opinion, and that there was no information or any facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading.

 

Houlihan Lokey relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the merger agreement were true and correct, (b) each party to the merger agreement would fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the proposed merger would be satisfied without waiver thereof, and (d) the proposed merger would be consummated in a timely manner in accordance with the terms described in the merger agreement, without any amendments or modifications thereto. Houlihan Lokey also relied upon and assumed, without independent verification, that (i) the proposed merger would be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for the consummation of the proposed merger would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or waivers made that would have an effect on the Company that would be material to Houlihan Lokey’s analyses or its opinion. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final form of the merger agreement would not differ from the draft of the merger agreement identified above in any respect material to its analyses.

 

Furthermore, in connection with its opinion, Houlihan Lokey was not requested to make, and did not make, any physical inspection or independent appraisal or evaluation of any of the assets, properties or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of the Company or any other party, nor was Houlihan Lokey provided with any such appraisal or evaluation. Houlihan Lokey did not estimate, and expressed no opinion regarding, the liquidation value of any entity or business. Houlihan Lokey did not undertake independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company was or may be a party or was or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which the Company was or may be a party or is or may be subject.

 

Houlihan Lokey was not requested to, and did not, (a) initiate or participate in any discussions or negotiations with, or solicit any indications of interest from, third parties with respect to the proposed merger, the assets, businesses or operations of the Company or any other party, or any alternatives to the proposed merger, (b) negotiate the terms of the proposed merger, or (c) advise Lodgian’s board of directors, the Company or any other party with respect to alternatives to the proposed merger. Houlihan Lokey’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of, the date of its opinion. Houlihan Lokey did not undertake, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring after the date of its opinion.

 

Houlihan Lokey’s opinion was furnished for the use and benefit of our board of directors (solely in its capacity as such) in connection with its consideration of the proposed merger and may not be used for any other purpose without Houlihan Lokey’s prior written consent. Houlihan Lokey’s opinion should not be construed as creating any fiduciary duty on Houlihan Lokey’s part to any party. Houlihan Lokey’s opinion is not intended to be, and does not constitute, a recommendation to our board, the Company, any security holder of the Company or any other person as to how to act or vote with respect to any matter relating to the proposed merger.

 

Houlihan Lokey’s opinion only addressed the fairness to the holders of shares of common stock, from a financial point of view of the per share merger consideration to be received by such holders in the proposed merger pursuant to the merger agreement and did not address any other aspect or implication of the proposed merger or any agreement, arrangement or understanding entered in connection therewith or otherwise including, without limitation, any agreements between Lone Star Funds or its affiliates and the Company’s lenders relating to outstanding loans of the Company or the Company’s hotel properties. In addition, Houlihan Lokey’s opinion did not address, among other things: (i) the underlying business decision of the Company, its

security holders or any other party to proceed with or effect the proposed merger, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form or any other portion or aspect of, the proposed merger or otherwise (other than the per share merger consideration to the extent expressly specified herein), (iii) the fairness of any portion or aspect of the proposed merger to the holders of any class of securities, creditors or other constituencies of the Company or to any other party, except as expressly set forth in the last sentence of Houlihan Lokey’s opinion, (iv) the relative merits of the proposed merger as compared to any alternative business strategies that might exist for the Company or any other party or the effect of any other transaction in which the Company or any other party might engage, (v) the fairness of any portion or aspect of the proposed merger to any one class or group of the Company’s or any other party’s security holders vis-à-vis any other class or group of the Company’s or such other party’s security holders (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders), (vi) whether or not the Company, its security holders or any other party is receiving or paying reasonably equivalent value in the proposed merger, (vii) the solvency, creditworthiness or fair value of the Company or any other participant in the proposed merger, or any of their respective assets, under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (viii) the fairness, financial or otherwise, of the amount or nature of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the proposed merger, any class of such persons or any other party, relative to the per share merger consideration or otherwise. Furthermore, no opinion, counsel or interpretation was intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. It was assumed that such opinions, counsel or interpretations had been or would be obtained from the appropriate professional sources. Furthermore, Houlihan Lokey relied, with the Company’s consent, on the assessments by the Company and its advisors, as to all legal, regulatory, accounting, insurance and tax matters with respect to the Company and the proposed merger, including potential contingent liabilities arising out of the Property Conveyance. The issuance of Houlihan Lokey’s opinion was approved by a committee authorized to approve such opinions.

 

In preparing its opinion to our board of directors, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokey’s valuation analyses described below is not a complete description of the analyses underlying Houlihan Lokey’s opinion. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytic methods employed and the adaptation and application of those methods to the unique facts and circumstances presented. As a consequence, neither Houlihan Lokey’s opinion nor the analyses underlying its opinion are readily susceptible to partial analysis or summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, analytic method or factor. Accordingly, Houlihan Lokey believes that its analyses must be considered as a whole and that selecting portions of its analyses, analytic methods and factors, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

 

In performing its analyses, Houlihan Lokey considered business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. No company, transaction or business used in Houlihan Lokey’s analyses for comparative purposes is identical to the Company or the proposed merger. While the results of each analysis were taken into account in reaching its overall conclusion with respect to fairness, Houlihan Lokey did not make separate or quantifiable judgments regarding individual analyses. The implied valuation reference ranges indicated by Houlihan Lokey’s analyses are illustrative and not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond our control and the control of Houlihan Lokey. Much of the information used in, and accordingly the results of, Houlihan Lokey’s analyses are inherently subject to substantial uncertainty.

Houlihan Lokey’s opinion and analyses were provided to our board of directors in connection with its consideration of the proposed merger and Houlihan Lokey’s analyses were among many factors considered by our board in evaluating the proposed merger. Neither Houlihan Lokey’s opinion nor its analyses were determinative of the per share merger consideration or of the views of our board or our management with respect to the proposed merger.

 

The following is a summary of the material valuation analyses performed in connection with the preparation of Houlihan Lokey’s opinion rendered to our board of directors on January 20, 2010. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying and the assumptions, qualifications and limitations affecting each analysis, could create a misleading or incomplete view of Houlihan Lokey’s analyses.

 

For purposes of its analyses, Houlihan Lokey reviewed a number of financial metrics including:

 

Enterprise Value — generally the value as of a specified date of the relevant company’s outstanding common equity securities (taking into account its outstanding warrants and other securities convertible into common equity securities) plus the value of its minority interests plus the value as of such date of its net debt (the value of its outstanding indebtedness, preferred stock and capital lease obligations less the amount of cash on its balance sheet).

 

EBITDA — generally the amount of the relevant company’s earnings before interest, taxes, depreciation, and amortization for a specified time period.

 

Unless the context indicates otherwise, enterprise values used in the selected companies analysis described below were calculated using the closing price of the common stock of the selected companies listed below as of January 14, 2010. Estimates of EBITDA of the Company for the fiscal years ending 2009 and 2010 were based on estimates provided by our management to Houlihan Lokey, as adjusted by the Company’s management to exclude certain non-recurring items, including contingent liabilities. Estimates of EBITDA for the selected companies listed below for fiscal year 2009 and 2010 were based on publicly available research analysts’ estimates for those companies.

 

For purposes of Houlihan Lokey’s analyses and opinion, our management advised and directed Houlihan Lokey to assume the following: (i) the properties associated with the Mortgage Loan and the IXIS 3 loan would be surrendered to the respective lenders in March 2010, (ii) the properties associated with ML Pool 3 would be surrendered to the lender in January 2010, (iii) the projections provided by management do not include the operating results of the properties securing the Mortgage Loan, the IXIS 3 loan or ML Pool 3, (iv) the Holiday Inn Express Palm Desert property is sold early in 2010 with net proceeds of approximately $1.8 million included in the pro forma cash balance, (v) the Company’s pro forma debt balance does not include the Mortgage Loan, ML Pool 3, the IXIS 3 loan or the debt associated with the Holiday Inn Palm Desert property, (vi) the Company would cease to be a public company in mid-2010 and (vii) the Company would continue to reduce its overhead expenses through further cost and headcount reductions. Houlihan Lokey was informed by our management that the before mentioned assumptions comprised the most likely scenario for the Company outside of the proposed transaction with LSREF Investments. Houlihan Lokey’s analyses and opinion are therefore based on the Company ceasing to be a public company and operating with only 14 hotels.

 

Selected Companies Analysis

 

Houlihan Lokey calculated the multiples of enterprise value to Adjusted EBITDA and certain other financial data for the Company and the selected companies in the hotel industry.

 

The calculated multiples included:

 

Enterprise Value as a multiple of 2009E Adjusted EBITDA; and

Enterprise Value as a multiple of 2010E Adjusted EBITDA.

 

The selected companies were selected because they were deemed to be similar to the Company in one or more respects which included nature of business, size, diversification, financial performance and geographic concentration. No specific numeric or other similar criteria were used to select the selected companies and all criteria were evaluated in their entirety without application of definitive qualifications or limitations to individual criteria. As a result, a significantly larger or smaller company with substantially similar lines of businesses and business focus may have been included while a similarly sized company with less similar lines of business and greater diversification may have been excluded. Houlihan Lokey identified a sufficient number of companies for purposes of its analysis but may not have included all companies that might be deemed comparable to the Company. The selected companies were:

 

Branded Comparable Companies

 

Marriott International, Inc.

Starwood Hotels & Resorts Worldwide, Inc.

Wyndham Worldwide Corp.

Choice Hotels International Inc.

 

Independent Comparable Companies

 

FelCor Lodging Trust Inc.

Host Hotels & Resorts, Inc.

LaSalle Hotel Properties

Sunstone Hotel Investors, Inc.

Diamondrock Hospitality Co.

Hersha Hospitality Trust

 

The selected companies analysis indicated the following:

 

 

Houlihan Lokey applied multiple ranges based on the selected companies analysis to the Company’s FY 2009E Adjusted EBITDA and FY 2010E Adjusted EBITDA. The selected companies analysis indicated (i) an implied reference range of $0.82 to $2.03 per share based on Enterprise Value as a multiple of FY 2009E Adjusted EBITDA and (ii) an implied reference range of $1.59 to $2.83 per share based on Enterprise Value as a multiple of 2010E Adjusted EBITDA, in each case as compared to the per share merger consideration of $2.50 per share of Company common stock in the proposed merger.

 

Discounted Cash Flow Analysis

 

Houlihan Lokey also calculated the net present value of the Company’s unlevered, after-tax cash flows based on projections provided by management of the Company. In performing a discounted cash flow analysis with respect to the Company, Houlihan Lokey applied discount rates ranging from 13.0% to 15.0% based on the estimated weighted average cost of capital for the Company and terminal value multiples ranging from 9.0x to 10.0x. The discounted cash flow analyses indicated an implied reference range of $2.26 to $4.11 per share, as compared to the per share merger consideration of $2.50 per share of Company common stock in the proposed merger.

Other Considerations

 

Implied Transaction Premiums.   Houlihan Lokey also considered the premium of the per share merger consideration to the trading prices of Company common stock for various periods as follows:

 

 

Other Matters

 

We engaged Houlihan Lokey as a financial advisor in connection with the proposed merger pursuant to a letter agreement dated as of January 6, 2010. We engaged Houlihan Lokey based on Houlihan Lokey’s experience and reputation and knowledge of the Company and its industry. Houlihan Lokey is regularly engaged to render financial opinions in connection with mergers and acquisitions, financial restructurings, tax matters, ESOP and ERISA matters, corporate planning, and for other purposes. Houlihan Lokey was paid a fee for rendering its opinion, which was not contingent upon the successful completion of the proposed merger. We have also agreed to reimburse certain of Houlihan Lokey’s expenses and to indemnify it and certain related parties for certain potential liabilities arising out of Houlihan Lokey’s engagement.

 

Houlihan Lokey and certain of its affiliates have in the past provided and may currently be providing investment banking, financial advisory and other financial services to Lone Star Funds and/or certain of its affiliates, as well as certain security holders of the Company including, without limitation, Key Colony and Oaktree Capital and/or certain of their respective affiliates, for which Houlihan Lokey and such affiliates have received, and may receive, compensation. Houlihan Lokey and certain of its affiliates may provide investment banking, financial advisory and other financial services to the Company and other participants in the proposed merger (including, without limitation, Lone Star Funds, Key Colony and Oaktree) and/or certain of their respective affiliates in the future, for which Houlihan Lokey and such affiliates may receive compensation. In addition, Houlihan Lokey and certain of its affiliates and certain of their respective employees may have committed to invest in private equity or other investment funds managed or advised by Lone Star Funds, Key Colony, Oaktree, other participants in the proposed merger and/or certain of their respective affiliates, and in portfolio companies of such funds, and may have co-invested with such funds, and may do so in the future. Furthermore, in connection with bankruptcies, restructurings, and similar matters, Houlihan Lokey and certain of its affiliates may have in the past acted, may currently be acting and may in the future act as financial advisor to debtors, creditors, equity holders, trustees and other interested parties (including, without limitation, formal and informal committees or groups of creditors) that may have included or represented and may include or represent, directly or indirectly, the Company, Lone Star Funds, Key Colony, Oaktree, other participants in the proposed merger and/or certain of their respective affiliates, for which advice and services Houlihan Lokey and such affiliates have received and may receive compensation.

 

In the ordinary course of business, certain of Houlihan Lokey’s affiliates, as well as investment funds in which they may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and financial instruments (including loans and other obligations) of, or investments in, the Company, Lone Star Funds or entities affiliated or associated with Lone Star Funds, or any other party that may be involved in the proposed merger and their respective affiliates or any currency or commodity that may be involved in the proposed merger.

 

Lodgian does not, as a matter of course, make public projections as to future performance or earnings. However, our management prepared certain sets of financial projections, which were provided to our financial advisors. We have included certain portions of those financial projections in this proxy statement to provide our shareholders with access to certain non-public information in connection with their evaluation of our board’s unanimous recommendation to approve the merger, the merger agreement and the other transactions contemplated by the merger agreement.

 

The accompanying financial projections were not prepared with a view toward public disclosure or toward complying with accounting principles generally accepted in the United States, or “GAAP” , the published guidelines of the SEC regarding forecasts or the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information. This information should not be relied upon as necessarily indicative of actual future results, and readers of this proxy statement are cautioned not to place undue reliance on the accompanying financial projections. These projections do not necessarily reflect revised prospects for our business, changes in general business or economic conditions, or any other transaction that has occurred or that may occur and that was not anticipated as of the respective dates the projections were prepared and, in particular, do not take into account or give effect to the merger. Financial projections of this type are based on various estimates and assumptions by our management, many of which are beyond our control, including estimates and assumptions with respect to industry performance, general business, economic, regulatory, credit market and financial conditions, as well as changes to our business, financial condition or results of operations, including the factors described under “Caution Regarding Forward-Looking Statements” .

 

Neither our independent registered public accounting firm, nor any other independent accountants or advisors, have compiled, examined or performed any procedures with respect to the financial projections contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the financial projections.

 

The inclusion of this information should not be regarded as an indication that we, our financial advisor, Houlihan Lokey, or any other person considered, or now considers, it to be predictive of actual future results. Since the projections cover multiple years, the projections by their nature may become subject to greater uncertainty with each successive year. We do not intend to update or otherwise revise any set of financial projections or the specific portions presented to reflect circumstances existing after the date when made or to reflect the occurrence of future events, even if any or all of the assumptions underlying the projections appear now or in the future to be in error. As a result, there can be no assurance that the results described in any of these projections will be realized or that actual results will not be significantly higher or lower than those projected. These projections do not reflect the effect of any proposed or other changes in GAAP that may be made in the future. Any such changes could have a material impact on the information set forth below. No one has made or makes any representation to any of our shareholders regarding the information contained in these projections.

 

We have made publicly available the actual results of our operations for fiscal year 2008, and for fiscal year 2009, through September 30, 2009. You should review our Forms 10-K and 10-Q to obtain this information.

 

Lodgian Management “As-Is” Projections

 

The projections set forth below, which we refer to in this proxy statement as the “As-Is Projections” , were discussed with our board on January 13, 2010, in connection with our review of strategic alternatives, and were also made available to our financial advisors.

 

The As-Is Projections assume that the merger is not consummated and reflect actual data through November 2009. From December 2009 through December 2014, the As-Is Projections assume that the ML Pool 3 assets are returned to the lender. Accordingly, these assets and the associated cost of debt service, as well as operating results from these properties, were excluded from the As-Is Projections. RevPAR growth estimates for the Company for 2010 through 2014 were determined by adjusting estimates that are published

by PKF Hospitality Research, who publishes forecasts of anticipated industry trends for future years and who we refer to in this proxy statement as “PKF” . PKF’s estimates of RevPAR growth for 2010 through 2013, as published in December 2009, are noted below. Our company’s portfolio typically performs slightly below the PKF trends. PKF measures the top 50 markets in the United States, while Lodgian’s portfolio includes hotels not in those markets. Separate RevPAR estimates were developed for the IXIS 3-Hotel loan pool properties, as this loan pool is driven primarily by the market in Phoenix, Arizona.

 

 

The As-Is Projections for 2010 through 2014 are as follows:

 

 

 

 

Lodgian Management “Give-Back” Projections

 

The projections set forth below, which we refer to in this proxy statement as the “Give-Back Projections” , were discussed with our board on January 13, 2010, in connection with our review of strategic alternatives and were also made available to our financial advisors.

 

The Give-Back Projections assume that the merger is not consummated and reflect actual data through November 2009. From December 2009 through December 2014, the Give-Back Projections assume the following: (i) the properties associated with the Mortgage Loan and the IXIS 3 loan would be surrendered to the respective lenders in March 2010, (ii) the properties associated with ML Pool 3 would be surrendered to the lender in January 2010, (iii) the projections provided by management do not include the operating results of the properties securing the Mortgage Loan, the IXIS 3 loan or ML Pool 3, (iv) the Holiday Inn Express Palm Desert property is sold early in 2010 with net proceeds of approximately $1.8 million included in the pro forma cash balance, (v) the Company’s pro forma debt balance does not include the Mortgage Loan, ML Pool 3, the IXIS 3 loan or the debt associated with the Holiday Inn Palm Desert property, (vi) the Company would cease to be a public company in mid-2010 and (vii) the Company would continue to reduce its overhead expenses through further cost and headcount reductions. The Give-Back Projections are therefore based on the Company ceasing to be a public company and operating with only 14 hotels. RevPAR growth estimates for the Company for 2010 through 2014 were determined by adjusting estimates that are published by PKF. PKF’s estimates of RevPAR growth for 2010 through 2013, as published in December 2009, are noted below. Our company’s portfolio typically performs slightly below the PKF trends. PKF measures the top 50 markets in the United States, while Lodgian’s portfolio includes hotels not in those markets.

 

The Give-Back Projections for 2010 through 2014 are as follows:

 

 

 

 

In connection with the merger agreement, LSREF Investments entered into voting agreements with Key Colony and Oaktree and certain of its affiliates. As set forth in the voting agreements, Key Colony held an aggregate of 3,004,853 shares of our common stock, which constituted approximately 13.9% of our outstanding shares of common stock as of January 22, 2010 and Oaktree held an aggregate of 2,788,864 shares of our common stock, which constituted approximately 12.9% of our outstanding shares of common stock as of January 22, 2010.

 

Pursuant to the voting agreements, Key Colony and Oaktree agreed to vote (or cause to be voted), in person or by proxy, all their shares of our common stock owned as of the record date:

 

 

In addition, pursuant to the voting agreements, Key Colony and Oaktree also granted and appointed LSREF Investments, each executive officer of LSREF Investments and each other person designated by LSREF Investments in writing, as Key Colony’s and Oaktree’s proxy, agent and attorney-in-fact (with full power of substitution) to attend any meeting of the stockholders of the Company at which the merger agreement or the merger may be discussed or considered and to vote Key Colony’s and Oaktree’s shares of common stock to adopt, approve and vote in favor of the merger agreement, the merger and the other transactions contemplated by the merger agreement, and against any company takeover proposal or company superior offer.

 

The voting agreements terminate upon the earliest to occur of (i) the termination of the merger agreement in accordance with its terms, and (ii) the effective time of the merger; provided that no party shall be relieved from any liability for any willful breach of the voting agreements by virtue of such termination.

 

If the merger agreement is adopted and the merger and the other transactions contemplated by the merger agreement are approved by our stockholders and all of the conditions set forth in the merger agreement have been satisfied or waived, Merger Sub will be merged with and into Lodgian, the separate existence of Merger Sub will cease and Lodgian will be the surviving corporation in the merger, and Lodgian will become a wholly owned subsidiary of LSREF Investments. When the merger is completed, we will cease to be a publicly traded company.

 

When the merger is completed, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by us, LSREF Investments or Merger Sub and other than shares owned by stockholders properly demanding appraisal rights) will be converted into the right to receive $2.50 in cash, without interest, subject to any applicable withholding tax, for each share of our common stock that you own, subject to decrease only if we have more than 21,675,040 shares of common stock issued and outstanding at the time of the merger. Each outstanding option to purchase shares of our common stock, whether or not vested, will be cancelled and all such holder’s rights under such option and any option plan shall terminate at the time of the merger.

 

At the effective time of the merger, our stockholders will have the right to receive the merger consideration but will cease to have ownership interests in us or rights as our stockholders. Therefore, our stockholders will not participate in our future earnings or growth and will not benefit from any appreciation in our value.

 

Our common stock is currently registered under the Securities Exchange Act of 1934, as amended, which we refer to in this proxy statement as the “Exchange Act” , and is quoted on NYSE Amex Equities under the symbol “LGN”. As a result of the merger, we will be the surviving corporation, our common stock will cease to be quoted on NYSE Amex Equities and there will be no public market for our common stock. In addition, registration of our common stock under the Exchange Act will be terminated and we will no longer be required to file periodic reports with the SEC.

 

When the merger becomes effective, the directors and officers of Merger Sub will be the directors and officers of the surviving corporation. Also at the effective time of the merger, our amended and restated certificate of incorporation will be amended as set forth in the merger agreement, and as so amended, will become our certificate of incorporation following the consummation of the merger until such time as it is amended in accordance with applicable law. The bylaws of Merger Sub, as in effect immediately prior to the effective time of the merger, will become our bylaws following the consummation of the merger until such time as they are amended in accordance with applicable law.

 

In the event that the merger agreement is not adopted by our stockholders or if the merger is not completed for any other reason, our stockholders will not receive any payment for their shares in connection with the merger. Instead, we will remain an independent public company and our common stock will continue to be quoted on NYSE Amex Equities. In addition, if the merger is not completed, we expect that management will operate our business in a manner similar to that in which it is being operated today and that our stockholders will continue to be subject to the same risks and opportunities to which they are currently subject, including, without limitation, risks related to our level of indebtedness, the volatility of the credit markets and continued weak economic conditions.

 

Accordingly, if the merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of our common stock. In the event the merger is not completed, our board of directors will continue to evaluate and review our business operations, properties, dividend policy and capitalization, among other things, make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value. If the merger agreement is not adopted by our stockholders or if the merger is not consummated for any other reason, there can be no

assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely impacted.

 

If the merger agreement is terminated, under certain circumstances, we will be obligated to pay a termination fee of $3.25 million to LSREF Investments. For a description of the circumstances triggering payment of the termination fee, see “Proposal 1 — The Merger Agreement — Termination Fee” on page [ • ]. In addition, pursuant to the terms of the amendment to the Mortgage Loan entered into with Hospitality on January 22, 2010, if the merger agreement is validly terminated for any reason other than as described in paragraph 5 of “Proposal 1 — The Merger Agreement — Termination of the Merger Agreement” above, the Company’s subsidiary borrowing entities on the loan will be required, in their sole discretion, to either pay down the principal balance of such loan by $5,000,000, or to cause the Holiday Inn Monroeville, Pennsylvania property to be pledged as additional security for the Mortgage Loan.

 

Members of our board of directors and certain of our executive officers have various interests in the merger described in this section that may be in addition to, or different from, the interests of our stockholders generally. You should keep this in mind when considering the recommendation of our board of directors for the approval of the merger proposal. The members of our board of directors were aware of these interests and considered them at the time they approved the merger proposal.

 

Restricted Stock

 

The following table sets forth the cash proceeds that each of our independent directors and Messrs. Ellis, MacLennan, Kelly and Ms. Cohen who we refer to in this section of our proxy statement as our executive officers, could receive at the closing of the merger from the (i) conversion of their shares of common stock into the merger consideration and (ii) the accelerated vesting of the shares of common stock subject to restricted stock grants and the conversion of those shares of stock into the merger consideration, based on his or her beneficial ownership as of February 12, 2010:

 

 

Restricted Stock.   For more information regarding the terms of our restricted stock grants, see “The Agreement and Plan of Merger — Effect of the Merger on Lodgian’s Restricted Stock Grants”.

 

Employment Agreements

 

We have employment agreements with three executive officers, and these employment agreements provide for enhanced payments upon a termination of employment under certain circumstances upon or after a change in control of Lodgian.

Daniel E. Ellis.   If Mr. Ellis resigns for “good reason” (as defined in his employment agreement) or his employment is terminated by Lodgian without “cause” (as defined in his employment agreement) during the period which starts 60 days before a “change in control” (as defined in his employment agreement) and ends 365 days after such change in control and he signs a release of any claims he might have against Lodgian and abides by his restrictive covenants, he will be paid his accrued but unpaid base salary plus (1) he will be paid in a lump sum an amount equal to 2 times his then annual base salary, (2) he will be paid a lump sum of $300,012, (3) Lodgian will reimburse him for his COBRA premiums for 24 months and (4) his interest in restricted stock grants will fully vest. If the payments made to Mr. Ellis exceed the maximum amount which can be paid before his payments are subject to the 20% additional tax as excess parachute payments, Lodgian will pay all of his resulting taxes unless such payments are no more than 110% of such maximum amount, in which event his payments shall be reduced to equal such maximum amount. Finally, the consummation of the merger will constitute a “change in control” but a change in control does not expressly constitute “good reason” for Mr. Ellis to resign.

 

James A. MacLennan.   If Mr. MacLennan resigns for “good reason” (as defined in his employment agreement) or his employment is terminated by Lodgian without “cause” (as defined in his employment agreement) during the period which starts 60 days before a “change in control” (as defined in his employment agreement) and ends 365 days after such change in control and he signs a release of any claims he might have against Lodgian and abides by his restrictive covenants, he will be paid his accrued but unpaid base salary plus (1) he will be paid in a lump sum an amount equal to 2 times his then annual base salary, (2) he will be paid a lump sum of $300,012, (3) Lodgian will reimburse him for his COBRA premiums for 24 months and (4) his interest in restricted stock grants will fully vest. If the payments made to Mr. MacLennan exceed the maximum amount which can be paid before his payments are subject to the 20% additional tax as excess parachute payments, Lodgian will pay all of his resulting taxes unless such payments are no more than 110% of such maximum amount, in which event his payments shall be reduced to equal such maximum amount. Finally, the consummation of the merger will constitute a “change in control” and a change in control expressly constitutes “good reason” for Mr. MacLennan to resign.

 

Donna Cohen.   If Ms. Cohen resigns for “good reason” (as defined in her employment agreement) or her employment is terminated by Lodgian without “cause” (as defined in her employment agreement) during the period which starts 60 days before a “change in control” (as defined in her employment agreement) and ends 365 days after such change in control and she signs a release of any claims she might have against Lodgian and abides by her restrictive covenants, she will be paid her accrued but unpaid base salary plus (1) she will be paid in a lump sum an amount equal to her then annual base salary, (2) she will be paid a lump sum of $50,002, (3) Lodgian will reimburse her for her COBRA premiums for 12 months and (4) her interest in restricted stock grants will fully vest. Finally, the consummation of the merger will constitute a “change in control” but a change in control does not expressly constitute “good reason” for Ms. Cohen to resign.

 

Separation Pay Agreement

 

We have a separation pay agreement with one executive officer which provides for payments upon a termination of employment under certain circumstances upon or after a change in control of Lodgian.

 

Joseph F. Kelly.   If Mr. Kelly resigns for “good reason” (as defined in his separation pay agreement) or his employment is terminated by Lodgian without “cause” (as defined in his separation pay agreement) during the period which starts 60 days before a “change in control” (as defined in his separation pay agreement) and ends 365 days after such change in control and he signs a release of any claims he might have against Lodgian and abides by his restrictive covenants, he will be paid his accrued but unpaid base salary plus (1) he will be paid in a lump sum an amount equal to two-thirds of his then annual base salary, (2) Lodgian will reimburse him for his COBRA premiums on a monthly basis for eight months, and (3) his interest in restricted stock grants will fully vest. Finally, the consummation of the merger will constitute a “change in control”, but a change in control does not expressly constitute “good reason” for Mr. Kelly to resign.

2002 Stock Incentive Plan

 

The Company maintains the Lodgian Amended and Restated 2002 Stock Incentive Plan (our “2002 Plan”), and all of our outstanding stock option grants and restricted stock grants have been made under our 2002 Plan, including the restricted stock grants called for under the terms of the Lodgian Executive Incentive Plan. If there is a “change in control” (as defined in the 2002 Plan), all of our outstanding stock options and restricted stock grants automatically will fully vest. The consummation of the merger will constitute a “change in control” of Lodgian under the 2002 Plan. Thus all outstanding stock options and restricted stock grants will full vest upon the consummation of the merger. Full vesting for restricted stock grants will benefit all individuals who hold outstanding restricted stock grants.

 

Cash Severance

 

The following table sets forth an estimate of the potential cash severance payments that would be payable in the event the executive officer resigns for “good reason” (as defined in his or her agreement) or his or her employment is terminated by Lodgian without “cause” (as defined in his or her agreement) following the merger pursuant to his or her employment agreement or severance pay agreement (assuming for illustrative purposes that the executive officer’s employment is terminated on February 12, 2010, but utilizing current annual salaries without regard to additional payments resulting from any further anticipated annual pay increases in 2010).

 

 

 

 

Our stockholders have the right under Delaware law to dissent from the adoption of the merger agreement, to exercise appraisal rights and to receive payment in cash for the fair value of their shares of our common stock determined in accordance with Delaware law. The fair value of shares of our common stock, as determined in accordance with Delaware law, may be more or less than the merger consideration to be paid to non-dissenting stockholders in the merger. To preserve their rights, stockholders who wish to exercise appraisal rights must not vote in favor of the adoption of the merger agreement and must follow specific procedures. Dissenting stockholders must precisely follow these specific procedures to exercise appraisal rights, or their appraisal rights may be lost. These procedures are described in this proxy statement and the provisions of Delaware law that grant appraisal rights and govern such procedures are attached as Annex C to this proxy statement. You are encouraged to read these provisions carefully and in their entirety. See “Appraisal Rights” on page [ • ].

 

If the merger is completed, our common stock will be delisted from NYSE Amex Equities and deregistered under the Securities Exchange Act and we will no longer file periodic reports with the SEC.

 

We expect that the merger will be accounted for by LSREF Investments using the purchase method of accounting, in accordance with generally accepted accounting principles.

 

The following discussion summarizes certain material U.S. federal income tax consequences of the merger to stockholders whose shares of our common stock are converted into the right to receive cash in the merger. This discussion is for general information only and is not tax advice. This discussion does not purport to consider all aspects of U.S. federal income taxation that might be relevant to our stockholders. This discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code” ), the Treasury regulations, Internal Revenue Service ( “IRS” ) rulings, and judicial and administrative decisions, each as in effect as of the date of this proxy statement, all of which are subject to change, possibly with retroactive effect. Any such change could alter the tax consequences described herein. We have not requested, and do not plan to request, any rulings from the IRS concerning matters discussed herein. This discussion is not binding on the IRS or any court, and there can be no assurance that the IRS will not take a contrary position or that any such contrary position will not be sustained in court.

 

This discussion applies only to stockholders who, on the date on which the merger is completed, hold shares of our common stock as capital assets within the meaning of section 1221 of the Code. This discussion does not apply to stockholders who received shares of our common stock pursuant to the exercise of employee stock options or otherwise as compensation for services, or through a tax-qualified retirement plan, or to stockholders subject to special rules under the U.S. federal income laws, including, for example, banks and financial institutions, dealers in securities, tax-exempt organizations, mutual funds, real estate investment trusts, regulated investment companies, partnerships and other pass-through entities (such as trusts and S corporations), controlled foreign corporations, passive foreign investment companies, persons subject to the alternative minimum tax, and corporations described in section 7874 of the Code. In addition, the following discussion does not apply to stockholders whose functional currency is not the U.S. dollar, or who hold their shares as part of a hedge, straddle, conversion transaction or other integrated transaction. This discussion also does not discuss any state, local, foreign or other tax considerations. If any entity that is treated as a partnership for U.S. federal income tax purposes holds shares of our common stock, the U.S. federal income tax treatment of its partners or members generally will depend upon the status of the partner or member and the activities of the entity.

 

All stockholders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences, as well as the foreign, state and local tax consequences, of the disposition of their shares in the merger.

 

For purposes of this discussion, a “U.S. holder” means a beneficial owner of shares of our common stock that is for U.S. federal income tax purposes one of the following:

 

 

For purposes of this discussion, a “non-U.S. holder” means a beneficial owner of shares of our common stock that is an individual, corporation, estate or trust that is not a U.S. holder as described in the bullets above.

U.S. Holders

 

The receipt by a U.S. holder of cash in exchange for shares of our common stock pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder will recognize a capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between the amount of cash received and the U.S. holder’s adjusted tax basis in the shares of our common stock surrendered in the merger. Gain or loss will be determined separately for each block of shares of our common stock (i.e., shares of our common stock acquired at the same cost in a single transaction) surrendered for cash in the merger. Any capital gain or loss will be long-term provided the U.S. holder’s holding period for the shares of our common stock is more than one year at the effective time of the merger. Long-term capital gains of individuals are eligible for reduced rates of taxation. There are limitations on the deductibility of capital losses.

 

Non-U.S. Holders

 

A non-U.S. holder’s gain or loss from the exchange of shares of our common stock for cash pursuant to the merger generally will be determined in the same manner as that of a U.S. holder. A non-U.S. holder generally should not be subject to U.S. federal income taxation on any gain or loss from the exchange of shares of our common stock for cash pursuant to the merger unless: (i) the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, or, if an applicable income tax treaty applies and so requires, the gain is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; (ii) the non-U.S. holder is an individual treated as being present in the United States for 183 days or more in the taxable year of the disposition of the shares of our common stock and certain other requirements are met; or (iii) as described below, shares of our common stock constitute a “United States real property interest,” or USRPI, by reason of our status as a “United States real property holding corporation,” or USRPHC, for U.S. federal income tax purposes.

 

A non-U.S. holder whose gain is effectively connected with the conduct of a trade or business in the United States generally will be subject to U.S. federal income tax on such gain on a net basis in the same manner as a U.S. holder. In addition, a non-U.S. holder that is a corporation may be subject to the 30 percent branch profits tax on such effectively connected gain.

 

A non-U.S. holder who is an individual present in the United States for 183 days or more in the taxable year of the disposition of shares of our common stock will generally be treated as a U.S. resident for federal income taxes and the federal income tax consequences with respect to their gain or loss from the exchange of our common stock for cash will be the same as the consequences described above for a U.S. holder. A non-U.S. holder who is an individual present in the United States for 183 days or more in the taxable year of the disposition of shares of our common stock and is not treated as a U.S. resident for federal income purposes under an applicable tax treaty or otherwise and who meets certain other requirements will be subject to a 30 percent tax on the gain derived from that disposition, which gain may be offset by United States source capital losses.

 

In general, gain from the sale of shares of our common stock will be subject to tax under provisions added to the Code by the Foreign Investment in Real Property Tax Act of 1980 (the “FIRPTA tax” ) if (i) we are, or have been, at any time during the shorter of the five year period preceding the date of the disposition or the non-U.S. holder’s holding period (the “testing period”) classified as a USRPHC, and (ii) the “publicly traded exception” to the FIRPTA tax does not apply to the non-U.S. holder. In general, the “publicly traded exception” applies if the non-U.S. holder owned, actually or constructively, no more than 5 percent of our outstanding common stock throughout the testing period. Non-U.S. holders who do not qualify for the “publicly traded exception” are required by applicable Treasury regulations to obtain a statement from us regarding our status as a USRPHC during the testing period and to file such statement with their U.S. federal income tax return for the year of sale. Such non-U.S. holders should consult their own tax advisors regarding the potential application of the FIRPTA tax to the exchange of their shares of our common stock in the merger.

If a non-U.S. holder is eligible for treaty benefits under an income tax treaty with the United States, the non-U.S. holder may be able to reduce or eliminate certain of the U.S. federal income tax liabilities discussed herein. Non-U.S. holders should consult their tax advisors regarding possible relief under an applicable income tax treaty.

 

Information and Backup Withholding

 

Cash payments made pursuant to the merger will be reported to our stockholders and the IRS to the extent required by the Code and applicable Treasury Regulations. These amounts ordinarily will not be subject to withholding of the U.S. federal income tax.

 

Backup withholding, currently imposed at a rate of 28 percent, and information reporting may apply to cash received pursuant to the merger, however. Backup withholding generally will not apply, however, to a holder that (i) in the case of a U.S. holder, furnishes a correct TIN and certifies that it is not subject to backup withholding on IRS Form W-9 or successor form; (ii) in the case of a non-U.S. holder, furnishes an applicable IRS Form W-8 or successor form; or (iii) is otherwise exempt from backup withholding and complies with other applicable rules and certification requirements.

 

Backup withholding is not an additional tax and any amount withheld under the backup withholding rules may be credited against the holder’s U.S. federal income tax liability and may entitle the holder to a refund if requirement information is timely furnished to the IRS.

 

This discussion of certain material U.S. federal income tax consequences is included for general informational purposes only. We urge you to consult your own tax advisor to determine the particular tax consequences to you of the receipt of cash in exchange for shares of our common stock pursuant to the merger.

 

Except for the filing of a certificate of merger with the Secretary of the State of the State of Delaware and the filing with the SEC of this proxy statement and any other filings and reports that may be required in connection with the merger agreement and the transactions contemplated by the merger agreement under the Exchange Act, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or the consummation of the merger.

 

The merger agreement does not contain a financing condition or a “market MAC” condition and the merger is not conditioned upon any financing arrangements. LSREF Investments estimates that the total amount of funds required to complete the merger, and the payment of any related fees and expenses, will be approximately $ [     ] .

 

Lone Star Guarantor provided us with a direct guarantee of the full and prompt payment and performance of all of the obligations of LSREF Investments and Merger Sub arising under the merger agreement (including, without limitation, payment of the merger consideration and any damages payable by LSREF Investments and/or Merger Sub as a result of its and/or their breach of the merger agreement) as limited pursuant to the terms of the merger agreement. The guaranty is a guaranty of payment and performance and not of collection, and Lone Star Guarantor agreed that its obligations under the guaranty are primary, absolute and unconditional.

 

On January 26, 2010, a putative class action was commenced in the Superior Court of Fulton County, Georgia against us, each of our directors, LSREF Investments and Merger Sub alleging that our board of

directors breached their fiduciary duties to our stockholders in approving and adopting a merger agreement that allegedly contains preclusive deal protection measures and unfair merger consideration. The complaint further alleges that we, LSREF Investments and Merger Sub aided and abetted our board of directors in allegedly breaching their fiduciary duties. The complaint seeks to enjoin the completion of the merger, an award of unspecified monetary damages and to recover certain costs incurred by the plaintiff. We believe the complaint to be without merit and intend to defend it vigorously, including opposing any efforts to enjoin the proposed transaction.

 

In addition, on January 29, 2010, a putative class action was commenced in the Court of Chancery of the State of Delaware against us, each of our directors, LSREF Investments, Merger Sub and Lone Star Funds, alleging that our board of directors breached their fiduciary duties to our stockholders by allegedly failing to obtain the highest price available for our stockholders, failing to adequately shop the Company and approving and adopting a merger agreement that allegedly contains preclusive deal protection measures. The complaint further alleges that Lone Star Funds aided and abetted our board of directors in allegedly breaching their fiduciary duties. The complaint seeks to enjoin the completion of the merger, an order compelling the board of directors to undertake a new sale process, an award of unspecified monetary damages and costs of litigation. We believe the complaint to be without merit and intend to defend it vigorously, including opposing any efforts to enjoin the proposed transaction.

PROPOSAL 1 — THE MERGER AGREEMENT

 

The merger agreement is the legal document that governs the merger. This section of the proxy statement describes the material provisions of the merger agreement but may not contain all the information about the merger agreement that is important to you. The merger agreement is included as Annex A to this proxy statement and is incorporated into this proxy statement by reference. We encourage you to read the merger agreement in its entirety. The merger agreement attached as Annex A to this proxy statement has been included to provide you with information regarding its terms. It is a commercial document that establishes and governs the legal relations between the Company and LSREF Investments and Merger Sub with respect to the transactions described in this proxy statement. It is not intended to be a source of factual, business or operational information about the Company, LSREF Investments or Merger Sub. The representations, warranties and covenants made by the Company, LSREF Investments and Merger Sub are qualified and subject to important limitations agreed to by the Company, LSREF Investments and Merger Sub in connection with negotiating the terms of the merger agreement. Furthermore, the representations and warranties may be subject to standards of materiality applicable to the Company, LSREF Investments and Merger Sub that may be different from those which are applicable to you. These representations and warranties may or may not have been accurate as of any specified date and do not purport to be accurate as of the date of this proxy statement.

 

Subject to the terms and conditions of the merger agreement and in accordance with Delaware law, at the effective time of the merger, Merger Sub, a wholly owned subsidiary of LSREF Investments, will be merged with and into the Company. The separate existence of Merger Sub will cease and we will continue as the surviving corporation and will become a wholly owned subsidiary of LSREF Investments.

 

The merger will become effective upon the filing of the certificate of merger with the Secretary of State of the State of Delaware or at such other time as is agreed by LSREF Investments, Merger Sub and the Company and specified in the certificate of merger.

 

The closing of the merger will occur no later than the second business day after the date that all of the conditions to the merger set forth in the merger agreement have been satisfied or waived, unless another time, date or place is agreed upon in writing by the Company, LSREF Investments and Merger Sub. Although we expect to complete the merger shortly after the special meeting of the Company’s stockholders, we cannot

specify when, or assure you that we, LSREF Investments and Merger Sub will satisfy or waive all conditions to the merger.

 

The directors and officers of Merger Sub immediately prior to the effective time of the merger will be the initial directors and officers of the surviving corporation. The directors and officers will serve in accordance with the charter and bylaws of the surviving corporation until their respective successors are duly elected or appointed and qualified, or until their death, resignation or removal.

 

At the effective time of the merger:

 

 

At the effective time of the merger, each issued and outstanding share of the Company’s common stock, other than (1) shares owned by Merger Sub or LSREF Investments, (2) shares owned by the Company as treasury stock and (3) shares held by dissenting stockholders who exercise and perfect their appraisal rights under Delaware law, will be converted into the right to receive $2.50 per share in cash, without interest and less any applicable withholding taxes, for each share of the Company’s common stock that they own, subject to decrease only if we have more than 21,675,040 shares of common stock issued and outstanding at the time of the merger. Shares owned by LSREF Investments, Merger Sub or the Company will be cancelled at the effective time of the merger without payment. The Company stockholders will receive the merger consideration after exchanging their stock certificates in accordance with the instructions contained in the letter of transmittal to be sent to the Company stockholders shortly after completion of the merger. The price of $2.50 per share was determined through negotiations between LSREF Investments and the Company.

 

LSREF Investments, Merger Sub and the Company will be entitled to deduct and withhold, or cause American Stock Transfer & Trust Company, LLC, the exchange agent, to deduct and withhold, from the merger consideration payable to any holder of shares of the Company’s common stock such amounts that it is required to deduct and withhold with respect to making such payment under the Code, or any applicable provision of state, local or foreign tax law.

 

All outstanding options to purchase shares granted under our 2002 Plan, whether or not vested, will be cancelled and all of such holder’s rights under such option will terminate at the effective time.

 

At the effective time of the merger, all rights under any Company option and any provision of the Company option plans and any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the securities of the Company will be cancelled.

 

American Stock Transfer & Trust Company, LLC will act as exchange agent for the holders of our shares in connection with the merger to receive in trust the aggregate merger consideration. On the closing date, LSREF Investments will deposit with the exchange agent cash in an amount equal to the aggregate cash

consideration payable in the merger. Promptly after the effective time of the merger, LSREF Investments and the surviving corporation will cause to be mailed to each holder of record of a certificate or certificates that immediately prior to the effective time of the merger represented outstanding shares or non-certificated shares represented by book-entry, a letter of transmittal and instructions for use in effecting the surrender of the certificates or book-entry share in exchange for the merger consideration to be received by each stockholder. The letter of transmittal will specify that delivery will be effected, and risk of loss and title to the certificates representing shares of our common stock will pass, only upon proper delivery of the certificates to the exchange agent. Upon surrender to the exchange agent of a stock certificate representing shares of our common stock or a book-entry share together with a duly executed letter of transmittal and any other documents that may be reasonably required by the exchange agent, you will be entitled to receive from the exchange agent $2.50 in cash, without interest and less any applicable withholding tax, subject to decrease only if we have more than 21,675,040 shares of common stock issued and outstanding at the time of the merger, for each share represented by the stock certificate, and the certificate surrendered will be cancelled.

 

From and after the effective time of the merger, until it is surrendered, each certificate that previously evidenced shares of our common stock will be deemed to represent only the right to receive $2.50 in cash per share represented by such certificate or book-entry share less any applicable withholding taxes, subject to decrease only if we have more than 21,675,040 shares of common stock issued and outstanding at the time of the merger. No interest will be paid or accrue on any merger consideration payable upon the surrender of the share certificates representing shares of our common stock.

 

In the event of a transfer of ownership of our common stock that is not registered in our records, the merger consideration for shares of our common stock may be paid to a person other than the person in whose name the surrendered certificate is registered, if the certificate surrendered is properly endorsed or otherwise in proper form for transfer and the person requesting such payment shall pay all transfer and other taxes required by reason of the payment of the merger consideration to a person other than the registered holder of the certificate surrendered or shall have established to the satisfaction of the surviving corporation that such taxes either has been paid or are not applicable.

 

The surviving corporation may request the exchange agent to deliver to it any funds unclaimed by our stockholders six months after the effective time of the merger. Any holders of our share certificates who have not surrendered such certificates in compliance with the above-described procedures may thereafter look only to the surviving corporation for payment of the merger consideration to which they are entitled.

 

If any share certificate for our common stock has been lost, stolen or destroyed, upon making of an affidavit by the owner of such certificate claiming such certificate has been lost, stolen or destroyed and, if required by LSREF Investments or the surviving corporation, the posting of an indemnity or bond by such person in the amount reasonably required by LSREF Investments or the surviving corporation as indemnity against any claim that may be made against LSREF Investments, Merger Sub, the Company or the surviving corporation with respect to that certificate, the exchange agent will deliver to such person the merger consideration, without interest and less any applicable withholding taxes, with respect to the shares formerly represented by such lost, stolen or destroyed certificate.

 

Share certificates should not be surrendered by our stockholders before the effective time of the merger and should be sent only pursuant to instructions set forth in the letter of transmittal to be mailed to our stockholders promptly following the effective time of the merger. In all cases, the merger consideration will be provided only in accordance with the procedures set forth in this proxy statement and such letters of transmittal.

 

The merger consideration paid to you upon exchange of your shares of our common stock will be paid in full satisfaction of all rights relating to the shares of our common stock.

 

The merger agreement contains representations and warranties made by each of the parties regarding aspects of their respective businesses, financial condition and structure, as well as other factors pertinent to the merger. These representations and warranties relate to the following subject matters with respect to each party:

 

 

In addition, we made additional representations and warranties related to the following subject matters:

 

 

LSREF Investments and Merger Sub made additional representations and warranties related to the following subject matters:

 

 

 

For purposes of this proxy statement, “company material adverse effect” means any fact, event, change, development, circumstances, effect or any combination of the foregoing that, individually or in the aggregate, has or would reasonably be expected to have a material adverse effect on the business, financial condition, or results of operations of the Company and its subsidiaries’ business, taken as a whole, or the Company’s ability to consummate the merger, except any such fact, event, change, development, circumstance, or effect resulting from, arising out of or related to (a) any change in or interpretations of U.S. generally accepted accounting principles, (b) any change in interest rates, or general market, political or economic conditions, including financial, credit and securities markets generally (which changes do not affect the Company and its subsidiaries’ to a materially disproportionate degree compared to other businesses operating in the same or similar industries), (c) any action taken, or failure to act, by LSREF Investments, Merger Sub or any of their respective affiliates other than as contemplated by the merger agreement, (d) any weather-related or other force majeure event or conditions arising out of acts of terrorism or war, including the escalation thereof, (e) changes in accounting rules and regulations of the SEC or any United States federal, state or local or any foreign statue, law, rule, regulation, ordinance, code, order, judgment, decree or any other requirement or rule of law (which changes do not affect the Company and its subsidiaries’ to a materially disproportionate degree compared to other businesses operating in the same or similar industries), (f) the execution and delivery of the merger agreement or announcement thereof, the performance of the Company’s obligations thereunder or the pendency or consummation of the transactions contemplated hereby, (g) any loss of customers or employees by the Company or any of its subsidiaries, (h) the Company’s failure to meet any internal or published projections, forecasts or estimates of revenues or earnings or published industry analyst expectations of financial performance (it being understood that this exception, as it relates to this clause (h) , shall not exclude any underlying fact, event, change, development, circumstance, effect of any combination of the foregoing which resulted in the failure of Lodgian to meet any internal or published projection, forecasts or estimates of revenues or earnings or published industry analyst expectations of financial performance), or (i) any taking of action at the written request of LSREF Investments or Merger Sub; provided , however , that the occurrence of any fact, event, act, omission, change, development, circumstance, effect or any combination of the foregoing that results, or would reasonably be expected to result, in any of the Mortgage Loan, the IXIS Portfolio loan, the IXIS — Holiday Inn Hilton Head, ML Pool 1, ML Pool 3, ML Pool 4, the Wachovia Bank — Worcester loan, the Wachovia Bank — Palm Desert loan, the Wachovia Bank — Phoenix West loan or the Wachovia Bank — Springhill Suites Pinehurst loan becoming full recourse to Lodgian (other than the full recourse liability of Lodgian pursuant to that certain Full Recourse Guaranty dated July 1, 2009, executed by Lodgian in favor of Wells Fargo Bank, N.A., as Trustee for the Registered Holders of Merrill Lynch Mortgage Trust 2005-CKI1, Commercial Mortgage Pass-Through Certificates, Series 2005-CKI1 relating to the Merrill Lynch Fixed Rate #4 loan), or to any of the Company’s subsidiaries that are currently not obligated with respect to such indebtedness shall be deemed to result in a company material adverse effect.

 

The merger agreement provides that until the effective time of the merger and unless otherwise contemplated by the merger agreement:

 

 

 

In addition, during the period from the date of the merger agreement until the earlier of the termination of the merger agreement or the effective time of the merger, except as expressly contemplated by the merger agreement or as required by applicable law, the Company has agreed to specific restraints relating to the following which it may not do without prior written consent of LSREF Investments (which consent may not be unreasonably withheld, conditioned or delayed):

 

 

 

 

Access to Information

 

Until the effective time of the merger, the merger agreement provides that the Company will afford LSREF Investments and its representatives, at all reasonable times, access as reasonably requested to all personnel, offices, properties and other facilities, and to all data, information, documents, contracts, agreements, commitments, books and records of or pertaining to the Company and any of its subsidiaries and will furnish to LSREF Investments, as soon as reasonably practicable, with (1) monthly unaudited consolidated statements of operations of the Company and its subsidiaries as of each month then ended and related balance sheet, in the Company’s standard format, excluding footnotes thereto (other than footnotes that address the areas addressed in footnotes 5, 7, 8 and 11 to the financial statements contained in the Company’s Form 10-Q filed for the period ended September 30, 2009, which footnotes may be in summary form), (2) monthly Hotelligence or STR reports received by the Company or any of its subsidiaries, and (3) other financial and operating data and other information with respect to the Company’s business and properties as LSREF Investments may from time to time reasonably request.

 

Company Recommendation

 

The merger agreement provides that subject to the duties of the Company’s board of directors under applicable law, the Company will (subject to certain exceptions) include in this proxy statement the unanimous recommendation of the Company’s board of directors that the stockholders of the Company adopt the merger agreement and approve the merger, which we refer to in this proxy statement as the “company recommendation” . At any time before the stockholder approval has been obtained, the company recommendation may be withdrawn or modified (other than in connection with a company takeover proposal, which is governed exclusively by the “non-solicitation” provisions of the merger agreement) only if the Company’s board of directors determines in good faith (after taking into account the advice of the Company’s outside legal counsel) that the failure to so withdraw or modify the company recommendation would be inconsistent with its fiduciary duties to the Company’s stockholders under applicable law, but only after:

 

 

No Solicitation

 

Unless otherwise permitted by the merger agreement, the merger agreement provides that the Company will not, and will cause its subsidiaries to not, directly or indirectly, and the Company will not, and will cause its subsidiaries to not, directly or indirectly, authorize or permit any of its or their officers, directors,

employees, agents, consultants, investment bankers, lawyers, accountants, agents and other representatives of the Company to:

 

 

However, at any time prior to the adoption of the merger agreement by the stockholders, if the Company:

 

 

then the Company may,

 

 

In addition, the Company has agreed to promptly as practicable (and in any event within 24 hours) notify LSREF Investments in writing of any bona fide inquiries, proposals or offers regarding any company takeover proposal, or any request for information or inquiry relating to, or that could reasonably be expected to lead to, a company takeover proposal, received by the Company. The notification must include a copy of the applicable company takeover proposal, request or inquiry. The Company has agreed to keep LSREF Investments informed on a current basis of the status and material terms and conditions (including all amendments or proposed amendments) of any such Acquisition Proposal, request or inquiry.

 

At any time prior to the date of the special meeting, the board of directors of the Company may (i) withdraw or modify the company recommendation or (ii) terminate the merger agreement and approve or recommend a company superior offer if, (A) the Company receives an unsolicited, bona fide written company takeover proposal not in breach of the non-solicitation provisions of the merger agreement, (B) the board of directors determines in good faith, after consultation with its outside financial and legal advisors, that such offer constitutes a company superior offer, and (C) following consultation with outside legal counsel, the board

of directors determines in good faith that the failure to withdraw or modify the company recommendation would be inconsistent with the fiduciary duties of the board of directors to the stockholders of the Company under applicable law; provided , however that the board of directors may not take such actions set forth in (i) or (ii) above, unless:

 

 

As described in this proxy statement, a “company takeover proposal” means (other than the merger) any inquiry, proposal or offer, whether in one transaction or a series of transactions, relating to (1) any direct or indirect acquisition or purchase of assets of the Company representing 20% or more of the consolidated assets of the Company and its subsidiaries, including by way of the purchase of stock or other equity interests of subsidiaries of the Company, (2) any issuance, sale or other disposition of (including by way of merger, consolidation, business combination, share exchange, recapitalization, joint venture, partnership or any similar transaction) securities (or options, rights or warrants to purchase, or securities convertible into or exchangeable for, such securities) representing 20% or more of the voting power or economic interests of the Company, (3) any tender offer, exchange offer, stock purchase or other transaction in which, if consummated, any person or “group” (as such term is defined under the Exchange Act) shall acquire beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange Act), or the right to acquire beneficial ownership, of 20% or more of the voting power or economic interests of the Company, or (4) any merger, consolidation, share exchange, business combination, recapitalization, reorganization, liquidation or dissolution involving the Company.

 

As described in this proxy statement, a “company superior offer” means a company takeover proposal (but replacing references to “20% or more” with “50% or more”) on terms that our board or directors determines, in good faith, based upon consultations with its outside legal counsel and its financial advisors, are more favorable from a financial point of view to the Company’s stockholders than the merger agreement and the merger, taken as a whole, after giving effect to any proposed adjustments to the terms and conditions of the merger agreement by LSREF Investments in response to such company takeover proposal, and which is reasonably likely to be consummated, taking into account all legal, financial and regulatory aspects and the estimated timing, risks and probability of the consummation of, and the conditions to, such company superior offer and the person making the company superior offer, and for which financing, if a cash transaction

(whether in whole or in part), is then fully committed or reasonably determined by our board of directors to be readily available.

 

Other Covenants

 

The merger agreement contains a number of mutual covenants, which subject to certain exceptions obligate the Company and LSREF Investments (and in some instance Merger Sub), to

 

 

The merger agreement also contains covenants requiring the Company (subject to certain exceptions), to

 

 

 

Indemnification and Insurance

 

After the closing of the merger, the surviving corporation will, to the fullest extent permitted under applicable law, indemnify and hold harmless each of the Company’s and its subsidiaries’ present and former directors and officers as of the effective time of the merger (collectively, the “Indemnified Parties”) against all costs and expenses (including attorneys’ fees), judgments, fines, losses, claims, damages, liabilities and settlement amounts actually and reasonably incurred or paid in connection with any claim, action, suit, proceeding or investigation (whether arising before or after the effective time of the merger), whether civil, criminal, administrative or investigative, arising out of or pertaining to any action or omission, in his or her capacity as an officer, director, employee, fiduciary or agent, occurring on or before the effective time of the merger, to the same extent as provided in the charter or bylaws of the Company, or any other applicable contract or agreement, in effect on the date of the merger agreement. In the event of any such claim, action, suit, proceeding or investigation, (i) the surviving corporation will pay the reasonable fees and expenses of counsel selected by the Indemnified Parties, which counsel shall be reasonably satisfactory to the surviving corporation, promptly after reasonably detailed statements therefor are received (provided the applicable Indemnified Party provides an undertaking to repay all advanced expenses if it is finally judicially determined that such Indemnified Party is not entitled to indemnification) and (ii) all counsel selected by the Indemnified Parties shall, to the extent consistent with their professional responsibilities, cooperate with the surviving corporation and its counsel, if any, in the defense of any such matter; provided , however , that the surviving corporation shall not be liable for any settlement effected without the surviving corporation’s written consent.

 

The surviving corporation may not amend its bylaws or certificate of incorporation as of or after the effective time of the merger if such action would adversely affect the rights of individuals who, on or prior to the effective time of the merger, were entitled to advances, indemnification, contribution or exculpation thereunder for actions or omissions by such individuals in their capacity as directors or officers at any time prior to the effective time of the merger.

 

The surviving corporation will either (i) cause to be obtained at the effective time of the merger “tail” insurance policies with a claims period of at least six years from the effective time of the merger with respect to directors’ and officers’ liability insurance in amount and scope at least as favorable as the Company’s existing policies for claims arising from facts or events that occurred on or prior to the effective time of the merger; or (ii) maintain in effect for six years from the effective time of the merger, if available, the current directors’ and officers’ liability insurance policies maintained by the Company (provided that the surviving corporation may substitute therefor policies of at least the same coverage containing terms and conditions that are not less favorable) with respect to matters occurring on or prior to the Effective Time; provided , however , that in no event shall the surviving corporation, in order to obtain such insurance policies required be required to expend in any year during such six year period more than 200% of current annual premiums paid by the Company for current comparable insurance coverage. In the event of an expiration, termination or cancellation of such current policies, the surviving corporation will be required to obtain as much coverage as is possible under substantially similar policies for such maximum annual amount.

 

Employee Benefits Matters

 

The merger agreement provides that LSREF Investments will cause the surviving corporation and each of its subsidiaries to continue to perform all of the Company’s and its subsidiaries’ obligations under the company employment plans in accordance with the terms and conditions of such company employment plans. The merger agreement further provides that LSREF Investments will cause the surviving corporation and each

of its subsidiaries to honor the terms of each employment agreement, retention agreement, separation agreement and other agreement to which it is a party.

 

The merger agreement also provides that LSREF Investments will cause the surviving corporation and each of its subsidiaries to give each of the Company’s employees full service credit for purposes of eligibility and vesting and benefit accruals (but not for purposes of benefit accruals (i) under any defined benefit pension plan or (ii) which would result in any duplication of benefits for the same period of service) under the company employment plans after the effective time of the merger to the same extent such service was recognized under such plan prior to the effective time of the merger. With respect to each company employment plan that is a “welfare benefit plan” (as defined in Section 3(1) of ERISA), the merger agreement provides that LSREF Investments will cause the surviving corporation and its subsidiaries (i) to waive immediately after the effective time of the merger any pre-existing condition limitation or eligibility limitation for any of the Company’s employees to the extent neither such employee nor his or her eligible dependents were subject to any such limitation under the corresponding company employment plan immediately prior to the effective time of the merger and (ii) to give effect after the effective time of the merger, in determining any deductible and maximum out-of-pocket limitations, to claims incurred and amounts paid by, and amounts reimbursed to, any of the Company’s employees under any company employment plan prior to the effective time of the merger.

 

Conditions to Each Party’s Obligation

 

Each party’s obligation to complete the merger is subject to the satisfaction or waiver of the following conditions at or prior to the effective time of the merger:

 

 

Additional Conditions to the Company’s Obligation

 

The Company’s obligation to complete the merger are subject to the satisfaction or waiver of the following conditions at or prior to the effective time of the merger:

 

 

Additional Conditions to LSREF Investments’ and Merger Sub’s Obligation

 

The obligations of LSREF Investments and Merger Sub to complete the merger are subject to the satisfaction or waiver of the following conditions at or prior to the effective time of the merger:

 

 

As a result of the conditions to the completion of the merger, even if the requisite stockholder approval is obtained, there can be no assurance that the merger will be completed.

 

The Company procured and delivered to LSREF Investments the fully executed Release Side Letter, on February 9, 2010, in a form and substance reasonably acceptable to LSREF Investments. Such condition has therefore been satisfied.

 

The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger, whether before or after our stockholders have approved and adopted the merger agreement, as follows:

 

1. by mutual written consent of LSREF Investments and the Company;

 

2. by either LSREF Investments or the Company if the merger is not consummated on or before June 30, 2010 (the “Outside Date”, which date may be extended to September 15, 2010 (i) by LSREF Investments providing written notice to the Company before June 30, 2010, provided that LSREF Investments is not in material breach of any of its representations, warranties or covenants under the merger agreement as of such date, or (ii) by the Company providing written notice to LSREF Investments before June 30, 2010, if, with respect to this clause (ii) , (A) the Company is not in material breach of any of its representations, warranties or covenants under the merger agreement as of such date, and (B) the maturities of each of the items of certain indebtedness of the Company, other than the ML Pool 3, the Wachovia — Worcester Loan, and the Wachovia — Phoenix West Loan, are December 1, 2010 or later, as of such date, as so extended, such date shall be the “Outside Date”); provided that the right to terminate the merger agreement is not available to any party whose failure to fulfill any obligation under the merger agreement has been the principal cause of, or resulted in, the failure of the merger to be consummated on or before such date;

 

3. by either LSREF Investments or the Company if any governmental authority shall have enacted, issued, promulgated, enforced or entered into any law, injunction, order, decree or ruling or taken any other action including the failure to have taken an action which has become final and non-appealable and has the effect of making consummation of the merger illegal or otherwise preventing or prohibiting consummation of the merger;

 

4. by LSREF Investments, if neither LSREF Investments nor Merger Sub is in material breach of any of its representations, warranties or covenants under the merger agreement, and if (i) any of the Company’s representations or warranties set forth in the merger agreement become untrue or inaccurate, which would give rise to the failure of applicable closing condition, or (ii) there has been a breach on the Company’s part of any of its covenants or agreements set forth in the merger agreement, which would give rise to the failure of applicable closing condition, and such breach (if curable) has not been cured within 20 days after we receive notice;

 

5. by the Company, if it is not in material breach of its representations, warranties or covenants under the merger agreement, and if (i) any of the representations or warranties of LSREF Investments or Merger Sub set forth in the merger agreement become untrue or inaccurate, which would give rise to the failure of applicable closing condition, or (ii) there has been a breach on the part of LSREF Investments or Merger Sub of any of its covenants or agreements set forth in the merger agreement, which would give rise to the failure of applicable closing condition, and such breach (if curable) has not been cured within 20 days after notice to LSREF Investments and Merger Sub;

 

6. by LSREF Investments, if (i) the Company enters into a definitive agreement providing for a transaction that is a company superior offer, (ii) the Company’s board of directors (or any committee thereof) withdraws or modifies the company recommendation in a manner adverse to LSREF Investments, (iii) within five business days of a written request by LSREF Investments for the board of directors of the Company to reaffirm the company recommendation following the date any company takeover proposal or any material modification thereto is first publicly announced, published or sent to our stockholders, the Company fails to issue a press release that reaffirms the company recommendation (which request may only be made once with respect to such company takeover proposal absent further material changes or amendments in such company takeover proposal), (iv) the Company fails to include the company recommendation in this proxy statement or (v) the Company or its board of directors (or any committee thereof) shall authorize or publicly propose any of the foregoing;

7. by the Company prior to receipt of stockholder approval, if our board of directors (or any committee thereof) shall have approved or recommended a company superior offer in accordance with the provisions described under “Proposal 1 — The Merger Agreement — No Solicitation” on page [ • ]; provided , however , that any such purported termination will be void and of no force or effect unless the Company concurrently with such termination (i) pays to LSREF Investments the termination fee and (ii) enters into a definitive acquisition, merger or similar agreement to effect the company superior offer;

 

8. by LSREF Investments or the Company, if, at the special meeting (or any adjournment or postponement thereof) stockholder approval is not obtained; or

 

9. by LSREF Investments, if (i) the Company shall have knowingly breached a material provision of the merger agreement related to its obligation to file the proxy statement or the company recommendation provisions of the merger agreement, provided that (A) LSREF Investments must provide to the Company written notice of such breach promptly after LSREF Investments has knowledge of such breach and (B) the Company must have failed to cure any such breach (if curable) within three days after receipt of such notice, or (ii) the Company shall have knowingly breached a material provision of the non-solicitation provisions of the merger agreement.

 

Generally, all fees and expenses incurred in connection with the merger agreement and the merger will be paid by the party incurring such fees and expenses, whether or not the merger is consummated. There are certain circumstances that will require the Company to pay a termination fee of $3.25 million to LSREF Investments:

 

 

On January 22, 2010, Hospitality, an affiliate of LSREF Investments, purchased the Mortgage Loan. An amendment to such loan was also concurrently entered into by Hospitality and Lodgian’s subsidiary borrowing entities which own the hotels securing the loan. Pursuant to such amendment, amongst other things, if the merger agreement is validly terminated for any reason other than as described in paragraph 5 of

“Proposal 1 — The Merger Agreement — Termination of the Merger Agreement” above, the Company’s subsidiary borrowing entities on the loan will be required, in their sole discretion, to either pay down the principal balance of such loan by $5,000,000, or to cause the Holiday Inn Monroeville, Pennsylvania property to be pledged as additional security for the Mortgage Loan. If the Holiday Inn Monroeville, Pennsylvania property is pledged as additional security for the loan, it may be subsequently released from the loan upon payment of cash release price of $5,000,000.

 

In the event the Company pays to LSREF Investments any termination fee due, the termination fee will be deemed to be liquidated damages and the sole and exclusive remedy for any and all losses or damages suffered or incurred by LSREF Investments, Merger Sub, any of their respective affiliates or any other person in connection with the merger agreement, the transactions contemplated by the merger or any matter forming the basis for such termination, and neither LSREF Investments, Merger Sub, any of their respective affiliates or any other person shall be entitled to bring or maintain any other claim, action or proceeding against us, our subsidiaries, any of our respective affiliates or any other person arising out of the merger agreement, any of the transactions contemplated by the merger or any matters forming the basis for such termination.

 

The merger agreement may be amended, modified or supplemented only by written agreement among the Company, LSREF Investments and Merger Sub. However, after the adoption of the merger agreement by the Company’s stockholders, no amendment or change can be made without first obtaining the approval of the Company’s stockholders if the amendment is otherwise required by law to be approved by its stockholders.

 

The merger agreement expressly disclaims any third party beneficiary rights other than as contemplated by the provision of directors’ and officers’ indemnification insurance and the rights of equity holders to receive the merger consideration after the effective time of the merger.

 

Any failure of the Company, LSREF Investments or Merger Sub, to comply with any obligation, covenant, agreement or condition in the merger agreement can be waived by LSREF Investments, or the Company, only by written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition will not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.

 

The parties agreed that except for the provisions relating to the termination fee which may be paid by the Company to LSREF Investments in certain circumstances, all remedies conferred upon LSREF Investments or Merger Sub are deemed cumulative with and not exclusive of any other remedy conferred by the merger agreement, or by law or equity, upon LSREF Investments or Merger Sub, and the exercise by LSREF Investments or Merger Sub of any one remedy will not preclude the exercise of any other remedy. The Company’s exclusive remedy for breach by LSREF Investments or Merger Sub of the merger agreement or any guarantee entered into in connection therewith is specific performance.

 

If a court of competent jurisdiction determines that the Company is not entitled to an award of specific performance to remedy a breach of the merger agreement by LSREF Investments or Merger Sub, then the Company may be awarded any other remedy available to it at law or in equity, including monetary damages (which the parties agreed may not be limited to reimbursement of expenses or out-of-pocket costs and, to the extent proven, may be determined by reference to the amount, if any, that would have been recoverable by the Company stockholders if such Company stockholders were entitled to bring an action against LSREF Investments). Notwithstanding anything else contained in the merger agreement, in no event will the collective

damages payable by LSREF Investments, Merger Sub or any of their affiliates, for breaches under the merger agreement or any guarantee entered into in connection therewith exceed $20,000,000 in the aggregate for all such breaches. If a court of competent jurisdiction enters a judgment awarding the Company damages for such alleged breach, the parties agreed that (i) if such judgment is entered within 60 days of the Company filing suit, then within five days following such determination LSREF Investments and Merger Sub may elect to and may consummate the merger, provided that if LSREF Investments and Merger Sub do not so elect to consummate the merger or do not consummate the merger with such five days, then the Company may enforce such judgment, and (ii) if such judgment is entered later than 60 days after the Company files suit, then (A) the Company may enforce such judgment, or, (B) if LSREF Investments and Merger Sub desire to consummate the merger and the Company consents (such consent to be in the sole and absolute discretion of the Company) to such consummation at such time, the parties may consummate the merger.

 

The discussion of the provisions set forth is not a complete summary regarding your appraisal rights under Delaware law and is qualified in its entirety by reference to the text of the relevant provisions of Delaware law, which are attached to this proxy statement as Annex C. Stockholders intending to exercise appraisal rights should carefully review Annex C. Failure to follow precisely any of the statutory procedures set forth in Annex C may result in a termination or waiver of these rights.

 

If the merger is consummated, dissenting holders of our common stock who follow the procedures specified in Section 262 of the DGCL within the appropriate time periods will be entitled to have their shares of our common stock appraised by a court and to receive the “fair value” of such shares in cash as determined by the Delaware Court of Chancery in lieu of the consideration that such stockholder would otherwise be entitled to receive pursuant to the merger agreement.

 

The following is a brief summary of Section 262, which sets forth the procedures for dissenting from the merger and demanding statutory appraisal rights. Failure to follow the procedures set forth in Section 262 precisely could result in the loss of appraisal rights. This proxy statement constitutes notice to holders of our common stock concerning the availability of appraisal rights under Section 262. A stockholder of record wishing to assert appraisal rights must hold the shares of stock on the date of making a demand for appraisal rights with respect to such shares and must continuously hold such shares through the effective time of the merger.

 

Stockholders who desire to exercise their appraisal rights must satisfy all of the conditions of Section 262. A written demand for appraisal of shares must be filed with the Company before the special meeting. This written demand for appraisal of shares must be in addition to and separate from a vote against the merger. Stockholders electing to exercise their appraisal rights must not vote “FOR” the merger. Any proxy or vote against the merger will not constitute a demand for appraisal within the meaning of Section 262.

 

A demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder’s name appears on the share certificate. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, this demand must be executed by or for the fiduciary. If the shares are owned by or for more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he is acting as agent for the record owner. A person having a beneficial interest in our common stock held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized below and in a timely manner to perfect whatever appraisal rights the beneficial owner may have.

 

A stockholder who elects to exercise appraisal rights should mail or deliver his, her or its written demand to the Company at our address at 3445 Peachtree Road, N.E., Suite 700, Atlanta, GA 30326, Attention: Secretary. The written demand for appraisal should specify the stockholder’s name and mailing address, and that the stockholder is thereby demanding appraisal of his, her or its share of our common stock. Within ten days after the effective time of the merger, we must provide notice of the effective time of the merger to all of our stockholders who have complied with Section 262 and have not voted for the merger.

 

Within 120 days after the effective time of the merger (but not thereafter), any stockholder who has satisfied the requirements of Section 262 may deliver to the Company a written demand for a statement listing the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. We, as the surviving corporation in the merger, must mail such written statement to the stockholder no later than the later of 10 days after the stockholder’s request is received by the Company or 10 days after the latest date for delivery of a demand for appraisal under Section 262.

 

Within 120 days after the effective time of the merger (but not thereafter), either we or any stockholder who has complied with the required conditions of Section 262 and who is otherwise entitled to appraisal rights may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the

shares of our common stock owned by stockholders entitled to appraisal rights. We have no present intention to file such a petition if demand for appraisal is made.

 

Upon the filing of any petition by a stockholder in accordance with Section 262, service of a copy must be made upon us. We must, within 20 days after service, file in the office of the Register in Chancery in which the petition was filed, a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom we have not reached agreements as to the value of their shares. If we file a petition, the petition must be accompanied by the verified list. The Register in Chancery, if so ordered by the court, will give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the Company and to the stockholders shown on the list at the addresses therein stated, and notice will also be given by publishing a notice at least one week before the day of the hearing in a newspaper of general circulation published in the City of Wilmington, Delaware, or such publication as the court deems advisable. The forms of the notices by mail and by publication must be approved by the court, and we will bear the costs thereof. The Delaware Court of Chancery may require the stockholders who have demanded an appraisal for their shares (and who hold stock represented by certificates) to submit their stock certificates to the Register in Chancery for notation of the pendency of the appraisal proceedings and the Delaware Court of Chancery may dismiss the proceedings as to any stockholder that fails to comply with such direction.

 

If a petition for an appraisal is filed in a timely fashion, after a hearing on the petition, the court will determine which stockholders are entitled to appraisal rights and will appraise the shares owned by these stockholders, determining the fair value of such shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be the fair value.

 

Stockholders considering seeking appraisal of their shares should note that the fair value of their shares determined under Section 262 could be more, the same or less than the consideration they would receive pursuant to the merger agreement if they did not seek appraisal of their shares. The costs of the appraisal proceeding may be determined by the court and taxed against the parties as the court deems equitable under the circumstances. Upon application of a dissenting stockholder, the court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all shares entitled to appraisal. In the absence of a determination or assessment, each party bears his, her or its own expenses. The exchange of shares for cash pursuant to the exercise of appraisal rights generally will be a taxable transaction for United States federal income tax purposes and possibly state, local and foreign income tax purposes as well. See “The Merger — Certain Material United States Federal Income Tax Consequences of the Merger” on page [ • ].

 

Any stockholder who has duly demanded appraisal in compliance with Section 262 will not, after the effective time of the merger, be entitled to vote for any purpose the shares subject to demand or to receive payment of dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the effective time of the merger.

 

At any time within 60 days after the effective time of the merger, any stockholder will have the right to withdraw his, her or its demand for appraisal and to accept the terms offered in the merger agreement. After this period, a stockholder may withdraw his, her or its demand for appraisal and receive payment for his, her or its shares as provided in the merger agreement only with our consent. If no petition for appraisal is filed with the court within 120 days after the effective time of the merger, stockholders’ rights to appraisal (if available) will cease. Inasmuch as we have no obligation to file such a petition, any stockholder who desires a petition to be filed is advised to file it on a timely basis. No petition timely filed in the court demanding appraisal may be dismissed as to any stockholder without the approval of the court, which approval may be conditioned upon such terms as the court deems just.

 

Failure by any stockholder to comply fully with the procedures of Section 262 of the DGCL (as reproduced in Annex C to this proxy statement) may result in termination of such stockholder’s appraisal rights.

 

Except as otherwise indicated below, the following table sets forth certain information regarding ownership of our common stock as of February 5, 2010, by (i) each person known to us to be the beneficial owner of more than 5% of the issued and outstanding common stock, (ii) each member of the Board of Directors, (iii) each of the “named executive officers” (as defined in Item 402(a)(3) of Regulation S-K), and (iv) all directors and executive officers as a group. All shares were owned directly with sole voting and investment power unless otherwise indicated.

 

 

 

 

PROPOSAL 2 — ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING

 

If we fail to receive a sufficient number of votes to adopt the merger agreement, we may propose to adjourn or postpone the special meeting, if a quorum is present, for a period of not more than 120 days for the purpose of soliciting additional proxies to adopt the merger agreement. We currently do not intend to propose adjournment or postponement of our special meeting if there are sufficient votes to adopt the merger agreement. Approval of the proposal to adjourn or postpone our special meeting for the purpose of soliciting additional proxies requires the affirmative vote of a majority of the votes cast at the special meeting by holders of shares of our common stock present or represented by proxy and entitled to vote thereon.

Our board of directors recommends that you vote “FOR” the proposal to adjourn or postpone the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement.

 

Other Business at the Special Meeting

 

Our board of directors currently knows of no other business that will be presented for consideration at the special meeting. Nevertheless, should any business other than that set forth in the notice of special meeting of stockholders properly come before the meeting, the enclosed proxy confers discretionary authority to vote with respect to such matters, including matters that the board of directors does not know, a reasonable time before proxy solicitation, are to be presented at the meeting. If any of these matters are presented at the meeting, then the proxy agents named in the enclosed proxy card will vote in accordance with their judgment.

FUTURE STOCKHOLDER PROPOSALS

 

If the merger is completed, we will no longer have public stockholders and there will be no public participation in any future meetings of our stockholders. However, if the merger is not completed, our stockholders will continue to be entitled to attend and to participate in our stockholders meetings. We intend to hold an annual stockholders meeting in [2010] only if the merger is not completed, or if we are required to do so by law.

 

Stockholder Proposals

 

For a stockholder proposal to be considered for inclusion in our proxy statement for the 2010 Annual Meeting, the written proposal must be received by our Secretary at our principal executive offices no later than [ • ], 2010. If the date of the 2010 Annual Meeting is moved more than 30 days before or after the anniversary date of the 2009 Annual Meeting, the deadline for inclusion of proposals in our proxy statement is instead a reasonable time before we begin to print and mail our proxy materials. Stockholder proposals also will need to comply with SEC regulations under Rule 14a-8 regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Proposals should be addressed to:

 

Corporate Secretary

Lodgian Inc.

3445 Peachtree Road, N.E.

Suite 700

Atlanta, GA 30326

 

For a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8, the stockholders must give timely written notice of his or her proposal to the Secretary in accordance with our Bylaws. To be timely given with respect to the 2010 Annual Meeting, the notice of a stockholders proposal must be delivered to or mailed and received at our principal executive offices

 

 

If the date of the 2010 Annual Meeting is not within 30 days before or after the anniversary of the 2009 Annual Meeting, then notice of a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8 must be received no later than the close of business on the tenth day after public announcement of the meeting date. The stockholder who gives the notice must have been a stockholder at the time the notice was given and must be entitled to vote at the meeting during which the business set forth in

the proposal will be considered. The notice must set forth as to each matter the stockholder proposes to bring before the meeting the following information:

 

 

The stockholder must also comply with all applicable requirements of the Exchange Act that apply to the proposal.

 

Nomination of Director Candidates

 

A stockholder may nominate a person or persons for election to our board of directors by giving timely written notice of his or her nomination to the Secretary. To be timely given with respect to the 2010 Annual Meeting, the notice must be delivered to or mailed and received at our principal executive offices

 

 

If the date of the 2010 Annual Meeting is not within 30 days before or after the anniversary of the 2009 Annual Meeting, then notice of a stockholder nomination must be received no later than the close of business on the tenth day after public announcement of the meeting date. The stockholder who makes the nomination must have been a stockholder at the time the nomination was made and must be entitled to vote at the meeting during which the nomination will be considered. The notice must set forth the following information:

 

 

The stockholder must also comply with all applicable requirements of the Exchange Act that apply to the nomination.

 

Copy of Bylaw Provisions

 

You may contact our Secretary at our principal executive offices for a copy of the relevant Bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates.

 

We will deliver only one copy of this proxy statement to multiple stockholders sharing an address unless we have received contrary instructions from one or more of the stockholders. Upon written or oral request, we

will promptly deliver a separate copy of the proxy statement to a stockholder at a shared address to which a single copy of the proxy statement is delivered. A stockholder can notify us that the stockholder wishes to receive a separate copy of the proxy statement by contacting us at Lodgian Inc., Attention: Investor Relations, 3445 Peachtree Road N.E, Suite 700, Atlanta, GA 30326, or by contacting us via telephone at (404) 364-9400. Conversely, if multiple stockholders sharing an address receive multiple proxy statements and wish to receive only one, such stockholders can notify us at the address or phone number set forth above.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that we file with the SEC at its Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.

 

Our public filings are also available to the public from document retrieval services and at the Internet site maintained by the SEC at www.sec.gov .

 

If you have any questions about this proxy statement, the special meeting or the merger or need assistance with the voting procedures, you should contact Innisfree our proxy solicitor, toll free at (888) 750-5834 (banks and brokers may call collect at: (212) 750-5833).

 

The SEC allows us to incorporate by reference information into this proxy statement. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. Information that we file later with the SEC, prior to the closing of the merger, will automatically update and supersede the previously filed information and be incorporated by reference into this proxy statement.

 

We incorporate by reference any documents that may be filed with the SEC between the date of this proxy statement and prior to the date of the special meeting of our stockholders. These include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements (except for information furnished to the SEC that is not deemed to be “filed” for purposes of the Exchange Act).

 

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of reports, proxy statements or other information concerning us, without charge, by written or telephonic request directed to us at Lodgian Inc., Attention: Investor Relations, 3445 Peachtree Road N.E, Suite 700, Atlanta, GA 30326, Telephone: (404) 364-9400. If you would like to request documents, please do so by [ • ], 2010, in order to receive them before the special meeting. In addition, these documents may also be obtained through our website at www.lodgian.com .

 

You should only rely on information provided in this proxy statement. No persons have been authorized to give any information or to make any representations other than those contained in this proxy statement and, if given or made, such information or representations must not be relied upon as having been authorized by us or any other person. This proxy statement is dated [ • ], 2010. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement to stockholders shall not create any implication to the contrary.

 

AGREEMENT AND PLAN OF MERGER

by and among

LODGIAN, INC.,

LSREF LODGING INVESTMENTS, LLC

and

LSREF LODGING MERGER CO., INC.

Dated as of January 22, 2010

 

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