LODGIAN INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Period ended September 30, 2004


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


o		For the transition period from to

Commission file no. 1-14537

Lodgian, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

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


Class		Outstanding as of November 8, 2004

Common		24,544,462

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2004			December 31, 2003
	(Unaudited in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	57,344		$	10,897
Cash, restricted		9,963			7,084
Accounts receivable (net of allowances: 2004 - $985; 2003 - $689)		11,380			8,169
Insurance receivable		3,001			—
Inventories		6,096			5,609
Prepaid expenses and other current assets		18,521			17,068
Assets held for sale		35,540			68,567

Total current assets		141,845			117,394
Property and equipment, net		560,622			563,818
Deposits for capital expenditures		36,828			15,782
Other assets, net		7,828			12,180

	$	747,123		$	709,174

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,124		$	7,131
Other accrued liabilities		37,114			31,432
Advance deposits		2,174			1,882
Current portion of long-term debt		15,570			16,563
Liabilities related to assets held for sale		34,531			57,948

Total current liabilities		100,513			114,956
Long-term debt:
12.25% Cumulative preferred shares subject to mandatory redemption		—			142,177
Long-term obligations		404,968			409,115

Total long-term debt		404,968			551,292

Total liabilities		505,481			666,248
Minority interests		2,036			2,320
Commitments and contingencies
Stockholders’ equity:
Common stock, $.01 par value, 60,000,000 shares authorized; 24,572,044 and 2,333,591 issued and outstanding at September 30, 2004 and December 31, 2003, respectively		246			23
Additional paid-in capital		306,932			89,874
Unearned stock compensation		(371	)		(508	)
Accumulated deficit		(68,177	)		(50,107	)
Accumulated other comprehensive income		1,052			1,324
Less: Treasury stock		(76	)		—

Total stockholders’ equity		239,606			40,606

	$	747,123		$	709,174

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three months ended						Nine months ended
	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
	(Unaudited in thousands, except per share data)						(Unaudited in thousands, except per share data)
Revenues:
Rooms	$	64,805		$	62,506		$	186,693		$	177,430
Food and beverage		16,950			16,407			52,874			51,991
Other		2,806			2,841			8,376			8,537

		84,561			81,754			247,943			237,958

Operating expenses:
Direct:
Rooms		18,722			17,697			51,700			49,790
Food and beverage		12,595			12,030			36,842			36,129
Other		2,095			2,013			6,144			5,793

		33,412			31,740			94,686			91,712

		51,149			50,014			153,257			146,246
Other operating expenses:
Other hotel operating costs		25,577			24,164			73,471			69,436
Property and other taxes, insurance and leases		5,597			6,087			16,724			19,671
Corporate and other		4,519			4,235			13,714			16,280
Casualty gains and losses		2,019			—			2,019			—
Depreciation and amortization		7,066			7,572			20,741			22,567
Impairment of long-lived assets		607			2			607			1,380

Other operating expenses		45,385			42,060			127,276			129,334

		5,764			7,954			25,981			16,912
Other income (expenses):
Interest income and other		212			114			321			321
Interest expense and other financing costs:
Preferred stock dividend		(865	)		(4,027	)		(9,383	)		(4,027	)
Other interest expense		(7,350	)		(7,665	)		(35,429	)		(20,863	)
Loss on preferred stock redemption		(4,471	)		—			(6,063	)		—

Loss before income taxes, reorganization items and minority interests		(6,710	)		(3,624	)		(24,573	)		(7,657	)
Reorganization items		—			—			—			(2,045	)

Loss before income taxes and minority interest		(6,710	)		(3,624	)		(24,573	)		(9,702	)
Minority interests		503			99			285			(118	)

Loss before income taxes — continuing operations		(6,207	)		(3,525	)		(24,288	)		(9,820	)
Provision for income taxes — continuing operations		(337	)		(75	)		(488	)		(226	)

Loss from continuing operations		(6,544	)		(3,600	)		(24,776	)		(10,046	)

Discontinued operations:
Loss from discontinued operations before income taxes		2,807			(46	)		6,706			(5,125	)
Income tax provision		—			—			—			—

Loss from discontinued operations		2,807			(46	)		6,706			(5,125	)

Net loss		(3,737	)		(3,646	)		(18,070	)		(15,171	)
Preferred stock dividend		—			—			—			(7,594	)

Net loss attributable to common stock	$	(3,737	)	$	(3,646	)	$	(18,070	)	$	(22,765	)

Basic and diluted loss per common share:

Net loss attributable to common stock	$	(0.15	)	$	(1.56	)	$	(1.77	)	$	(9.76	)

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


															ACCUMULATED
	COMMON STOCK					ADDITIONAL			UNEARNED						OTHER						TOTAL
						PAID-IN			STOCK			ACCUMULATED			COMPREHENSIVE			TREASURY			STOCKHOLDERS’
	SHARES			AMOUNT		CAPITAL			COMPENSATION			DEFICIT			LOSS (net of tax)			STOCK			EQUITY
	(Unaudited in thousands, except share data)
Balance December 31, 2003		2,333,591		$	23	$	89,874		$	(508	)	$	(50,107	)	$	1,324		$	—		$	40,606
Partial shares cancelled on reverse stock split		(971	)		—		(5	)		—			—			—			—			(5	)
Issuance of restricted stock		—			—		25			(25	)		—			—			—			—
Issuance of new common shares		18,285,714			183		175,693			—			—			—			—			175.876
Surrender of unexchanged shares		(2,657	)		—		—			—			—			—			—			—
Amortization of unearned stock compensation		—			—		—			162			—			—			—			162
Exercise of stock options		241			—		4			—			—			—			—			4
Exchange of preferred shares for common shares		3,941,115			40		41,341			—			—			—			—			41,381
Vesting of restricted stock units		22,222			—		—			—			—			—			—			—
Treasury stock		(7,211	)		—		—			—			—			—			(76	)		(76	)
Comprehensive loss:																						—
Net loss		—			—		—			—			(18,070	)		—			—			(18,070	)
Currency translation		—			—		—			—			—			—			—			—
adjustments (related taxes estimated at nil)		—			—		—			—			—			(272	)		—			(272	)

Total comprehensive loss																						(18,342	)

Balance September 30, 2004		24,572,044			246		306,932			(371	)		(68,177	)		1,052			(76	)		239,606

The comprehensive loss for the three months ended September 30, 2004 was $3.7 million and the comprehensive loss for the three months ended September 30, 2003 was $3.6 million.

The comprehensive loss for the nine months ended September 30, 2003 was $14.2 million.

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months ended
	September 30, 2004			September 30, 2003
	(Unaudited in thousands)
OPERATING ACTIVITIES:
Net loss	$	(18,070	)	$	(15,171	)
Less: (loss) income from discontinued operations		(6,706	)		5,125

Loss from continuing operations		(24,776	)		(10,046	)
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization		20,741			22,567
Impairment of long-lived assets		607			1,380
Amortization of unearned stock compensation		137			42
Preferred stock dividends		9,383			4,027
Loss on redemption of preferred stock		6,063			—
Casualty losses		2,019			—
Minority interests		(285	)		118
Write-off and amortization of deferred financing costs		9,357			2,606
Other		914			470
Changes in operating assets and liabilities:
Accounts receivable, net of allowances		(3,211	)		(1,123	)
Insurance receivable		(46	)		—
Inventories		(487	)		(108	)
Prepaid expenses, other assets and restricted cash		(3,932	)		8,961
Accounts payable		2,204			(2,647	)
Other accrued liabilities		5,501			2,796
Advance deposits		292			698

Net cash provided by operating activities from continuing operations		24,481			29,741
Net cash provided by (used in) operating activities from discontinued operations		779			(2,187	)

Net cash provided by operating activities		25,260			27,554

INVESTING ACTIVITIES:
Capital improvements		(22,312	)		(29,726	)
Net proceeds from disposition of discontinued operations and land parcels		38,919			—
Withdrawals for capital expenditures		(21,046	)		6,532
Other		(493	)		(397	)

Net cash used in investing activities		(4,932	)		(23,591	)

FINANCING ACTIVITIES:
Proceeds from issuance of long term debt		370,000			80,000
Proceeds from working capital revolver		—			2,000
Proceeds from exercise of stock options and issuance of common stock		175,904			—
Shares redeemed from reverse stock split		(5	)		—
Preferred stock redemption		(114,043	)		—
Treasury stock		(76	)		—
Principal payments on long-term debt		(400,234	)		(81,584	)
Payments of deferred financing costs		(5,409	)		(4,725	)

Net cash provided by (used in) financing activities		26,137			(4,309	)

Effect of exchange rate changes on cash		(18)			—
Net increase (decrease) in cash and cash equivalents		46,447			(346	)
Cash and cash equivalents at beginning of period		10,897			10,875

Cash and cash equivalents at end of period	$	57,344		$	10,529

Supplemental cash flow information:
Cash paid during the period for:
Interest, net of the amounts capitalized shown below	$	27,705		$	20,634
Interest capitalized		469			898
Income taxes, net of refunds		753			218
Supplemental disclosure of non-cash investing and financing activities:
Net non-cash debt decrease		(208	)		(10,981	)
Issuance of promissory notes as consideration for taxation liabilities		2,466			852
Preferred stock dividend accrued		—			11,621

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(Throughout this Form 10-Q, we will use the terms “Lodgian,” “we,” “our,” and “us,” to refer to Lodgian, Inc. and unless the context otherwise requires or expressly states, our subsidiaries).

1. Business Summary

We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms and gross annual revenues, as reported by Hotel & Motel Management Magazine in September 2004. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as “Crowne Plaza,” “Holiday Inn,” “Marriott,” and “Hilton.” As of November 8, 2004, we operated 87 hotels with an aggregate of 16,368 rooms, located in 30 states and Canada. Of the 87 hotels, 78 hotels, with an aggregate of 14,350 rooms, are part of our continuing operations, while nine hotels, with an aggregate of 2,018 rooms, are held for sale. Our portfolio of 87 hotels consists of:

• 82 hotels that we wholly own and operate through subsidiaries;

• four hotels that we operate in joint ventures in which we have a 50% or greater voting equity interest and exercise control; and

• one hotel that we operate in a joint venture in which we have a 30% non-controlling equity interest.

We consolidate all of these hotels in our financial statements, other than the one hotel in which we hold a non-controlling equity interest and which we account for under the equity method.

Our hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale and upscale market segments of the lodging industry. As of November 8, 2004, we operated all but three of our hotels under franchises obtained from nationally recognized hospitality franchisors. We operate 59 of our hotels under franchises obtained from InterContinental Hotels Group as franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn Express brands. We operate 15 of our hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott and Residence Inn by Marriott brands. We operate another 10 hotels under other nationally recognized brands. We believe that these strong national brands afford us many benefits such as guest loyalty and market share premiums.

2. General

Our condensed consolidated financial statements include the accounts of Lodgian, Inc., its wholly-owned subsidiaries and four joint ventures in which Lodgian, Inc. has a controlling financial interest (owns a 50% or greater voting equity interest and exercises control). We believe we have control of the joint ventures when we manage and have control of the joint ventures’ assets and operations. We report the third party partners’ share of the net income or loss of these joint ventures and their share of the joint ventures’ equity as minority interest. We include in other assets our investment in the hotel in which we hold a minority interest and which we account for under the equity method. We report our share of the income or loss of this minority-owned hotel as part of interest income and other. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accounting policies which we follow for quarterly financial reporting are the same as those which we disclosed in Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2003.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2003, we developed a portfolio improvement strategy which was consistent with our goals of operating a portfolio of profitable, well-maintained and appealing hotels at superior locations in strong markets. In accordance with this strategy and our efforts to reduce debt and interest costs, we identified 19 hotels, one office building and three land parcels for sale. Between November 1, 2003 and November 8, 2004, we sold the office building, ten of the 19 hotels and two of the three land parcels. As of November 8, 2004, our hotel portfolio consisted of 87 hotels, 78 of which represent our continuing operations portfolio (including one hotel in which we have a non-controlling equity interest which we do not consolidate). We believe that our held for sale assets as of September 30, 2004 remain properly classified in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2004, the results of our operations for the three and nine months ended September 30, 2004 and September 30, 2003 and our cash flows for the nine months ended September 30, 2004 and September 30, 2003. Our results for interim periods are not necessarily indicative of our results for the entire year. You should read these financial statements in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2003.

As we prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP), we reclassify certain prior period amounts to conform to the current period’s presentation. We also make estimates and assumptions which affect:

• the reported amounts of assets and liabilities;

• the reported amounts of revenues and expenses during the reporting period; and

• the disclosures of contingent assets and liabilities at the date of our financial statements.

Our actual results could differ from our estimates.

Reverse Stock Split

On April 27, 2004, our Board of Directors authorized a reverse stock split of our common stock in a ratio of one-for-three (1:3) with resulting fractional shares paid in cash. The reverse split affected all of our issued and outstanding common shares, warrants, stock options, and restricted stock. The record date for the reverse split was April 29, 2004 and our new common stock began trading under the split adjustment on April 30, 2004.

All amounts for common stock, warrants, stock options, and restricted stock, and all earnings per share computations have been retroactively adjusted to reflect the change in our capital structure.

Stock-based Compensation

As we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003, on November 25, 2002, we adopted a new Stock Incentive Plan which replaced the stock option plan previously in place. In accordance with the Stock Incentive Plan, and prior to the consummation of the public offering, we were permitted to grant awards to acquire up to 353,333 shares of common stock to our directors, officers, or other key employees or consultants as determined by a committee appointed by our Board of Directors. Awards may consist of stock options, stock appreciation rights, stock awards, performance share awards, section 162(m) awards or other awards determined by the committee. We cannot grant stock options pursuant to the Stock Incentive Plan at an exercise price which is less than 100% of the fair market value per share on the date of the grant. Vesting, exercisability, payment and other restrictions pertaining to any awards made pursuant to the Stock Incentive Plan are determined by the Committee. At our 2004 annual meeting, stockholders approved an amendment and restatement of the Stock Incentive Plan to, among other things, increase the number of shares of common stock available for issuance thereunder by 29,667 immediately and, in the event we consummated a firm commitment, underwritten public offering of our common stock, by an additional amount to be determined pursuant to a formula. With the

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

consummation of our public offering of common stock on June 25, 2004, the total number of shares available for issuance under our Stock Incentive Plan increased to 2,950,832 shares.

On April 9, 2004, the Company issued to our CEO, Thomas Parrington, 1,382 restricted stock units in accordance with his employment agreement. The restricted stock units vest on April 9, 2005 when they will be convertible into an equal number of shares of common stock. On July 15, 2004, 22,222 restricted stock units previously issued to Mr. Parrington vested. Pursuant to the terms of his restricted unit award agreement, Mr. Parrington elected to have the Company withhold an appropriate number of vested shares to satisfy the employment tax withholding requirements associated with the vesting of the restricted units. Accordingly, 7,211 shares were withheld and deemed repurchased by the Company, thereby resulting in the reporting of treasury stock in our Condensed Consolidated Statement of Stockholders’ Equity.

We present below a summary of our stock option plan and the restricted stock units activity under the plan for the nine months ended September 30, 2004:


				Weighted Average
	Options			Exercise Price
Balance, December 31, 2003		157,529		$	13.92
Granted		383,500			10.52
Exercised		(241	)		15.21
Forfeited		(8,991	)		15.21

Balance, September 30, 2004		531,797		$	11.46


	Restricted
	Stock Units
Balance, December 31, 2003		66,666
Issued		1,382
Forfeited		—
Shares converted to common stock		(22,222	) (1)

Balance, September 30, 2004		45,826

(1)

At September 30, 2004, 22,222 units of the restricted stock had vested.

In the following table, we summarize information for options outstanding and exercisable at September 30, 2004:


	Options outstanding						Options exercisable
			Weighted average		Weighted average				Weighted average
Range of prices	Number		remaining life (in years)		exercise prices		Number		exercise prices

$9.00 to $10.50		33,333		8.8	$	9.00		11,111	$	9.00
$10.51 to $15.00		382,000		9.7	$	10.52		—	$	10.52
$15.01 to $15.50		109,298		8.9	$	15.21		72,810	$	15.21
$15.51 to $16.00		7,166		9.0	$	15.66		2,389	$	15.66

		531,797		9.5	$	11.46		86,310	$	14.42

We account for stock option grants in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Under APB No. 25, if the exercise price of

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

our employee stock options is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under SFAS No. 123, “Accounting for Stock-Based Compensation” (as amended by SFAS No. 148), compensation cost is measured at the grant date based on the estimated value of the award and is recognized over the service (or vesting) period. The income tax benefit, if any, associated with the exercise of stock options is credited to additional paid-in capital.

Had the compensation cost of our stock option plan been recognized under SFAS No. 123, based on the fair market value at the grant dates, our pro forma net loss and net loss per share would have been as follows:


	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2004			2003 (1)			2004			2003(1)
Loss from continuing operations
As reported	$	(6,544	)	$	(3,600	)	$	(24,776	)	$	(10,046	)
Add: Stock-based compensation expense included in net income, net of tax effects		62			42			162		$	42
Deduct: Total pro forma stock-based employee compensation expense, net of tax effects		(423	)		(504	)		(778	)		(504	)

Pro forma		(6,905	)		(4,062	)		(25,392	)		(10,508	)
Income (loss) from discontinued operations
As reported		2,807			(46	)		6,706			(5,125	)
Add: Stock-based compensation expense included in net income, net of tax effects
Deduct: Total pro forma stock-based employee compensation expense, net of tax effects		—			—			—			—

Pro forma		2,807			(46	)		6,706			(5,125	)
Net loss
As reported		(3,737	)		(3,646	)		(18,070	)		(15,171	)
Add: Stock-based compensation expense included in net income, net of tax effects		62			42			162			42
Deduct: Total pro forma stock based employee compensation expense, net of tax effects		(423	)		(504	)		(778	)		(504	)

Pro forma		(4,098	)		(4,108	)		(18,686	)		(15,633	)
Net loss attributable to common stock
As reported		(3,737	)		(3,646	)		(18,070	)		(22,765	)
Add: Stock-based compensation expense included in net income, net of tax effects		62			42			162			42
Deduct: Total pro forma stock based employee compensation expense, net of tax effects		(423	)		(504	)		(778	)		(504	)

Pro forma		(4,098	)		(4,108	)		(18,686	)		(23,227	)
Loss from continuing operations attributable to common stock before discontinued operations
As reported		(6,544	)		(3,600	)		(24,776	)		(17,640	)
Add: Stock-based compensation expense included in net income, net of tax effects		62			42			162			42
Deduct: Total pro forma stock based employee compensation expense, net of tax effects		(423	)		(504	)		(778	)		(504	)

Pro forma		(6,905	)		(4,062	)		(25,392	)		(18,102	)
Basic and diluted loss per common share:
Loss from continuing operations
As reported	$	(0.27	)	$	(1.54	)	$	(2.43	)	$	(4.31	)
Add: Stock-based compensation expense included in net income, net of tax effects		—			0.02			0.02			0.02
Deduct: Total pro forma stock-based employee compensation expense, net of tax effects		(0.01	)		(0.22	)		(0.08	)		(0.21	)

Pro forma		(0.28	)		(1.74	)		(2.49	)		(4.50	)
Income (loss) from discontinued operations
As reported		0.12			(0.02	)		0.66			(2.19	)
Add: Stock-based compensation expense included in net income, net of tax effects		—			—			—			—
Deduct: Total pro forma stock-based employee compensation expense, net of tax effects		—			—			—			—

Pro forma		0.12			(0.02	)		0.66			(2.19	)
Net loss
As reported		(0.15	)		(1.56	)		(1.77	)		(6.50	)
Add: Stock-based compensation expense included in net income, net of tax effects		—			0.02			0.01			0.02
Deduct: Total pro forma stock-based employee compensation expense, net of tax effects		(0.01	)		(0.22	)		(0.08	)		(0.22	)

Pro forma		(0.16	)		(1.76	)		(1.84	)		(6.70	)
Net loss attributable to common stock
As reported		(0.15	)		(1.56	)		(1.77	)		(9.76	)
Add: Stock-based compensation expense included in net income, net of tax effects		—			0.02			0.01			0.02
Deduct: Total pro forma stock-based employee compensation expense, net of tax effects		(0.01	)		(0.22	)		(0.08	)		(0.22	)

Pro forma		(0.16	)		(1.76	)		(1.84	)		(9.96	)
Loss from continuing operations attributable to common stock before discontinued operations
As reported		(0.27	)		(1.54	)		(2.43	)		(7.56	)
Add: Stock-based compensation expense included in net income, net of tax effects		—			0.02			0.02			0.02
Deduct: Total pro forma stock-based employee compensation expense, net of tax effects		(0.01	)		(0.22	)		(0.08	)		(0.22	)

Pro forma		(0.28	)		(1.74	)		(2.49	)		(7.76	)

(1)

There were 150,666 options outstanding between January 1, 2003 and September 30, 2003.

3. Discontinued Operations

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and September 30, 2004, we sold one hotel and two land parcels for an aggregate sales price of $5.3 million. From the sale of these assets, we paid down debt of approximately $3.2 million.

In accordance with SFAS No. 144, we have included the hotel assets sold during 2003 and 2004 as well as the hotel assets held for sale at September 30, 2004 (including any related impairment charges) in Discontinued Operations in the Consolidated Statements of Operations. The assets held for sale at September 30, 2004 and December 31, 2003 and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheets. Where the carrying values of the assets held for sale exceeded the estimated fair values, net of selling costs, we reduced the carrying values and recorded impairment charges. We determine fair values using quoted market prices, when available, or other accepted valuation techniques. During the three and nine months ended September 30, 2004, we recorded impairment charges of $0.4 million and $3.0 million, respectively, on assets held for sale. We consider properties to be assets held for sale when management approves and commits to a formal plan to actively market a property for sale. Upon designation of a property as an asset held for sale, we record the carrying value of the property at the lower of its carrying value or its estimated fair market value, less estimated selling costs, and we stop recording depreciation expense. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year.

At September 30, 2004, nine hotels and one land parcel were held for sale. At December 31, 2003, 18 hotels and three land parcels were held for sale. The following condensed combined table summarizes the assets and liabilities relating to the properties identified as held for sale as of September 30, 2004 and December 31, 2003:


	September 30, 2004		December 31, 2003
	(Unaudited in thousands)
ASSETS
Accounts receivable, net of allowances	$	949	$	1,252
Inventories		739		1,377
Prepaid expenses and other current assets		638		1,039
Property and equipment, net		32,246		61,624
Other assets		968		3,275

	$	35,540	$	68,567

LIABILITIES
Accounts payable	$	944	$	1,234
Other accrued liabilities		2,000		3,120
Advance deposits		204		390
Current portion of long-term debt		388		771
Long-term debt		30,995		52,433

Total liabilities	$	34,531	$	57,948

The condensed combined results of operations of the properties classified as Discontinued Operations for the three and nine months ended September 30, 2004 were as follows:

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2004			2003			2004			2003
	(Unaudited in thousands)						(Unaudited in thousands)
Revenues:
Rooms	$	7,800		$	14,752		$	24,235		$	36,595
Food and beverage		1,673			2,907			6,430			8,442
Other		254			927			1,090			2,613

		9,727			18,586			31,755			47,650

Operating expenses:
Direct:
Rooms		2,417			4,117			7,452			11,027
Food and beverage		1,443			2,360			5,028			6,748
Other		209			626			847			1,810

		4,069			7,103			13,327			19,585

		5,658			11,483			18,428			28,065
Other operating expenses:
Other hotel operating costs		3,301			6,252			11,815			17,726
Property and other taxes, insurance and leases		674			1,870			1,757			5,738
Depreciation and amortization		65			409			216			3,358
Impairment of long-lived assets		368			1,678			2,972			3,748

Other operating expenses		4,408			10,209			16,760			30,570

		1,250			1,274			1,668			(2,505	)
Interest income		50			—			50			—
Interest expense and other financing costs		(448	)		(1,320	)		(4,216	)		(2,621	)
Gain on asset dispositions		1,955			—			9,204			1

Income (loss) before income taxes		2,807			(46	)		6,706			(5,125	)
Provision for income taxes		—			—			—			—

Net loss	$	2,807		$	(46	)	$	6,706		$	(5,125	)

4. Cash, Restricted

As of September 30, 2004, our restricted cash consisted of amounts reserved for letter of credit collateral, a deposit required by our bankers and cash reserved pursuant to certain loan agreements.

5. Loss Per Share

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


	Three months ended						Nine months ended
	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
	(Unaudited in						(Unaudited in
	thousands, except						thousands, except
	per share data)						per share data)
Basic and diluted loss per share:
Numerator:
Loss from continuing operations	$	(6,544	)	$	(3,600	)	$	(24,776	)	$	(10,046	)
Loss from discontinued operations		2,807			(46	)		6,706			(5,125	)

Net loss		(3,737	)		(3,646	)		(18,070	)		(15,171	)
Preferred stock dividend		—			—			—			(7,594	)

Net loss attributable to common stock		(3,737	)		(3,646	)		(18,070	)		(22,765	)

Loss from continuing operations		(6,544	)		(3,600	)		(24,776	)		(10,046	)
Preferred stock dividend		—			—			—			(7,594	)

Loss from continuing operations attributable to common stock before discontinued operations	$	(6,544	)	$	(3,600	)	$	(24,776	)	$	(17,640	)

Denominator:
Denominator for basic and diluted loss per share—weighted-average shares		24,571			2,333			10,205			2,333

Basic and diluted loss per common share:
Loss from continuing operations	$	(0.27	)	$	(1.54	)	$	(2.43	)	$	(4.31	)
Loss from discontinued operations		0.12			(0.02	)		0.66			(2.19	)

Net loss		(0.15	)		(1.56	)		(1.77	)		(6.50	)

Net loss attributable to common stock		(0.15	)		(1.56	)		(1.77	)		(9.76	)

Loss from continuing operations attributable to common stock before discontinued operations	$	(0.27	)	$	(1.54	)	$	(2.43	)	$	(7.56	)

We did not include the shares associated with the assumed conversion of the restricted stock units (45,826 shares) or the exercise of stock options (options to acquire 531,797 shares of common stock) and A and B warrants (rights to acquire 503,546 and 343,122 shares of common stock, respectively) in the computation of diluted loss per share for the three and nine months ended September 30, 2004 because their inclusion would have been antidilutive.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We did not include the shares associated with the assumed conversion of the restricted stock units (66,666 shares) or the exercise of stock options (options to acquire 150,666 shares of common stock) and A and B warrants (rights to acquire 503,546 and 343,122 shares of common stock, respectively) in the computation of diluted loss per share for the three and nine months ended September 30, 2003 because their inclusion would have been antidilutive.

6. Other Accrued Liabilities

At September 30, 2004 and December 31, 2003, other accrued liabilities consisted of the following:


	September 30, 2004		December 31, 2003
	(Unaudited in thousands)
Salaries and related costs	$	17,615	$	16,211
Property and sales taxes		12,022		9,427
Professional fees		920		570
Provision for state income taxes		342		2,361
Franchise fee accrual		1,464		1,115
Accrued interest		1,871		526
Accrual for allowed claims		2,180		186
Other		700		1,036

	$	37,114	$	31,432

7. Debt

Substantially all of our property and equipment are pledged as collateral for long-term obligations with the exception of three hotels and one land parcel, of which two of the hotels and the land parcel are classified as held for sale. Certain of our mortgage notes are subject to a prepayment or yield maintenance penalty if we repay them prior to their maturity. Set forth below, by debt pool, is a summary of our debt at September 30, 2004 along with the applicable interest rates and the related carrying values of the property, plant and equipment which collateralize these debts:

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


				September 30, 2004
				(Unaudited in thousands)
	Number			Property, plant			Long-term			Interest
	of Hotels			and equipment, net			obligations			rates
				(1)			(1)
Refinancing Debt
Merrill Lynch Mortgage Lending, Inc. — Floating		28		$	123,283		$	106,625		LIBOR plus 3.40%
Merrill Lynch Mortgage Lending, Inc. — Fixed		35			313,980			259,407			6.58	%

Merrill Lynch Mortgage Lending, Inc. — Total		63			437,263			366,032
Other financing
Computershare Trust Company of Canada		1			14,870			7,498			7.88	%
Column Financial, Inc.		9			62,623			25,641			10.59	%
Lehman Brothers Holdings, Inc.		5			35,036			23,051		$16,242 at 9.40%; $6,809 at 8.90%
JP Morgan Chase Bank		2			8,635			10,248			8.00	%
DDL Kinser		1			3,146			2,311			8.25	%
Column Financial, Inc.		1			10,297			8,648			9.45	%
Column Financial, Inc.		1			6,018			3,105			10.74	%

Total — other financing		20			140,625			80,502

		83			577,888			446,534			6.77%	(2)
Long-term debt — other
Tax notes issued pursuant to our Joint Plan of Reorganization		—			—			3,565
Other		—			—			1,822

		—			—			5,387

Property, plant and equipment — other		3			14,980			—

		86			592,868			451,921
Held for sale		(9	)		(32,246	)		(31,383	)

Total September 30, 2004		77			560,622			420,538

(1)		Long-term obligations and property, plant and equipment of one hotel in which we have a non-controlling equity interest that we do not consolidate are excluded from the table above.

(2)		The 6.77% in the table above represents our annual weighted average cost of mortgage debt at September 30, 2004, using a 1.84% LIBOR rate.

Mortgage Debt

On June 25, 2004, we closed on the $370 million Merrill Lynch Mortgage Lending, Inc. (“Merrill Lynch Mortgage”) refinance (“Refinancing Debt”) secured by 64 of our hotels, of which one was subsequently sold. We refinanced (1) our outstanding mortgage debt (“Merrill Lynch Exit Financing”) with Merrill Lynch Mortgage which, as of June 25, 2004, had a balance of $290.9 million, (2) certain of our outstanding mortgage debt (the “Lehman Financing”) with Lehman Brothers Holdings, Inc. (“Lehman”) which, as of June 25, 2004, had a balance of $56.1 million, and (3) our outstanding mortgage debt on the Crowne Plaza Hotel in Macon, Georgia, in which we own a 60% interest that, as of June 25, 2004, had a balance of $6.9 million.

Prepayment penalties totaling $2.7 million were paid on the Merrill Lynch Mortgage Exit Financing debt (not including $0.2 million allocated to discontinued operations). Deferred loan costs related to the Merrill Lynch Exit Financing debt, Lehman debt, and Macon debt that were written off and charged to other interest expense were $3.4 million, $3.3 million and nil, respectively (not including the write-off of $0.3 million and $0.4 million of deferred loan costs for Merrill Lynch and Lehman, respectively, that were allocated to discontinued operations). We purchased a swaption contract to hedge against rising interest rates until the interest rate on the fixed rate Refinancing Debt was determined. The swaption net cost of $1.9 million was expensed to other interest expense and the $1.1 million of loan origination fees incurred on the Floating Rate Debt was expensed to other interest expense of which $0.8 million was allocated to continuing operations and $0.3 million was allocated to discontinued operations.

Immediately after closing, the Refinancing Debt consisted of a loan of $110 million bearing a floating rate of interest (the “Floating Rate Debt”), presently secured by 28 of our hotels (29 hotels at the loan’s inception), and four loans totaling $260 million each bearing a fixed interest rate of 6.58% (the “Fixed Rate Debt”) and secured, in the aggregate, by 35 of our hotels. Merrill Lynch Mortgage also has the right to further divide the Refinancing Debt into first priority mortgage loans and mezzanine loans. Prior to any securitization of the four fixed rate loans, those loans are subject to cross-collateralization provisions.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Each of the four fixed rate loans (“Fixed Rate Loan”) comprising the Fixed Rate Debt is a five-year loan and bears a fixed rate of interest of 6.58%. Except for certain defeasance provisions, we may not prepay the Fixed Rate Debt except during the 60 days prior to maturity. We may, after the earlier of 48 months after the closing of any Fixed Rate Debt or the second anniversary of the securitization of any Fixed Rate Debt, defease such Fixed Rate Debt, in whole or in part.

The Floating Rate Debt is a two-year loan with three one-year extension options and bears interest at LIBOR plus 3.40%. The first extension option will be available to us only if no defaults exist and we have entered into the requisite interest rate cap agreement. The second and third extension options will be available to us only if no defaults exist, a minimum debt yield ratio of 13% is met, and minimum debt service coverage ratios of 1.3x for the second extension and 1.35x for the third extension are met. An extension fee of 0.25% of the outstanding Floating Rate Debt is payable if we opt to exercise each of the second and third extensions. We may prepay the Floating Rate Debt in whole or in part, subject to a prepayment penalty in the amount of 3% of the amount prepaid during the first year of the loan and 1% of the amount prepaid during the second year of the loan. Repayments of debt related to assets held for sale at June 25, 2004, are exempt from the prepayment penalty.

The Refinancing Debt provides that when either (i) the debt yield ratio for the hotels securing the Floating Rate Debt or any Fixed Rate Loan for the trailing 12-month period is below 9% during the first year, 10% during the second year and 11%, 12% and 13% during each of the next three years (in the case of the Floating Rate Debt to the extent extended), or (ii) in the case of the Floating Rate Debt (to the extent extended), the debt service coverage ratio is less than 1.30x in the fourth year or 1.35x in the fifth year, excess cash flows produced by the mortgaged hotels securing the applicable loan (after payment of operating expenses, management fees, required reserves, service fees, principal and interest) must be deposited in a restricted cash account. These funds can be used for the prepayment of the applicable loan in an amount required to satisfy the applicable test, capital expenditures reasonably approved by the lender with respect to the hotels securing the applicable loan, and scheduled principal and interest payments due on the Floating Rate Debt of up to $0.9 million or any Fixed Rate Loan of up to $525,000, as applicable. Funds will no longer be deposited into the restricted cash account when the debt yield ratio and, if applicable, the debt service coverage ratio are sustained above the minimum requirements for three consecutive months and there are no defaults.

As of September 30, 2004, our debt yield ratios were above the minimum requirement for the four Fixed Rate Loans; however, we did not meet the required debt yield ratio with regard to the Floating Rate Loan. As a result, all excess cash generated by the assets that secure this floating rate loan will be placed into a restricted cash account and these restricted funds can be used for prepayment of the loan, capital expenditures, or scheduled principal and interest payments up to $0.9 million as designated above. Funds will no longer be retained in the restricted cash account when the debt yield ratio is sustained above the minimum requirement for three consecutive months. As of September 30, 2004, no funds were in the restricted cash account.

Each loan comprising the Refinancing Debt is non-recourse; however, we have agreed to indemnify Merrill Lynch Mortgage in certain situations, such as fraud, waste, misappropriation of funds, certain environmental matters, asset transfers in violation of the loan agreements, or violation of certain single-purpose entity covenants. In addition, each loan comprising the Refinancing Debt will become full recourse in certain limited cases such as bankruptcy of a borrower or Lodgian. During the term of the Refinancing Debt, we will be required to fund, on a monthly basis, a reserve for furniture, fixtures and equipment equal to 4% of the previous month’s gross revenues from the hotels securing each of the respective loans comprising the Refinancing Debt.

Additionally, as of September 30, 2004, we were not in compliance with the debt service coverage ratio requirement of the loan from Column Financial secured by nine of our hotels, primarily due to the fact that one of the hotels securing this loan (New Orleans Airport Plaza Hotel) is not currently affiliated with a national brand and is undergoing a major renovation. We have entered into a franchise agreement with Radisson Hotels International, Inc. to rebrand this property as a Radisson hotel and expect to complete the renovation and open the hotel as a Radisson during the first quarter of 2005. The total investment we are making on the renovation of this property and its rebranding is $3.8 million. In addition, we will be completing capital expenditures of approximately $7.0 million on two other hotels in this loan pool during the fourth quarter 2004 and in 2005.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Under the terms of the Column Financial loan agreement until the required DSCR is met, the lender is permitted to require the borrowers to deposit all revenues from the mortgaged properties into an account controlled by the lender. The revenues are then disbursed to pay property expenses in accordance with the loan agreement. The lender may apply excess proceeds after payment of expenses to additional principal payments. However, as of November 8, 2004, the lender has not elected to require revenue for these properties to be deposited into its account.

Third party paid loan costs, incurred as a part of the Refinancing Debt, totaling $5.4 million, were deferred and will be amortized using the effective yield method over five years for the Fixed Rate Debt and three years for the Floating Rate Debt.

In the table above, approximately 76.1% of our mortgage debt (including current portion) at September 30, 2004, bears interest at fixed rates and 23.9% bears interest at a floating rate.

8. Commitments and Contingencies

Franchise Agreements and Capital Expenditures

We benefit from the superior brand qualities of Crowne Plaza, Holiday Inn, Marriott, Hilton and other brands. Included in the benefits of these brands are their reputation for quality and service, revenue generation through their central reservation systems, access to revenue through the global distribution systems, guest loyalty programs and brand Internet booking sites. Reservations made by means of these franchisor facilities generally account for approximately 35% of our total reservations.

To obtain these franchise affiliations, we enter into franchise agreements with hotel franchisors that generally have terms of between 10 and 20 years. The franchise agreements typically authorize us to operate the hotel under the franchise name, at a specific location or within a specified area, and require that we operate a hotel in accordance with the standards specified by the franchisor. As part of our franchise agreements, we are generally required to pay a royalty fee, an advertising/marketing fee, a fee for the use of the franchisor’s nationwide reservation system and certain ancillary charges. Royalty fees generally range from 3.0% to 6.0% of gross room revenues, advertising/marketing fees generally range from 1.0% to 4.0% of gross room revenues and reservation system fees generally range from 1.0% to 2.0% of gross room revenues.

These costs vary with revenues and are not fixed commitments. Franchise fees incurred (which are reported in other hotel operating costs on our Condensed Consolidated Statement of Operations) for the three and nine months ended September 30, 2004 and September 30, 2003 were as follows:


	Three months ended				Nine months ended
	September 30, 2004		September 30, 2003		September 30, 2004		September 30, 2003
	(Unaudited in thousands)				(Unaudited in thousands)
Continuing operations	$	5,951	$	5,560	$	17,072	$	15,718
Discontinued operations		713		1,221		1,997		2,999

	$	6,664	$	6,781	$	19,069	$	18,717

During the term of the franchise agreements, the franchisors may require us to upgrade facilities to comply with their current standards. Our current franchise agreements terminate at various times and have differing remaining terms. For example, the terms of one, eleven and nine of our franchise agreements are scheduled to expire in 2004, 2005, and 2006, respectively. As franchise agreements expire, we may apply for a franchise renewal. In connection with renewals, the franchisor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facilities, or the franchisor may elect not to renew the franchise. The costs incurred in connection with these agreements are primarily monthly payments due to the franchisors based on a percentage of room revenues.

If we do not comply with the terms of a franchise agreement, following notice and an opportunity to cure, the franchisor has the right to terminate the agreement, which could lead to a default under one or more of our loan

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

agreements, and which could materially and adversely affect us. Prior to terminating a franchise agreement, franchisors are required to notify us of the areas of non-compliance and give us the opportunity to cure the non-compliance. In the past, we have been able to cure most cases of non-compliance and most defaults within the cure periods, and those events of non-compliance and defaults did not cause termination of our franchises or defaults on our loan agreements. If we perform an economic analysis of the hotel and determine that it is not economically feasible to comply with a franchisor’s requirements, we will either select an alternative franchisor or operate the hotel without a franchise affiliation. However, terminating or changing the franchise affiliation of a hotel could require us to incur significant expenses, including liquidated damages, and capital expenditures. Our loan agreements generally prohibit a hotel from operating without a franchise.

As of November 8, 2004, we have been notified that we were not in compliance with some of the terms of eight of our franchise agreements and have received default and termination notices from franchisors with respect to an additional 11 hotels. We believe that we will cure the non-compliance and defaults on all of these hotels before the applicable termination dates. We cannot, however, assure you that we will be able to complete our action plans (which we estimate will cost approximately $1.6 million of which $0.4 million is reserved with our lenders) to cure the alleged defaults prior to the specified termination dates or be granted additional time in which to cure any defaults.

In addition, as part of our bankruptcy reorganization proceedings, we entered into stipulations with each of our major franchisors setting forth a timeline for completion of capital expenditures for some of our hotels. However, as of November 8, 2004, we have not completed the required capital expenditures for 33 hotels in accordance with the stipulations and estimate that completing those improvements will cost $21.3 million of which $15.9 million is reserved with our lenders. Under the stipulations, the applicable franchisors could therefore seek to declare certain franchise agreements in default and, in certain circumstances, seek to terminate the franchise agreement. We have scheduled or have begun renovations on 26 of these hotels aggregating $16.5 million of the $21.3 million. In addition, five of these hotels are held for sale and represent $2.2 million of the $21.3 million.

We are not aware of any other instances of non-compliance with our franchise agreements.

We agreed to enter into new franchise agreements for all of our Marriott-affiliated hotels during 2004, and to pay, over a three year period, a fee aggregating approximately $0.5 million ($0.2 million of which has already been paid), subject to offsets. As part of our agreement, Marriott will review the capital improvements we have made at our Marriott franchised hotels during 2004, and may, in its reasonable business judgment, require us to make additional property improvements and to place amounts into a reserve account for the purpose of funding those property improvements.

To comply with the requirements of our franchisors and to improve our competitive position in individual markets, we have significantly enhanced our capital improvement program in 2004.

Letters of Credit

As of September 30, 2004, we had one irrevocable letter of credit totaling $3.4 million outstanding, fully collateralized by our cash (classified as restricted cash in the accompanying Condensed Consolidated Balance Sheets), as a guarantee to Zurich American Insurance Company. This letter of credit will expire in November 2004 but may require renewal beyond that date. The Donlen Fleet Management Services letter of credit for $0.1 million was cancelled on September 30, 2004 and is no longer outstanding.

Self-insurance

We are self-insured up to certain limits with respect to employee medical, employee dental, property insurance, general liability insurance, workers’ compensation, auto liability and other forms of insurance. We establish liabilities for these self-insured obligations annually, based on actuarial valuations and our history of claims. Should unanticipated events cause these claims to escalate beyond normal expectations, our financial condition and results of operations would be negatively affected. As of September 30, 2004, and December 31, 2003, we had approximately $11.2 million and $10.0 million accrued for these liabilities, respectively.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

There are other types of losses for which we cannot obtain insurance at all or at a reasonable cost, including losses caused by acts of war. If an uninsured loss or a loss that exceeds our insurance limits were to occur, we could lose both the revenues generated from the affected hotel and the capital that we have invested. We also could be liable for any outstanding mortgage indebtedness or other obligations related to the hotel. Any such loss could materially and adversely affect our financial condition and results of operations.

We believe that we maintain sufficient insurance coverage for the operation of our business.

Casualty losses

During August and September 2004, eight of our hotels were damaged (six extensively) from the hurricanes that made landfall in the Southeastern United States. Two of the hotels (West Palm Beach Crowne Plaza and Melbourne Holiday Inn) remain closed and are not expected to reopen until the second quarter of 2005. All properties in our portfolio are covered by property casualty insurance.

With regard to physical property damage, we are recognizing expenses related to hurricane damage repairs as we incur them. We have also written off the net book value (NBV) of the assets that were destroyed by the hurricane. As the combined repair expenses and net book value write-offs exceed the relevant insurance deductibles, we have recorded a receivable from the insurance carriers. For the three months ended September 30, 2004, we incurred $1.2 million in hurricane repair costs, wrote off approximately $3.8 million in NBV of destroyed assets, and recorded a $3.0 million receivable due from the insurance company for amounts that exceed the deductibles, which results in a $2.0 million casualty loss for the nine months ended September 30, 2004.

Litigation

From time to time, as we conduct our business, legal actions and claims are brought against us. The outcome of these matters is uncertain. However, we believe that all currently pending matters will be resolved without a material adverse effect on our results of operations or financial condition. Claims relating to the period before we filed for Chapter 11 protection are limited to the amounts approved by the Bankruptcy Court for settlement of such claims and are payable out of a reserve for allowed claims as recorded on our balance sheet. On July 26, 2004, the Preferred Stock was redeemed and cash of $2.2 million replaced the Preferred Stock shares held in the disputed claims reserve. Accordingly, as of September 30, 2004, a $2.2 million accrual for allowed claims is recorded in other accrued liabilities for these claims. As of September 30, 2004, approximately $20,000 in cash remained to be paid on the Impac claims. We have reserved for all claims approved by the Bankruptcy Court which have not yet been paid.

9. Stockholders’ Equity

On June 25, 2004, we completed a public equity offering of 18,285,714 shares of our common stock, par value $0.01 per share, at a price of $10.50 per share. Net proceeds from this equity offering, after deducting the underwriting discount, advisory fee and other offering expenses, amounted to approximately $175.9 million.

Additionally, immediately upon the consummation of the equity offering, we exchanged 3,941,115 shares of our common stock for 1,483,558 shares of Series A Preferred Stock (“the Preferred Share Exchange”) held by (1) certain affiliates of, and investments accounts managed by, Oaktree Capital Management, LLC (“Oaktree”), (2) an affiliate of Blackstone Real Estate Advisors (“Blackstone”), and (3) Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), based on a common stock price of $10.50 per share. In the Preferred Share Exchange, Oaktree, Blackstone and Merrill Lynch received 2,262,661, 1,049,034 and 629,420 shares of our common stock, respectively. As part of the Preferred Share Exchange, we recorded a $1.6 million loss on Preferred Stock redemption for the 4% prepayment premium on the Preferred Stock shares that were converted to common stock.

From the proceeds of the public equity offering on July 26, 2004, we redeemed 4,048,183 shares of outstanding Series A Preferred Stock totaling approximately $114.0 million. The 79,278 shares of Preferred Stock that were part

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of the disputed claims reserve were replaced with approximately $2.2 million of cash. Approximately $4.5 million was paid for the 4% prepayment premium on the Preferred Stock when it was redeemed on July 26, 2004.

10. New Accounting Pronouncements

On July 1, 2003, in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” we reclassified the Preferred Stock to the liability section of the consolidated balance sheet and began presenting the related dividends in interest expense. Prior to the adoption of SFAS No. 150, we presented the Preferred Stock between liabilities and equity in our consolidated balance sheet (called the “mezzanine” section) and reported the Preferred Stock dividend as a deduction from retained earnings with no effect on our results of operations. In accordance with SFAS No. 150, the Preferred Stock and the dividends for the period prior to July 1, 2003, have not been reclassified. Thus, the Preferred Stock dividends for the three and nine months ended September 30, 2004 of $0.9 million and $9.4 million, respectively, and the Preferred Stock dividends for the three months ended September 30, 2003 of $4.0 million are presented as part of interest expense while the Preferred Stock dividend for the period January 1, 2003 to June 30, 2003 of $7.6 million, is presented as a deduction from retained earnings.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), to address perceived weaknesses in accounting for entities commonly known as special-purpose or off-balance sheet entities. In addition to numerous FASB Staff Positions written to clarify and improve the application of FIN 46, the FASB recently announced a deferral for certain entities, and an amendment to FIN 46 entitled FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”). FIN 46 establishes consolidation criteria for entities for which “control” is not easily discernible under Accounting Research Bulletin 51, Consolidated Financial Statements, which is based on the premise that holders of the equity of an entity control the entity by virtue of voting rights. FIN 46 provides guidance for identifying the party with a controlling financial interest resulting from arrangements or financial interests rather than from voting interests. FIN 46 defines the term “variable interest entity” (“VIE”) and is based on the premise that if a business enterprise absorbs a majority of the VIE’s expected losses and/or receives a majority of its expected residual returns (measure of risk and reward), that enterprise (the primary beneficiary) has a controlling financial interest in the VIE. The assets, liabilities, and results of the activities of the VIE should be included in the consolidated financial statements of the primary beneficiary. We were required to adopt the provisions of FIN 46R relating to any interests in special-purpose entities (SPEs) as of December 31, 2003. In addition, during the first quarter of 2004, we were required to apply the provisions of FIN 46R to any other entities falling within its scope. The adoption of FIN 46 and the counterpart revision (FIN 46R) has not had and is not expected to have a material impact on our financial position and results of operations.

11. Related Party Transactions

Oaktree and Blackstone, representatives of which serve on our board of directors, and/or affiliates received 2,262,661 shares and 1,049,034 shares of common stock that were exchanged as part of the Preferred Share Exchange. Approximately $26.3 million and $11.1 million of the net proceeds from the equity offering were used to redeem the remaining shares of Preferred Stock held by Oaktree and Blackstone, respectively. Including the Preferred Share Exchange shares, Oaktree and Blackstone are currently the beneficial owners of 2,817,577 and 1,326,909 shares of our common stock, respectively.

Richard Cartoon, our Executive Vice President and Chief Financial Officer between October 4, 2001 and October 13, 2003, is a principal in a business which we retained in October 2001 to provide Richard Cartoon’s services as Chief Financial Officer and other restructuring support and services. In addition to amounts paid for Richard Cartoon’s services as Chief Financial Officer, we were billed $116,000 and $190,000 including expenses, for other support and services provided by Richard Cartoon, LLC for the three and nine months ended September 30, 2004, respectively. Richard Cartoon, LLC is continuing to provide restructuring support and Sarbanes-Oxley related services.

Until May 1, 2004, we had a revolving loan agreement with OCM Fund II that allowed us to borrow up to $2 million; however, all of our borrowings under that agreement were repaid in full in December 2003. The interest

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

rate on the loan was 10% per annum, and in 2003 we paid $42,222 in interest to OCM Fund II on our borrowings. This revolving loan agreement was secured by two land parcels and expired on May 1, 2004. OCM Fund II is a greater than 10% stockholder, and Oaktree is the general partner of OCM Fund II. Russel S. Bernard, a principal of Oaktree and Sean F. Armstrong, a managing director of Oaktree, are directors of Lodgian.

Merrill Lynch, which served as a joint lead managing underwriter in the offering with Citigroup (See Note 9), is currently the owner of 890,031 shares of our common stock, including 629,420 shares obtained as part of the Preferred Share Exchange, and warrants to purchase 4,287 shares of our common stock. Merrill Lynch also received approximately $6.7 million in cash from the net proceeds of the offering for the remaining shares of Preferred Stock they held on July 26, 2004. In November 2002, in connection with our emergence from Chapter 11 bankruptcy, we received exit financing of $302.7 million of senior and mezzanine debt provided by Merrill Lynch Mortgage, an affiliate of Merrill Lynch, which was refinanced as part of our Refinancing Debt in June 2004.

On June 25, 2004, the public equity offering was completed along with the funding of the $370 million of Refinancing Debt with Merrill Lynch Mortgage. Lodgian paid Merrill Lynch an advisory fee of $1,440,000, a 1% origination fee on the Floating Rate Debt of $1.1 million, and prepayment penalties on the exit financing debt of $2.9 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the discussion below in conjunction with the unaudited condensed consolidated financial statements and accompanying notes, set forth in “Item I. Financial Statements” included in this Form 10-Q. Also, the discussion which follows contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in our Form 10-K for the year ended December 31, 2003.

Executive Overview

We consolidate all of these hotels in our financial statements, other than the one hotel in which we hold a minority interest and which we account for on the equity method.

During 2003, we developed a portfolio improvement strategy which was consistent with our goals of operating a portfolio of profitable, well-maintained and appealing hotels at superior locations in strong markets. In accordance with this strategy and our efforts to reduce debt and interest costs, we identified 19 hotels, one office building and three land parcels for sale. Between November 1, 2003 and November 8, 2004, we sold the office building, ten of the nineteen hotels and two of the three land parcels. As of November 8, 2004, our portfolio consisted of 87 hotels, 78 of which represent our continuing operations portfolio (including one hotel in which we have a non-controlling equity interest and which we do not consolidate).

Reverse Stock Split

On April 27, 2004, our Board of Directors authorized a reverse stock split of our common stock in a ratio of one-for-three (1:3) with resulting fractional shares paid in cash. The reverse split affected all of our issued and outstanding common shares, warrants, stock options and restricted stock. The record date for the reverse split was April 29, 2004 and our new common stock began trading under the split adjustment on April 30, 2004.

All amounts for common stock, warrants, stock options, restricted stock, and all earnings per share computations have been retroactively adjusted to reflect this change in our capital structure.

Equity Offering

On June 25, 2004, we completed an offering of 18,285,714 shares of common stock at a price of $10.50 per share. Net proceeds from this equity offering, after deducting the underwriting discount, advisory fee and other offering expenses, amounted to approximately $175.9 million. On July 26, 2004, approximately $114.0 million of the net proceeds was used to redeem the remaining outstanding Series A Preferred Stock shares including accrued dividends and a 4% prepayment premium, and approximately $2.2 million in cash replaced the 79,278 shares of Preferred Stock that was previously held in the disputed claims reserve. We intend to use approximately $35.2 million of the net proceeds to fund capital expenditures, of which $22.7 million was deposited into a reserve account

with Merrill Lynch Mortgage as part of the Refinancing Debt. Approximately $1.8 million of the net proceeds of the equity offering was used to settle a deferred ground rent obligation on one of our hotels. We intend to use the remaining net proceeds for general corporate purposes including funding our growth strategy.

Series A Preferred Stock

On June 25, 2004, immediately following the consummation of our equity offering, we exchanged 3,941,115 shares of our common stock for 1,483,558 shares of Series A Preferred Stock held by (1) certain affiliates of, and investments accounts managed by, Oaktree Capital Management, LLC, (2) an affiliate of Blackstone Real Estate Advisors, and (3) Merrill Lynch, Pierce, Fenner & Smith Incorporated, based on a common stock price of $10.50 per share. In the Preferred Share exchange, Oaktree, Blackstone and Merrill Lynch received 2,262,661, 1,049,034, and 629,420 shares of our common stock, respectively.

On July 26, 2004, we used approximately $114.0 million of the net proceeds from the equity offering to redeem the remaining outstanding shares of Series A Preferred Stock including accrued dividends and a 4% prepayment premium, and approximately $2.2 million to replace the 79,278 shares of Preferred Stock held in the disputed claims reserve.

Overview of Continuing Operations

Below is an overview of our results of operations, which are presented in more detail in “Results of Operations — Continuing Operations:”

• Revenues increased as a result of an increase in leisure and business travel and average daily rates as the hospitality industry and the economy continued to recover in the third quarter 2004. In addition, hotels that were renovated in 2003 and early 2004 experienced improved occupancy levels and rates upon the completion of their renovations.

• Operating expenses, including direct hotel and other operating expenses, increased $3.1 million in the third quarter 2004 as compared to the third quarter 2003. Our hotels were negatively affected by increased benefit costs for 401k, workers’ compensation, union costs, and state unemployment tax rate increases, and higher utility costs, advertising, repair and maintenance costs, and bad debt costs related to an airline bankruptcy filing. The hotels benefited, however, from the stabilization of health insurance costs due to better claims experience, and lower insurance premiums and self-insured losses for property and casualty programs (excluding hurricane losses). Corporate overhead expenses increased due to higher costs related to Sarbanes Oxley compliance, partially offset by lower post-emergence Chapter 11 costs. Depreciation and amortization costs were lower due to the reduced asset base that resulted from impairment charges. We also recorded additional impairment charges in the third quarter 2004.

• During August and September 2004, eight of our hotels were damaged by the hurricanes that made landfall in the Southeastern United States. Six of the hotels incurred damage which will result in costs that will exceed the respective property insurance deductibles. Two of those six hotels (West Palm Beach Crowne Plaza and Melbourne Holiday Inn) remain closed and are not expected to reopen until the second quarter of 2005. All of the affected hotels are covered by insurance which includes coverage for business interruption. The deductibles for named windstorms are 2% of replacement cost for each hotel, per occurrence. Currently, we estimate that Lodgian will incur an aggregate deductible of $2.9 million for claims associated with the six hotels whose losses are expected to exceed their respective deductibles. The adjustment of these claims is complex due to the fact that, in some cases, multiple storms affected certain hotels in a relatively short time period, making it difficult in some cases to determine which storm caused what damage to each hotel. Under the terms of our insurance policies, we must satisfy a separate deductible for each named windstorm for each hotel. We are working with our insurance carrier to resolve these claims in as prompt a manner as possible. On November 2, 2004, our insurer advanced $1.5 million to us for losses associated with two of the affected hotels.

• Interest expense and other financing costs were negatively affected by the 4% prepayment premium due when the Preferred Stock was redeemed, offset by a reduced Preferred Stock dividend cost as a result of the

Preferred Stock shares that were exchanged on June 25, 2004 and the remaining outstanding Preferred Stock shares that were redeemed on July 26, 2004.

• Net loss attributable to common stock was $3.7 million for the third quarter 2004 compared with $3.6 million for the third quarter 2003.

Overview of Discontinued Operations

As discussed above, during 2003, we identified 19 hotels, one office building and three land parcels for sale as part of our portfolio improvement strategy and our efforts to reduce debt and interest costs. Between November 1, 2003 and November 8, 2004, we sold ten of the nineteen hotels, the office building, and two of the three land parcels. Summarized below is certain financial data related to the ten hotels, the office building, and two land parcels sold between November 1, 2003 and November 8, 2004:


	(Unaudited in thousands)
Aggregate sales price	$	53,610
Debt pay down (principal only)		38,715
Total revenues for the year ended December 31, 2003		28,121
Direct operating expenses for the year ended December 31, 2003		12,918
Other hotel operating expenses for the year ended December 31, 2003		10,900

In accordance with SFAS No. 144, we have included the hotel assets sold during 2003 and 2004 as well as the hotel assets held for sale at September 30, 2004 (including any related impairment charges) in Discontinued Operations in the Consolidated Statement of Operations. The assets held for sale at September 30, 2004 and December 31, 2003 and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheets. Where the carrying values of the assets held for sale exceeded the estimated fair values, net of selling costs, we reduced the carrying values and recorded impairment charges. We determine fair values using quoted market prices, when available, or other accepted valuation techniques. During the three and nine months ended September 30, 2004, we recorded impairment charges of $0.4 million and $3.0 million on assets held for sale. Where the estimated selling prices, net of selling costs, of assets held for sale exceeded the carrying values, we did not increase the carrying values of the assets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year.

While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of September 30, 2004 remain properly classified in accordance with SFAS No. 144.

The results of operations of the other 77 hotels that we consolidate in our financial statements are reported in continuing operations. Our continuing operations reflect the results of operations of those hotels which we plan to retain in our portfolio for the foreseeable future.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. As we prepare our financial statements, we make estimates and assumptions which affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from our estimates. A summary of our significant accounting policies is included in Note 1 of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003. Also, our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the year ended December 31, 2003, and we believe no changes have occurred.

Income Statement Overview

The discussion below focuses primarily on our continuing operations. In the continuing operations discussions, we compare the results of operations for the 77 consolidated hotels which we plan to retain in our portfolio for the foreseeable future, for the three months ended September 30, 2004 and September 30, 2003 and the results of operations for the nine months ended September 30, 2004 and September 30, 2003. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Income Statement Overview” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003 for a general description of the categorization of our revenues and expenses.

Three Months Ended September 30, 2004 (“Third Quarter 2004”) Compared to the Three Months Ended September 30, 2003 (“Third Quarter 2003”) and Nine Months Ended September 30, 2004 (“2004 Period”) Compared to the Nine Months Ended September 30, 2003 (“2003 Period”)

Results of Operations — Continuing Operations

Revenues — Continuing Operations

Third Quarter 2004 Compared to Third Quarter 2003


	Three months ended
	September 30, 2004			September 30, 2003			Increase (decrease)
Revenues (unaudited in thousands):
Rooms	$	64,805		$	62,506		$	2,299		3.7	%
Food and beverage		16,950			16,407			543		3.3	%
Other		2,806			2,841			(35	)	(1.2	)%

Total revenues	$	84,561		$	81,754		$	2,807		3.4	%
Occupancy		65.5	%		64.7	%				1.2	%
ADR	$	76.55		$	74.43		$	2.12		2.8	%
RevPAR	$	50.17		$	48.15		$	2.02		4.2	%

The $2.3 million, or 3.7%, increase in rooms revenues is a result of a 4.2% increase in revenue per available room (RevPAR). Available rooms for the quarter were reduced due to the closure of two hotels (West Palm Beach Crowne Plaza and Melbourne Holiday Inn) resulting from the mandatory evacuation of these properties by local authorities as hurricanes approached these locations and the continuing closure of these two hotels for substantial damage that resulted from the hurricanes. The 1.2% occupancy increase for the third quarter was negatively affected by the displacement at our hotels that were being renovated during the quarter. Additional displacement was caused by cancellations at hotels impacted by hurricanes or the threat of hurricanes during the quarter. For the three months ended September 30, 2004, total revenue displacements from our renovation program and the impact of the hurricanes were approximately $0.9 million and $1.1 million, respectively.

2004 Period Compared to 2003 Period


	Nine months ended
	September 30, 2004			September 30, 2003			Increase (decrease)
Revenues (unaudited in thousands):
Rooms	$	186,693		$	177,430		$	9,263		5.2	%
Food and beverage		52,874			51,991			883		1.7	%
Other		8,376			8,537			(161	)	(1.9	)%

Total revenues	$	247,943		$	237,958		$	9,985		4.2	%
Occupancy		63.1	%		61.6	%				2.4	%
ADR	$	76.72		$	74.73		$	1.99		2.7	%
RevPAR	$	48.37		$	46.06		$	2.31		5.0	%

The $9.3 million, or 5.2%, increase in rooms revenues is a result of a 5.0% increase in RevPAR, the impact of leap year’s additional day in February and the temporary closing of hotels in the third quarter due to mandatory hurricane evacuations and the continuing closure of the West Palm Beach Crowne Plaza and Melbourne Holiday Inn hotels. RevPAR increased as a result of a 2.4% increase in occupancy and a 2.7% increase in ADR. The 2.4% occupancy increase for the nine months ended September 30, 2004 reflects the negative impact of displacement from our renovation programs and the hurricanes. For the nine months ended September 30, 2004, total revenue

displacement from our renovation programs and the hurricanes were approximately $1.9 million and $1.1 million, respectively.

Direct operating expenses — Continuing Operations

Third Quarter 2004 Compared to Third Quarter 2003


	Three months ended
	September 30,			September 30,			Increase
	2004			2003			(decrease)
	(Unaudited in thousands)
Direct operating expenses:
Rooms	$	18,722		$	17,697		$	1,025	5.8	%
Food and beverage		12,595			12,030			565	4.7	%
Other		2,095			2,013			82	4.1	%

	$	33,412		$	31,740		$	1,672	5.3	%

% of total revenues		39.5	%		38.8	%

Rooms expenses as a percentage of revenue were 28.9% in the third quarter 2004 as compared to 28.3% in the third quarter 2003. The cost per occupied room (POR) was $22.11 in the third quarter 2004 as compared to $21.07 in the second quarter 2003. Payroll and related benefits, on an actual POR basis, were $13.47 in the third quarter 2004 as compared to $13.45 in the third quarter 2003. Other rooms expenses, on an actual POR basis, were $8.64 in the third quarter 2004 as compared to $7.62 in the third quarter 2003, partially due to increased costs in linen expense resulting from upgraded linen packages mandated at our Crowne Plaza Hotels during the quarter.

2004 Period Compared to 2003 Period


	Nine months ended
	September 30,			September 30,			Increase
	2004			2003			(decrease)
	(Unaudited in thousands)
Direct operating expenses:
Rooms	$	51,700		$	49,790		$	1,910	3.8	%
Food and beverage		36,842			36,129			713	2.0	%
Other		6,144			5,793			351	6.1	%

	$	94,686		$	91,712		$	2,974	3.2	%

% of total revenues		38.2	%		38.5	%

Rooms expenses increased $1.9 million while rooms revenues increased $9.3 million in the first nine months of 2004 as compared to the same period in 2003. Rooms expenses, as a percentage of room revenues, were 27.7% for the first nine months of 2004 as compared to 28.1% in the same period in 2003. Rooms expenses, on an actual POR basis, were $21.25 in the first nine months of 2004, as compared to $20.97 for the same period in 2003. Payroll and related benefits, on an actual POR basis, were $13.32 for the first nine months of 2004 as compared to $13.41 for the same period in 2003. Other rooms expenses, on an actual POR basis, were $7.93 for the first nine months of 2004 as compared to $7.56 for the same period in 2003, partially due to increases in travel agent commissions and guest loyalty program expenses.

Other operating expenses — Continuing Operations

Third Quarter 2004 Compared to Third Quarter 2003


	Three months ended
	September 30,			September 30,			Increase
	2004			2003			(decrease)
	(Unaudited in thousands)
Other operating expenses:
Other hotel operating costs	$	25,577		$	24,164		$	1,413		5.8	%
Property and other taxes, insurance and leases		5,597			6,087			(490	)	(8.1	)%
Corporate and other		4,520			4,235			285		6.7	%
Casualty gains and losses, net		2,019			—			2,019		100.0	%
Depreciation and amortization		7,066			7,572			(506	)	(6.7	)%
Impairment of long-lived assets		607			2			605		30,250.0	%

	$	45,386		$	42,060		$	3,326		7.9	%

% of total revenues		53.7	%		51.4	%

Other hotel operating costs increased $1.4 million in the third quarter 2004 as compared to the same period 2003 primarily due to the following:

• Hotel administration costs increased $0.7 million, with bad debt expenses increasing $0.3 million primarily due to the USAir bankruptcy filing, and increases in salary and employee benefits.

• Franchise fees increased $0.4 million as a result of the increase in room revenues and the increased cost of brand loyalty programs.

Property and other taxes, insurance and leases decreased $0.5 million as compared to third quarter 2003 primarily as a result of stabilization in the insurance markets and improved loss experience, successful appeals related to property tax assessments and settlement of a deferred ground rent obligation at one of our hotels.

Casualty losses were $2.0 million as a result of eight properties incurring, in the aggregate, $5.0 million in costs ($1.2 million in hurricane repair expenses and approximately $3.8 million in net book value write-offs for destroyed assets) caused by the hurricanes that hit the Southeastern United States in August and September 2004, offset by expected insurance proceeds of $3.0 million.

2004 Period Compared to 2003 Period


	Nine months ended
	September 30,			September 30,			Increase
	2004			2003			(decrease)
	(Unaudited in thousands)
Other operating expenses:
Other hotel operating costs	$	73,471		$	69,436		$	4,035		5.8	%
Property and other taxes, insurance and leases		16,724			19,671			(2,947	)	(15.0	)%
Corporate and other		13,714			16,280			(2,566	)	(15.8	)%
Casualty gains and losses, net		2,019			—			2,019		100.0	%
Depreciation and amortization		20,741			22,567			(1,826	)	(8.1	)%
Impairment of long-lived assets		607			1,380			(773	)	(56.0	)%

	$	127,276		$	129,334		$	(2,058	)	(1.6	)%

% of total revenues		51.3	%		54.4	%

Other hotel operating costs increased $4.0 million in the first nine months of 2004 as compared to the same period 2003 due to the following:

• Hotel administration costs increased $1.1 million, primarily due to increases in salary and employee benefits and costs related to labor union contract negotiations.

• Advertising and promotion costs increased $0.6 million due to increased costs of advertising, market research materials and salary and benefit increases.

• Franchise fees increased $1.4 million as a result of the increase in room revenues and the increased cost of brand loyalty programs.

• Repairs and maintenance costs increased $0.5 million primarily as a result of our continuing increased emphasis on preventive maintenance programs and renovations projects.

• Utility costs increased $0.5 million as a result of increased occupied rooms and rate and consumption increases. POR costs for 2004 were $6.08 as compared to $6.03 in 2003, an increase of 0.8%.

Property and other tax savings of $0.5 million, insurance premium and self-insured loss savings of $1.1 million, franchise tax savings of $0.4 million, and ground rent savings of $1.0 million in the first nine months of 2004 were offset partially by equipment rental increases of $0.1 million.

Corporate and other expenses decreased $2.6 million in the nine months ended September 30, 2004 as compared to the same period in 2003 as a result of a significant reduction in post-emergence legal, professional and other costs

related to the Chapter 11 proceedings. For the nine months ended September 30, 2004 these costs totaled $0.4 million as compared to $3.5 million for the same period in 2003 (not including $2.0 million of reorganization items).

Depreciation and amortization expenses decreased $1.8 million as a result of our reduced asset base on the continuing operations hotels due to asset write-downs for impairment charges. Impairment of long-lived assets totaled $0.6 million for the nine months ended September 30, 2004 and $1.4 million for the nine months ended September 30, 2003.

Non-operating income (expenses) — Continuing Operations

Third Quarter 2004 Compared to Third Quarter 2003


	Three months ended
	September 30,			September 30,			Increase
	2004			2003			(decrease)
	(Unaudited in thousands)
Non-operating income (expenses):
Interest income and other	$	212		$	114		$	98		86.0	%
Interest expense and other financing costs:
Preferred stock dividend		(865	)		(4,027	)		3,162		(78.5	)%
Other interest expense		(7,350	)		(7,665	)		315		(4.1	)%
Loss on preferred stock redemption		(4,471	)		—			(4,471	)	(100.0	)%
Minority interests		(503	)		(99	)		(404	)	408.1	%

The Preferred Stock dividend relates to the 12.25% dividend on the Preferred Stock issued on November 25, 2002. Dividends for the third quarter 2004 were $0.9 million as compared to $4.0 million for the third quarter 2003 as the Preferred Stock was redeemed in its entirety on July 26, 2004.

Other interest expense for the third quarter 2004 decreased $0.3 million as deferred loan cost amortization decreased $1.0 million, mortgage interest charges increased $0.5 million as a larger portion of our mortgage debt is now locked at higher fixed rates, and capitalized interest costs decreased $0.1 million.

Loss on preferred stock redemption of $4.5 million represents the 4% prepayment premium that was due when we redeemed the remaining outstanding Preferred Stock on July 26, 2004.

2004 Period Compared to 2003 Period


	Nine months ended
	September 30,			September 30,			Increase
	2004			2003			(decrease)
	(Unaudited in thousands)
Non-operating income (expenses):
Interest income and other	$	321		$	321		$	—		0.0	%
Interest expense and other financing costs:
Preferred stock dividend		(9,383	)		(4,027	)		(5,356	)	133.0	%
Other interest expense		(35,429	)		(20,863	)		(14,566	)	69.8	%
Loss on preferred stock redemption		(6,063	)		—			(6,063	)	(100.0	)%
Minority interests		(285	)		118			(403	)	(341.5	)%

In accordance with SFAS No. 150 effective for us on July 1, 2003, dividends relating to the period after the effective date are reported as interest expense. Dividends for the period prior to the effective date continue to be shown as a deduction from retained earnings with no effect on our results of operations. Accordingly, the $9.4 million dividend charged for the nine months ended September 30, 2004 is reported in interest expense while $4.0 million of dividend expense is reported as interest expense for the period July 1, 2003 to September 30, 2003 and $7.6 million is shown as a deduction from retained earnings for the January 1, 2003 to June 30, 2003 period. As a

result of the redemption of our remaining outstanding Preferred Stock shares, we did not incur Preferred Stock dividend expense after July 26, 2004.

Other interest expense increased $14.6 million for the nine months ended September 30, 2004 as compared to the same period in 2003 because we did not pay interest on 18 hotels while they were in Chapter 11 in early 2003, because a larger portion of our mortgage debt is locked in at slightly higher fixed interest rates, and because of the following second quarter 2004 transactions:

• The $1.9 million net cost of the swaption contract to hedge against rising interest rates until the Fixed Rate Loans’ interest rate was locked;

• Prepayment penalties paid to Merrill Lynch Mortgage of $1.9 million on the Senior Loan and $0.8 million on the Mezzanine Loan (not including $0.2 million of prepayment penalties allocated to discontinued operations) with the extinguishment of Merrill Lynch Exit Financing debt;

• The write-off of $6.7 million in deferred loan costs ($3.3 million for Lehman, $3.4 million for Merrill Lynch and nil for Macon), not including $0.7 million in deferred loan costs allocated to discontinued operations, as a result of the extinguishment of the Merrill Lynch Mortgage, Lehman Debt and Macon Debt;

• The $0.8 million loan origination costs incurred as a part of the Refinancing Debt (not including $0.3 million of origination costs allocated to discontinued operations); and

Loss on Preferred Stock redemption of $6.1 million represents the 4% prepayment premium for the shares converted to common stock immediately following the consummation of our equity offering on June 25, 2004 and the remaining shares that were redeemed on July 26, 2004.

The aggregate results of our four joint ventures in which we have a controlling equity interest for the nine months ended September 30, 2004 were stronger in the first nine months of 2004 as compared to 2003; hence, the credit in minority interests is $0.4 million more than in the same period 2003.

Results of Operations — Discontinued Operations

Discontinued operations include results of operations for both assets sold during the reporting period and assets that have been identified for sale. Consequently, the 9 hotels and one land parcel which were held for sale at September 30, 2004, as well as the 19 hotels (10 hotels sold and eight hotels returned to lender and one hotel returned to lessor in January 2003 as part of the bankruptcy process), one office building, and two land parcels that were disposed of between January 1, 2003 and September 30, 2004, are included in discontinued operations. We present the current quarter’s results of these hotels as discontinued operations as well as the comparative results for the prior quarter.

Set forth below are the condensed combined statement of operations for the properties classified as discontinued operations:

Third Quarter 2004 Compared to Third Quarter 2003


	Three months ended
	September 30,			September 30,			Increase
	2004			2003			(Decrease)
	(Unaudited in thousands)
Revenues:
Rooms	$	7,800		$	14,752		$	(6,952	)
Food and beverage		1,673			2,907			(1,234	)
Other		254			927			(673	)

		9,727			18,586			(8,859	)

Operating expenses:
Direct:
Rooms		2,417			4,117			(1,700	)
Food and beverage		1,443			2,360			(917	)
Other		209			626			(417	)

		4,069			7,103			(3,034	)

		5,658			11,483			(5,825	)

Other operating expenses:
Other hotel operating costs		3,301			6,252			(2,951	)
Property and other taxes, insurance and leases		674			1,870			(1,196	)
Depreciation and amortization		65			409			(344	)
Impairment of long-lived assets		368			1,678			(1,310	)

Other operating expenses		4,408			10,209			(5,801	)

		1,250			1,274			(24	)
Interest income		50			—			50
Interest expense and other financing costs		(448	)		(1,320	)		872
Gain on asset dispositions		1,955			—			1,955

Income (loss) before income taxes		2,807			(46	)		2,853
Provision for income taxes		—			—			—

Net income (loss)	$	2,807		$	(46	)	$	2,853

Third quarter 2004 revenues and expenses reflected in discontinued operations above are not fully comparable with the third quarter 2003 revenues and expenses as a result of the following:

• For the third quarter 2004 there were no revenues or expenses for the hotel and office building sold during 2003 or for the eight properties sold in the first six months of 2004. However, the third quarter 2003 results reflect the full quarter’s operations for these ten properties. For the third quarter 2003, revenues for these ten properties were $6.0 million and direct operating expenses were $2.7 million in aggregate.

• Less than a full quarter’s revenues and expenses are in the results for the third quarter 2004 for the one hotel and two land parcels sold during the quarter.

Additionally, the following factors affected the results of the hotels included in discontinued operations:

• Depreciation on these hotels was suspended when we classified these assets as held for sale. Four of the nineteen hotels were identified for sale at the end of the third quarter 2003; hence depreciation would have been recorded in the third quarter 2003 with no depreciation on these assets recorded during the third quarter 2004. Impairment charges of $0.4 million recorded in the third quarter 2004 represent the excess of the carrying values of assets held for sale over the revised estimated selling price less estimated selling costs.

• The gain on asset dispositions of $2.0 million represents the gain on sale on one hotel sold during the third quarter 2004.

2004 Period Compared to 2003 Period


	Nine months ended
	September 30,			September 30,			Increase
	2004			2003*			(Decrease)
	(Unaudited in thousands)
Revenues:
Rooms	$	24,235		$	36,595		$	(12,360	)
Food and beverage		6,430			8,442			(2,012	)
Other		1,090			2,613			(1,523	)

		31,755			47,650			(15,895	)

Operating expenses:
Direct:
Rooms		7,452			11,027			(3,575	)
Food and beverage		5,028			6,748			(1,720	)
Other		847			1,810			(963	)

		13,327			19,585			(6,258	)

		18,428			28,065			(9,637	)

Other operating expenses:
Other hotel operating costs		11,815			17,726			(5,911	)
Property and other taxes, insurance and leases		1,757			5,738			(3,981	)
Depreciation and amortization		216			3,358			(3,142	)
Impairment of long-lived assets		2,972			3,748			(776	)

Other operating expenses		16,760			30,570			(13,810	)

		1,668			(2,505	)		4,173
Interest income		50			—			50
Interest expense and other financing costs		(4,216	)		(2,621	)		(1,595	)
Gain on asset dispositions		9,204			1			9,203

Income (loss) before income taxes		6,706			(5,125	)		11,831
Provision for income taxes		—			—			—

Net income (loss)	$	6,706		$	(5,125	)	$	11,831

*Revenues and expenses for the nine months ended September 30, 2003 include de minimus amounts for the eight hotels conveyed to a lender and one hotel returned to the lessor of a capital lease in January 2003.

The nine months ended September 30, 2004 revenues and expenses reflected in discontinued operations above are not fully comparable with the nine months ended September 30, 2003 revenues and expenses as a result of the following:

• For the nine months ended September 30, 2004 there are no revenues and expenses in the table for the hotel and office building sold during 2003. The hotel was sold in November 2003 and the office building was sold in December 2003. However, the nine months ended September 30, 2003 results reflect the full period’s operations for these two properties. For the nine months ended September 30, 2003, revenues for these two properties were $2.2 million and direct operating expenses were $1.0 million in aggregate.

• Less than nine month’s revenues and expenses are included in the results for the nine months ended September 30, 2004 for the nine hotels and two land parcels sold at various intervals during the period.

Additionally the following factors affected the results of the hotels included in discontinued operations:

• Depreciation on these hotels was suspended when we classified these assets as held for sale. Seventeen of the nineteen hotels were identified for sale from June 2003 to September 2003 and, hence, depreciation would have been recorded in the nine months ended September 30, 2003 with no depreciation on these assets being recorded during the nine months ended September 30, 2004. Impairment charges of $3.0 million and $3.7 million were recorded for the nine months ended September 30, 2004 and September 30, 2003, respectively, which represent the excess of the carrying values of assets held for sale over the revised estimated selling price less estimated selling costs.

• Interest expense increased as a result of the Lehman Financing which was executed in May 2003 and which replaced debt on which we were not required to pay interest while the related hotels were in Chapter 11.

• The gain on asset dispositions of $9.2 million represents the gain on sale of seven of the nine hotels sold during the nine months ended September 30, 2004.

Income taxes

At December 31, 2003, we had available net operating loss carryforwards of approximately $254 million for federal income tax purposes, which will expire in 2004 through 2023. The recently concluded equity offering resulted in another Section 382 ownership change, placing further limitations on the Company’s ability to utilize these losses. As a result of the section 382 ownership change, our ability to use these net operating loss carryforwards is subject to an annual limitation of approximately $8.3 million. Due to these and other limitations, a portion or all of the net operating loss carryforwards could expire unused. At December 31, 2003, we established a valuation allowance of $140.0 million to fully offset our net deferred tax asset.

EBITDA

We use earnings before interest, taxes, depreciation and amortization (“EBITDA”) to measure our performance and to assist us in the assessment of hotel property values. EBITDA is also a widely-used industry measure. However, EBITDA is a non-GAAP measure and should not be used as a substitute for measures such as net income (loss), cash flows from operating activities, or other measures computed in accordance with GAAP. Depreciation, amortization and impairment are significant non-cash expenses for us as a result of the high proportion of our assets which are long-lived, including property, plant and equipment. We depreciate property, plant and equipment over their estimated useful lives and amortize deferred financing and franchise fees over the term of the applicable agreements. We impair properties when the book value exceeds the fair market value. Preferred stock dividends are treated as interest expense and, hence, are added back to loss from continuing operations to derive EBITDA. We also believe that EBITDA provides pertinent information to investors and is an additional indicator of our operating performance.

The following table presents EBITDA from continuing operations, a non-GAAP measure, for the three months ended September 30, 2004 and September 30, 2003, and the nine months ended September 30, 2004 and September 30, 2003, and provides a reconciliation with the loss from continuing operations, a GAAP measure:


	Three months ended						Nine months ended
	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
	(Unaudited in thousands)						(Unaudited in thousands)
Continuing operations:
Loss from continuing operations	$	(6,544	)	$	(3,600	)	$	(24,776	)	$	(10,046	)
Depreciation and amortization		7,066			7,572			20,741			22,567
Impairment of long-lived assets		607			2			607			1,380
Interest income and other		(212	)		(114	)		(321	)		(321	)
Interest expense		7,350			7,665			35,429			20,863
Preferred stock dividends		865			4,027			9,383			4,027
Loss on preferred stock redemption		4,471			—			6,063			—
Provision for income taxes — continuing operations		337			75			488			226

EBITDA from continuing operations	$	13,940		$	15,627		$	47,614		$	38,696

Loss from continuing operations, and accordingly, EBITDA from continuing operations, is after deducting the following items:


	Three months ended				Nine months ended
	September 30, 2004		September 30, 2003		September 30, 2004		September 30, 2003
	(Unaudited in thousands)				(Unaudited in thousands)
Post-emergence Chapter 11 expenses, included in corporate and other on our consolidated statement of operations	$	67	$	320	$	397	$	3,511
Reorganization expenses	$	—	$	—	$	—	$	2,045
Casualty losses for damage caused to our properties by the hurricanes that hit the southeastern United States in the third quarter	$	2,019	$	—	$	2,019	$	—

Additional Financial Information Regarding Quarterly Results of Our Continuing Operations

The following table presents certain quarterly data for our continuing operations for the seven quarters ended September 30, 2004. The data have been derived from our unaudited condensed consolidated financial statements for the periods indicated. Our unaudited consolidated financial statements have been prepared on substantially the same basis as our audited consolidated financial statements and include all adjustments, consisting primarily of normal recurring adjustments we consider to be necessary to present fairly this information when read in conjunction with our consolidated financial statements. The results of operations for certain quarters may vary from the amounts previously reported on our Forms 10-Q filed for prior quarters due to timing of our identification of assets held for sale during the course of the fiscal year ended December 31, 2003. The allocation of results of operations between our continuing operations and discontinued operations, at the time of the quarterly filings, was based on the assets held for sale, if any, as of the dates of those filings. This table represents the comparative quarterly operating results for the 77 hotels classified in continuing operations at September 30, 2004.


	Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2004			2004			2004			2003			2003			2003			2003
Revenues:
Rooms	$	64,805		$	64,325		$	57,563		$	52,089		$	62,506		$	61,010		$	53,914
Food and beverage		16,950			19,436			16,488			18,800			16,407			18,977			16,607
Other		2,806			2,816			2,754			2,817			2,841			2,838			2,858

		84,561			86,577			76,805			73,706			81,754			82,825			73,379

Operating expenses:
Direct:
Rooms		18,722			16,960			16,018			16,023			17,697			16,730			15,363
Food and beverage		12,595			12,713			11,534			12,557			12,030			12,365			11,734
Other		2,095			2,077			1,972			2,178			2,013			1,842			1,938

		33,412			31,750			29,524			30,758			31,740			30,937			29,035

		51,149			54,827			47,281			42,948			50,014			51,888			44,344

Other operating expenses:
Other hotel operating costs		25,577			23,822			24,072			22,546			24,164			22,797			22,475
Property and other taxes, insurance and leases		5,597			5,376			5,751			5,343			6,087			6,923			6,661
Corporate and other		4,519			4,782			4,413			4,791			4,235			6,075			5,970
Casualty gains and losses		2,019			—			—			—			—			—			—
Depreciation and amortization		7,066			6,870			6,805			7,156			7,572			7,573			7,422
Impairment of long-lived assets		607			—			—			11,286			2			1,378			—

Other operating expenses		45,385			40,850			41,041			51,122			42,060			44,746			42,528

		5,764			13,977			6,240			(8,174	)		7,954			7,142			1,816
Other income (expenses):		—			—			—			—			—			—			—
Interest income and other		212			66			43			366			114			124			83
Interest expense and other financing costs:		—			—			—			—			—			—			—
Preferred stock dividend		(865	)		(4,233	)		(4,285	)		(4,065	)		(4,027	)		—
Other interest expense		(7,350	)		(19,920	)		(8,159	)		(7,756	)		(7,665	)		(6,919	)		(6,279	)
Gain on asset dispositions		—			—			—			444			—			—			—
Loss on preferred stock redemption		(4,471	)		(1,592	)		—			—			—			—			—

(Loss) income before income taxes, reorganization items and minority interests		(6,710	)		(11,702	)		(6,161	)		(19,185	)		(3,624	)		347			(4,380	)
Reorganization items		—			—			—			647			—			(808	)		(1,237	)

Loss before income taxes and minority interest		(6,710	)		(11,702	)		(6,161	)		(18,538	)		(3,624	)		(461	)		(5,617	)
Minority interests		503			(71	)		(147	)		1,412			99			(69	)		(148	)

Loss before income taxes — continuing operations		(6,207	)		(11,773	)		(6,308	)		(17,126	)		(3,525	)		(530	)		(5,765	)
(Provision) benefit for income taxes — continuing operations		(337	)		(75	)		(76	)		48			(75	)		(75	)		(76	)

Loss from continuing operations		(6,544	)		(11,848	)		(6,384	)		(17,078	)		(3,600	)		(605	)		(5,841	)

Discontinued operations:		—			—			—			—			—			—			—
(Loss) income from discontinued operations before income taxes		2,807			4,601			(702	)		572			(46	)		(1,836	)		(3,243	)
Income tax benefit (provision)		—			—			—			—			—			—			—

(Loss) income from discontinued operations		2,807			4,601			(702	)		572			(46	)		(1,836	)		(3,243	)

Net loss		(3,737	)		(7,247	)		(7,086	)		(16,506	)		(3,646	)		(2,441	)		(9,084	)
Preferred stock dividend		—			—			—			—			—			(3,818	)		(3,776	)

Net loss attributable to common stock	$	(3,737	)	$	(7,247	)	$	(7,086	)	$	(16,506	)	$	(3,646	)	$	(6,259	)	$	(12,860	)

Loss from continuing operations is after deducting the following items:


	September 30, 2004		June 30, 2004		March 31, 2004		December 31, 2003		September 30, 2003		June 30, 2003		March 31, 2003
Post-emergence Chapter 11 expenses, included in corporate and other on our consolidated statement of operations	$	67	$	135	$	195	$	642	$	320	$	1,013	$	2,178
Reorganization expenses	$	—	$	—	$	—	$	—	$	—	$	808	$	1,237
Casualty losses for damage caused to our properties by the hurricanes that hit the southeastern United States in the third quarter	$	2,019	$	—	$	—	$	—	$	—	$	—	$	—

EBITDA Reconciliation of Continuing Operations

The following table is a reconciliation of the quarterly EBITDA for the hotels classified as continuing operations as of September 30, 2004, reflecting the reclassification of certain hotels from continuing operations to discontinued operations as discussed in connection with the preceding table:


	Three Months Ended
	September 30, 2004			June 30, 2004			March 31, 2004			December 31, 2003			September 30, 2003			June 30, 2003			March 31, 2003
Continuing operations:
Loss from continuing operations		(6,544	)	$	(11,848	)	$	(6,384	)	$	(17,078	)	$	(3,600	)	$	(605	)	$	(5,841	)
Depreciation and amortization		7,066			6,870			6,805			7,156			7,572			7,573			7,422
Impairment of long-lived assets		607			—			—			11,286			2			1,378			—
Interest income and other		(212	)		(66	)		(43	)		(366	)		(114	)		(124	)		(83	)
Interest expense and other financing costs		7,350			19,920			8,159			7,756			7,665			6,919			6,279
Preferred stock dividends		865			4,233			4,285			4,065			4,027			—			—
Gain on asset dispositions		—			—			—			(444	)		—			—			—
Loss on preferred stock redemption		4,471			1,592			—			—			—			—			—
Provision (benefit) for income taxes—continuing operations		337			75			76			(48	)		75			75			76

EBITDA	$	13,940		$	20,776		$	12,898		$	12,327		$	15,627		$	15,216		$	7,853

Hotel data by market segment and region

The following two tables present data on occupancy, ADR and RevPAR for the hotels in our portfolio (including one hotel that we do not consolidate) at September 30, 2004, by market segment for the third quarter 2004 and the third quarter 2003 and the nine months ended September 30, 2004 and September 30, 2003.

Combined Continuing and Discontinued Operations — 87 hotels


			Quarter Ended						Nine Months Ended
	Capital expenditures Nine Months Ended		September 30, 2004			September 30, 2004			September 30, 2004			September 30, 2004
	September 30, 2004
	(in thousands $)
Upper Upscale
Number of properties	$	748		4			4			4			4
Number of rooms				825			825			825			825
Occupancy				72.1	%		62.9	%		69.4	%		60.7	%
Average daily rate			$	97.95		$	90.69		$	95.94		$	90.74
RevPAR			$	70.59		$	57.01		$	66.56		$	55.09
Upscale
Number of properties		9,059		17			17			17			17
Number of rooms				3,002			3,002			3,002			3,002
Occupancy				66.7	%		67.0	%		68.2	%		67.1	%
Average daily rate			$	84.43		$	80.83		$	85.97		$	84.10
RevPAR			$	56.33		$	54.18		$	58.62		$	56.39
Midscale with Food & Beverage
Number of properties		11,031		54			54			54			54
Number of rooms				10,939			10,939			10,939			10,939
Occupancy				64.3	%		65.3	%		60.0	%		59.7	%
Average daily rate			$	73.41		$	73.25		$	72.51		$	71.64
RevPAR			$	47.22		$	47.80		$	43.50		$	42.80
Midscale without Food & Beverage
Number of properties		813		9			9			9			9
Number of rooms				1,067			1,067			1,067			1,067
Occupancy				63.6	%		58.9	%		61.4	%		54.7	%
Average daily rate			$	59.06		$	57.97		$	60.41		$	58.96
RevPAR			$	37.56		$	34.15		$	37.09		$	32.27
Independent Hotels
Number of properties		244		3			3			3			3
Number of rooms				535			535			535			535
Occupancy				38.9	%		42.2	%		39.0	%		43.9	%
Average daily rate			$	61.99		$	62.87		$	62.78		$	60.90
RevPAR			$	24.11		$	26.51		$	24.51		$	26.72
All Hotels
Number of properties		21,895		87			87			87			87
Number of rooms				16,368			16,368			16,368			16,368
Occupancy				64.3	%		64.3	%		61.4	%		60.3	%
Average daily rate			$	75.75		$	74.42		$	75.60		$	74.14
RevPAR			$	48.69		$	47.85		$	46.40		$	44.70

Continuing Operations — 78 hotels


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

The categories in the tables above are based on the Smith Travel Research Chain Scales and are defined as:

• Upper Upscale: Hilton and Marriott;

• Upscale: Courtyard by Marriott, Crowne Plaza, Radisson and Residence Inn by Marriott;

• Midscale with Food & Beverage: Clarion, DoubleTree, Four Points, Holiday Inn, Holiday Inn Select, Holiday Inn SunSpree Resort and Quality Inn

• Midscale without Food & Beverage Fairfield Inn by Marriott and Holiday Inn Express

The following two tables present data on occupancy, ADR and RevPAR for the hotels in our portfolio (including one hotel that we do not consolidate) at September 30, 2004, by region for the third quarter 2004 and the third quarter 2003 and the nine months ended September 30, 2004 and September 30, 2003.

Combined Continuing and Discontinued Operations — 87 hotels


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

Continuing Operations — 78 hotels


			Quarter Ended						Nine Months Ended
			September 30,			September 30,			September 30,			September 30,
	Capital expenditures Nine Months Ended		2004			2004			2004			2004
	September 30, 2004
	(in thousands $)
Northeast Region
Number of properties	$	4,715		28			28			28			28
Number of rooms				5,155			5,155			5,155			5,155
Occupancy				72.4	%		72.3	%		66.8	%		65.8	%
Average daily rate			$	85.61		$	83.09		$	84.14		$	82.01
RevPAR			$	61.98		$	60.05		$	56.25		$	53.96
Southeast Region
Number of properties		6,983		27			27			27			27
Number of rooms				4,613			4,613			4,613			4,613
Occupancy				60.1	%		59.6	%		59.9	%		59.4	%
Average daily rate			$	69.69		$	68.22		$	70.31		$	67.97
RevPAR			$	41.90		$	40.67		$	42.11		$	40.38
Midwest Region
Number of properties		2,799		16			16			16			16
Number of rooms				3,263			3,263			3,263			3,263
Occupancy				62.5	%		59.9	%		59.4	%		56.6	%
Average daily rate			$	68.93		$	68.60		$	70.14		$	69.34
RevPAR			$	43.09		$	41.10		$	41.65		$	39.28
West Region
Number of properties		6,674		7			7			7			7
Number of rooms				1,319			1,319			1,319			1,319
Occupancy				61.0	%		62.4	%		64.8	%		63.2	%
Average daily rate			$	76.44		$	69.66		$	81.49		$	78.25
RevPAR			$	46.66		$	43.47		$	52.80		$	49.45
All Hotels
Number of properties		21,171		78			78			78			78
Number of rooms				14,350			14,350			14,350			14,350
Occupancy				65.2	%		64.5	%		62.7	%		61.4	%
Average daily rate			$	76.49		$	74.42		$	76.64		$	74.63
RevPAR			$	49.86		$	47.99		$	48.08		$	45.84

The regions in the tables above are defined as:

• Northeast: Canada, Connecticut, Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania, Vermont, West Virginia;

• Southeast: Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee;

• Midwest: Arkansas, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Oklahoma, Texas; and

• West: Arizona, California, Colorado, New Mexico.

Liquidity and Capital Resources

Working Capital

We use our cash flows primarily for operating expenses, debt service, and capital expenditures. Currently, our principal sources of liquidity consist of cash flows from operations and existing cash balances. Cash flows from operations may be adversely affected by factors such as a reduction in demand for lodging or certain large scale renovations being performed at our hotels. To the extent that significant amounts of our accounts receivable are due from airline companies, a further downturn in the airline industry also could materially and adversely affect the collectibility of our accounts receivable, and hence our liquidity. A further downturn in the airline industry could also affect revenues by decreasing the aggregate levels of demand for our hotels by airline industry employees. At September 30, 2004, airline receivables represented approximately 15.2% of our accounts receivable net of allowances.

Between November 1, 2003 and November 8, 2004, we sold ten hotels, one office building, and two land parcels with another nine hotels and one land parcel classified as assets held for sale. The aggregate sales price from the sale of the ten hotels, the office building and two land parcels sold between November 1, 2003 and November 8, 2004,

was $53.6 million, $38.7 million of which was used to pay down debt and $11.2 million of which was used for general corporate purposes, including capital expenditures.

Our ability to make scheduled debt service payments and fund operations and capital expenditures depends on our future performance and financial results, including the successful implementation of our business strategy and, to a certain extent, the general condition of the lodging industry and the general economic, political, financial, competitive, legislative and regulatory environment. In addition, our ability to refinance our indebtedness depends to a certain extent on these factors as well. Many factors affecting our future performance and financial results, including the severity and duration of macro-economic downturns, are beyond our control. See “Matters Which May Affect Future Results — Risks Related to Our Business” in our Annual Report on Form 10-K for the year ended December 31, 2003.

In June 2004, we completed an offering to the public of our common stock, the purpose of which was to redeem our outstanding Preferred Stock, to fund capital expenditures related to renovations and repositionings of selected hotels, and for general corporate purposes including funding our growth strategy. In connection with this offering, we closed on the $370 million Merrill Lynch Mortgage Lending, Inc. refinance in order to extend maturities and to convert a substantial portion of floating rate debt to fixed rate debt.

We intend to continue to use our cash flow to make scheduled debt service payments and fund operations and capital expenditures and, therefore, do not anticipate paying dividends on our common stock in the foreseeable future.

Although we have emerged from Chapter 11, the distribution of shares to general unsecured creditors is not complete as we continue to reconcile the claims made by these creditors. We have established an accrual for allowed claims from which these claims will be paid. Until this process is complete, we will continue to incur expenses in respect of these claims as well as Bankruptcy Court fees and professional fees.

In accordance with GAAP, all assets held for sale, including assets that would normally be classified as long-term assets in the normal course of business, were reported as “assets held for sale” in current assets. Similarly, all liabilities related to assets held for sale were reported as “liabilities related to assets held for sale” in current liabilities, including debt that would otherwise be classified as long-term liabilities in the ordinary course of business.

At September 30, 2004, we had working capital (current assets less current liabilities) of $41.3 million compared to $2.4 million at December 31, 2003. The increase in working capital was primarily due to an increase in cash and cash equivalents resulting from the cash proceeds received from the June 2004 common stock offering. The net proceeds to us from the common stock offering approximated $175.9 million, of which approximately $25.7 million was used to fund reserve accounts with Merrill Lynch Mortgage pursuant to requirements in our June 2004 Refinancing Debt agreements. A reserve of $22.7 million was funded for capital expenditures and a reserve of $3.0 million was funded for requirements related to a hotel ground lease that was ultimately resolved at approximately $1.8 million. On July 26, 2004, we used approximately $114.0 million of the proceeds from our equity offering to redeem all of our outstanding shares of Series A Preferred Stock, including accrued dividends and a 4% prepayment premium. Approximately $2.2 million in cash replaced the 79,278 shares of Preferred Stock held in the disputed claims reserve.

During the third quarter 2004 and the nine months ended September 30, 2004, we spent approximately $9.4 million and $22.3 million, respectively, on capital expenditures. We expect to spend an additional $21.4 million, which includes committed hurricane repair capital expenditures, during the remainder of 2004, and an additional $38.4 million in the first half of 2005 to complete the projects started in 2004, thereby completing substantially all of our deferred renovations.

We believe that the combination of our current cash, cash flows from operations, capital expenditure escrows and the proceeds of asset sales will be sufficient to meet our liquidity needs for the next 24 months.

Our ability to meet our long-term cash needs is dependent on the continuation and extent of the recovery of the economy and the lodging industry, improvement in our operating results, the successful implementation of our

portfolio improvement strategy and our ability to obtain third party sources of capital on favorable terms as and when needed. In the short term, we continue to diligently monitor our costs. Our future liquidity needs and sources of working capital are subject to uncertainty and we can provide no assurance that we will have sufficient liquidity to be able to meet our operating expenses, debt service requirements, including scheduled maturities, and planned capital expenditures. We could lose the right to operate certain hotels under nationally recognized brand names, and furthermore, the termination of one or more franchise agreements could lead to defaults and acceleration under one or more loan agreements as well as obligations to pay liquidated damages under the franchise agreements. See “Matters Which May Affect Future Results — Risks Related to Our Business” in our Annual Report on Form 10-K for the year ended December 31, 2003, for further discussion of conditions that could adversely affect our estimates of future liquidity needs and sources of working capital.

Cash Flow

Operating Activities

Net cash provided by operating activities was $25.3 million and $27.6 million for the nine months ended September 30, 2004 and 2003, respectively. Although EBITDA of $47.6 million for nine months ended September 30, 2004 was $8.9 million higher than nine months ended September 30, 2003, net cash provided by operating activities was $2.3 million lower in the nine months ended September 30, 2004 primarily because the 2003 period benefited from the release of bankruptcy-related restricted cash.

During the nine months ended September 30, 2003, $11.8 million of restricted cash was released and made available for our operations.

Investing Activities

Investing activities provided a net cash outflow of $4.9 million for the nine months ended September 30, 2004 and $23.6 million for the first nine months of 2003. The $18.7 million decrease in the net cash used in investing activities in the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003 is a result of $38.9 million of net proceeds generated from asset sales, offset by $21.0 million deposited into lender controlled escrows and $22.3 million spent on capital improvements. In the nine months ended September 30, 2003, $6.5 million was reimbursed from lender controlled escrows and $29.7 million was spent on capital improvements.

Financing activities

The $26.1 million in net cash provided by financing activities in the nine months ended September 30, 2004 was primarily due to the proceeds received from the equity offering of our common stock in June 2004 of $175.9 million, net of the underwriting discount and approximately $4.1 million of other expenses we incurred related to the equity offering.

Principal payments on long term debt were the result of our debt refinance with Merrill Lynch and the sale of nine hotels in the nine months ended September 30, 2004. Principal payments, including scheduled principal payments, were approximately $400.2 million for the nine months ended September 30, 2004 compared with principal payments and the refinance of 18 of our hotels upon their emergence from Chapter 11 of $81.6 million in the nine months ended September 30, 2003. Financing activities also consisted of payments of financing costs of $5.4 million and $4.7 million for the nine months ended September 30, 2004 and September 30, 2003, respectively.

On July 26, 2004, all of our remaining outstanding Preferred Stock was redeemed for $114.0 million in cash.

On September 18, 2003, we drew down the full availability of $2.0 million under a revolving credit facility with OCM Real Estate Opportunities Fund II, L.P. (the “OCM Fund”). The revolving loan agreement, secured by two land parcels, expired on May 1, 2004. We did not renew the facility on May 1, 2004. Borrowings under the facility bore interest at the fixed rate of 10% per annum and were repaid in December 2003 out of the proceeds we received from the sale of an office building.

Debt and Contractual Obligations

The following table sets forth our debt and contractual obligations:


			Contractual Obligations Due by Year (5)
	Total		Year 1		Year 2		Year 3		Year 4		Year 5		Thereafter
	(Unaudited in thousands)
Continuing Operations
*Refinancing Debt (1)*
Merrill Lynch Mortgage Lending, Inc. Floating	$	75,385	$	873	$	74,512	$	—	$	—	$	—	$	—
Merrill Lynch Mortgage Lending, Inc. Fixed		259,407		4,042		4,320		4,618		4,889		241,538		—
*Other financing*
Computershare Trust Company of Canada		7,498		240		259		280		6,719		—		—
Column Financial, Inc.		25,641		2,426		2,696		2,996		3,329		4,025		10,169
Lehman Brothers Holdings, Inc.		23,051		517		567		21,967		—		—		—
JP Morgan Chase Bank		10,248		563		607		657		710		770		6,941
DDL Kinser		2,311		2,311		—		—		—		—		—
Column Financial, Inc.		8,648		427		469		516		566		677		5,993
Column Financial, Inc.		3,105		3,105		—		—		—		—		—

Total other financing		80,502		9,589		4,598		26,416		11,324		5,472		23,103

		415,294		14,504		83,430		31,034		16,213		247,010		23,103
Long-term debt — other (2)		5,244		1,066		965		1,359		930		304		620

		420,538		15,570		84,395		32,393		17,143		247,314		23,723
Interest expense (3)		113,582		28,136		26,446		21,565		19,193		15,674		2,568
Ground and parking lease obligations		117,458		2,880		2,890		2,927		2,995		3,032		102,734
Purchase Obligations (4)		2,205		84		84		84		84		84		1,785

Total continuing obligations		653,783		46,670		113,815		56,969		39,415		266,104		130,810
Obligations related to assets held for sale
*Refinancing Debt*
Merrill Lynch Mortgage Lending, Inc. Floating		31,240		362		30,878		—		—		—		—
Long-term debt — other (2)		143		26		26		26		26		26		13
Interest expense (3)		3,081		1,681		1,400
Ground and parking lease obligations		2,496		290		302		290		252		252		1,110

Total obligations related to assets held for sale		36,960		2,359		32,606		316		278		278		1,123

	$	690,743	$	49,029	$	146,421	$	57,285	$	39,693	$	266,382	$	131,933

(1)		Discussed in “Note 7, Debt” in the notes to our unaudited condensed financial statements.

(2)		Comprised of unsecured notes payable of $3.6 million for pre-petition bankruptcy-related tax obligations and $1.8 million for other obligations.

(3)		LIBOR rate of 1.99% was used for all periods.

(4)		Purchase obligation is for a management fee agreement expiring December 2030.

(5)		Year 1 through Year 5 represents the 12 months ending September 30 starting with 2005 and ending in 2009.

We do not include the following information in the table above:

• Franchise fees — Substantially all of our franchise fees vary with our revenues. Franchise fees expense for the three and nine months ended September 30, 2004 and September 30, 2003 relating to our continuing operations and discontinued operations are shown in Note 8. Commitments and Contingencies, “Franchise Agreements and Capital Expenditures”;

• Equipment rentals and costs relating to our maintenance contracts - These items are of a short term nature and are cancelable by us. For the three and nine months ended September 30, 2004, costs relating to equipment rentals and maintenance contracts for our continuing operations were approximately $1.1 million and $3.6 million, respectively; and

• Other purchase obligations — As of September 30, 2004, we had no other material purchase obligations.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Market Risk

We are exposed to interest rate risks on our variable rate debt. At September 30, 2004 and December 31, 2003, we had outstanding variable rate debt of approximately $106.6 million and $382.8 million, respectively.

In order to manage our exposure to fluctuations in interest rates with the U.S. portion of the exit financing received in November 2002 ($299.3 million at December 31, 2003 and repaid on June 25, 2004), we entered into two interest rate cap agreements, which allowed us to obtain exit financing at floating rates and effectively cap them at LIBOR of 6.44% plus the spread. If LIBOR exceeded 6.44%, the contracts would have required settlement of net interest receivable at specified intervals, which generally coincide with the dates on which interest was payable on the underlying debt. If LIBOR would have been below 6.44%, there would have been no settlement from the interest rate caps. Therefore, we were exposed to interest rate risks on the exit financing debt for increases in LIBOR up to 6.44% but we were not exposed to increases in LIBOR above 6.44% because settlements from the interest rate caps would have offset the incremental interest expense. The one-month LIBOR as of September 30, 2004 was 1.84%. The notional principal amount of the interest rate caps outstanding was $302.2 million at December 31, 2003.

On May 22, 2003, we finalized the $80 million Lehman Financing which was repaid on June 25, 2004. The Lehman Financing was a two-year term loan with an optional one-year extension and bore interest at the higher of 7.25% or LIBOR plus 5.25%. In order to manage our exposure to fluctuations in interest rates with the Lehman Financing, we entered into an interest rate cap agreement, which allowed us to obtain this financing at a partial floating rate and effectively capped the interest rate at LIBOR of 5.00% plus 5.25%. When LIBOR exceeded 5.00%, the contracts would have required settlement of net interest receivable at specified intervals, which generally coincided with the dates on which interest was payable on the underlying debt. If LIBOR would have fallen below 5.00%, there would have been no settlement from the interest rate cap. We were exposed to interest rate risks on the Lehman Financing for LIBOR of between 2.00% and 5.00%. The notional principal amount of the interest rate cap outstanding was $79.2 million at December 31, 2003.

On June 25, 2004, we refinanced both the exit financing and Lehman financing with Merrill Lynch Mortgage. The new refinancing is organized in four fixed rate pools and one floating rate pool. In order to manage our exposure to fluctuations in interest rates with the floating pool, we entered into an interest rate cap agreement, which allowed us to obtain this financing at a floating rate and effectively cap the interest rate at LIBOR of 5.00% plus 3.40%. When LIBOR exceeds 5.00%, the contract requires settlement of net interest receivable at specified intervals, which generally coincide with the dates on which interest is payable on the underlying debt. When LIBOR is below 5.00%, there is no settlement from the interest rate cap. We are exposed to interest rate risks on the floating pool for increases in LIBOR up to 5.00%, but we are not exposed to increases in LIBOR above 5.00% because settlements from the interest rate caps would offset the incremental interest expense. The notional principal amount of the interest rate cap outstanding was $110.0 million at September 30, 2004.

The fair value of the interest rate cap related to Refinanced Debt as of September 30, 2004 was approximately $52,000. The fair values of the two interest rate caps related to the Merrill Lynch Exit Financing and the one cap related to the Lehman Financing as of September 30, 2004 and December 31, 2003 were approximately nil and $15,000, respectively. The fair values of the interest rate caps were recognized on the balance sheet in other assets. Adjustments to the carrying values of the interest rate caps are reflected in interest expense.

With respect to the fair market value of the four interest rate caps, we believe that our interest rate risk at September 30, 2004 and December 31, 2003 was minimal. The impact on annual results of operations of a hypothetical one-point interest rate reduction on the interest rate caps as of September 30, 2004 would be a reduction in net income of approximately $48,000. These derivative financial instruments are viewed as risk management tools. We do not use derivative financial instruments for trading or speculative purposes. However, we have not elected the hedging requirements of SFAS No. 133.

The nature of our fixed rate obligations does not expose us to fluctuations in interest payments. The impact on the fair value of our fixed rate obligations of a hypothetical one-point interest rate increase on the outstanding fixed-rate debt as of September 30, 2004 and December 31, 2003 would be approximately $12.9 million and $3.0 million, respectively.

In addition, the hotel business is inherently capital intensive, as the vast majority of assets are hotels, which are long-lived. Lodgian’s exposure to market risk associated with changes in interest rates relates primarily to its debt obligations. As of September 30, 2004, approximately 23.6% of the long-term debt carries floating rates of interest. For the balance of long-term debt, the nature of fixed rate obligations does not expose us to the risk of changes in the fair value of these instruments. Our outstanding debt was $451.9 million at September 30, 2004, including current maturities and long-term debt related to assets held for sale.

At September 30, 2004, approximately $106.6 million of debt instruments outstanding were subject to changes in the LIBOR rate. Without regard to additional borrowings under those instruments or scheduled amortization, the annualized effect of each twenty five basis point increase in LIBOR would be a reduction in income before income taxes of approximately $0.3 million. The fair value of the fixed rate mortgage debt (book value $339.9 million) at September 30, 2004 is estimated at $354.4 million.

Forward-looking Statements

We make forward looking statements in this report and other reports we file with the SEC. In addition, management may make oral forward-looking statements in discussions with analysts, the media, investors and others. These statements include statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” and “projects” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current views with respect to future events and the impact of these events on our business, financial condition, results of operations and prospects are subject to many risks and uncertainties including the following:

• The effects of regional, national and international economic conditions, including the magnitude and duration of the economic recovery in the United States;

• Competitive conditions in the lodging industry and increases in room capacity;

• The effects of actual and threatened terrorist attacks and international conflicts and their impact on domestic and international travel, including the potentially marked decrease in travel in connection with military action in Iraq or elsewhere;

• The effectiveness of changes in management and our ability to retain qualified individuals to serve in senior management positions;

• Requirements of franchise agreements, including the right of some franchisors to immediately terminate their respective agreements if we breach certain provisions;

• Seasonality of the hotel business;

• The financial condition of the airline industry and its impact on air travel;

• The effect that Internet reservation channels may have on the rates that we are able to charge for hotel rooms;

• Increases in the cost of debt and our continued compliance with the terms of our loan agreements;

• Our high level of secured debt;

• Our ability to complete planned hotel and land parcel dispositions;

• Our ability to meet the continuing listing requirements of the American Stock Exchange;

• The effect of self-insured claims in excess of our reserves, or our ability to obtain adequate property and liability insurance to protect against losses, or to obtain insurance at reasonable rates;

• Potential litigation and/or governmental inquiries and investigations;

• Laws and regulations applicable to our business, including federal, state or local hotel, resort, restaurant or land use regulations, employment, labor or disability laws and regulations;

• The short time that the public market for our new securities has existed;

• The risks identified under “Risks Related to Our Business” and “Risks Relating to Our Common Stock” in our Annual Report on Form 10-K for the year ended December 31, 2003; and

• Our ability to collect insurance proceeds for both property damage and business interruption claims related to damage caused by hurricanes to certain hotels.

• If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we and our auditors may not be able to render the required attestation concerning our assessment and the effectiveness of the internal controls over financial reporting, we may be subject to investigation and/or sanctions by regulatory authorities, such as the Securities Exchange Commission or the American Stock Exchange, and our reputation may be harmed. Any such action could adversely affect our financial results and the market price of our common stock.

Any of these risks and uncertainties could cause actual results to differ materially from historical results or those anticipated. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained and caution you not to place undue reliance on such statements. We undertake no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances or their impact on our business, financial condition, results of operations and prospects. Many of these factors are not within our control and we caution you not to put undue reliance on forward looking statements.

Inflation

We have not determined the precise impact of inflation. However, we believe that the rate of inflation has not had a material effect on our revenues or expenses in recent years. It is difficult to predict whether inflation will have a material effect on our results in the long-term.

New Accounting Pronouncements

The table below summarizes recent accounting pronouncements and their effects on Lodgian:


		Month	Effective date for	Summary of Major
	Description	Issued	Lodgian	Provisions	Effect on Lodgian
FIN No. 46	Consolidation of Variable Interest Entities	January-03	Special purpose entities — December 31, 2003. Other entities — first quarter of 2004.	Addresses consolidation by a business of variable interest entities in which it is the primary beneficiary.	No impact, since we have no variable interest entities

SFAS No. 150	Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity	May-03	July-03	Aims to eliminate diversity by requiring that certain types of freestanding instruments be reported as liabilities including mandatorily redeemable shares which unconditionally obligate the issuer to redeem the shares for cash or by transferring other assets	Our Mandatorily Redeemable 12.25% Cumulative Preferred Stock has been reclassified to long-term debt in the Condensed Consolidated Financial Statements and the related dividends for the period January 1, 2004 to September 30, 2004 have been included in interest expense. All Preferred Stock was exchanged or redeemed as of July 26, 2004.

Implementation of Section 404 of the Sarbanes-Oxley Act of 2002

We are in the process of implementing the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, with respect to which we are devoting substantial time and resources and are incurring substantial costs. For the nine months ended September 30, 2004, we have incurred $0.7 million on services related to Sarbanes-Oxley compliance. Section 404 requires our management to assess the effectiveness of our internal controls over financial reporting and include an assertion in our annual report as to the effectiveness of our controls.

The Sarbanes-Oxley Act of 2002 imposes new duties on us and our executives, directors, attorneys and independent registered public accountants. In order to comply with the Sarbanes-Oxley Act, we are evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls. We are currently performing the system and process evaluation and testing (and any necessary remediation) required in an effort to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. During the course of this work we identified internal control activities which we believe needed improvement. However, we do not believe that any of the deficiencies noted to date constitute material weaknesses in internal control as defined by the Public Company Accounting Oversight Board. We are taking the necessary steps to appropriately remediate the deficiencies noted in our internal controls over financial reporting, including documentation of new and existing policies and procedures and implementation of additional monitoring controls. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the outcome of our testing and resulting remediation actions or the impact of the same on our operations since there is no precedent

available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our auditors may not be able to render the required attestation concerning our assessment and the effectiveness of the internal controls over financial reporting, we may be subject to investigation and/or sanctions by regulatory authorities, such as the Securities Exchange Commission or the American Stock Exchange, and our reputation may be harmed. Any such action could adversely affect our financial results and the market price of our common stock. (See further discussion of the Company’s efforts surrounding compliance with Sarbanes-Oxley at “Item 4. Controls and Procedures”.)

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk.”

Item 4. Controls and Procedures

a) Based on an evaluation of our disclosure controls and procedures carried out as of September 30, 2004, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective since they would cause material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

b) During the quarter ended September 30, 2004, there were no changes in our internal control over financial reporting which materially affected, or are likely to materially affect, our internal control over financial reporting. After the end of that quarter, we determined we had a significant deficiency in our disclosure controls over contracts. As a result, we revised our internal control over financial reporting to assure that the accounting for significant or unusual agreements is reviewed and approved, prior to the posting of any general ledger entries, by one of the following finance employees: our Director of Financial Reporting, our Chief Accounting Officer or our Chief Financial Officer. (See further discussion of the Company’s efforts surrounding compliance with Sarbanes-Oxley at “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Implementation of Section 404 of the Sarbanes-Oxley Act of 2002”.)

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits

(a) A list of the exhibits required to be filed as part of this Report on Form 10-Q, is set forth in the “Exhibit Index” which immediately precedes such exhibits, and is incorporated herein by reference.


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

	•		82 hotels that we wholly own and operate through subsidiaries;

	•		four hotels that we operate in joint ventures in which we have a 50% or greater voting equity interest and exercise control; and

	•		one hotel that we operate in a joint venture in which we have a 30% non-controlling equity interest.

	•		the reported amounts of assets and liabilities;

	•		the reported amounts of revenues and expenses during the reporting period; and

	•		the disclosures of contingent assets and liabilities at the date of our financial statements.

	•		Revenues increased as a result of an increase in leisure and business travel and average daily rates as the hospitality industry and the economy continued to recover in the third quarter 2004. In addition, hotels that were renovated in 2003 and early 2004 experienced improved occupancy levels and rates upon the completion of their renovations.

	•		Operating expenses, including direct hotel and other operating expenses, increased $3.1 million in the third quarter 2004 as compared to the third quarter 2003. Our hotels were negatively affected by increased benefit costs for 401k, workers’ compensation, union costs, and state unemployment tax rate increases, and higher utility costs, advertising, repair and maintenance costs, and bad debt costs related to an airline bankruptcy filing. The hotels benefited, however, from the stabilization of health insurance costs due to better claims experience, and lower insurance premiums and self-insured losses for property and casualty programs (excluding hurricane losses). Corporate overhead expenses increased due to higher costs related to Sarbanes Oxley compliance, partially offset by lower post-emergence Chapter 11 costs. Depreciation and amortization costs were lower due to the reduced asset base that resulted from impairment charges. We also recorded additional impairment charges in the third quarter 2004.

	•		During August and September 2004, eight of our hotels were damaged by the hurricanes that made landfall in the Southeastern United States. Six of the hotels incurred damage which will result in costs that will exceed the respective property insurance deductibles. Two of those six hotels (West Palm Beach Crowne Plaza and Melbourne Holiday Inn) remain closed and are not expected to reopen until the second quarter of 2005. All of the affected hotels are covered by insurance which includes coverage for business interruption. The deductibles for named windstorms are 2% of replacement cost for each hotel, per occurrence. Currently, we estimate that Lodgian will incur an aggregate deductible of $2.9 million for claims associated with the six hotels whose losses are expected to exceed their respective deductibles. The adjustment of these claims is complex due to the fact that, in some cases, multiple storms affected certain hotels in a relatively short time period, making it difficult in some cases to determine which storm caused what damage to each hotel. Under the terms of our insurance policies, we must satisfy a separate deductible for each named windstorm for each hotel. We are working with our insurance carrier to resolve these claims in as prompt a manner as possible. On November 2, 2004, our insurer advanced $1.5 million to us for losses associated with two of the affected hotels.

	•		Interest expense and other financing costs were negatively affected by the 4% prepayment premium due when the Preferred Stock was redeemed, offset by a reduced Preferred Stock dividend cost as a result of the

			Preferred Stock shares that were exchanged on June 25, 2004 and the remaining outstanding Preferred Stock shares that were redeemed on July 26, 2004.

	•		Net loss attributable to common stock was $3.7 million for the third quarter 2004 compared with $3.6 million for the third quarter 2003.

	•		Hotel administration costs increased $0.7 million, with bad debt expenses increasing $0.3 million primarily due to the USAir bankruptcy filing, and increases in salary and employee benefits.

	•		Franchise fees increased $0.4 million as a result of the increase in room revenues and the increased cost of brand loyalty programs.

	•		Hotel administration costs increased $1.1 million, primarily due to increases in salary and employee benefits and costs related to labor union contract negotiations.

	•		Advertising and promotion costs increased $0.6 million due to increased costs of advertising, market research materials and salary and benefit increases.

	•		Franchise fees increased $1.4 million as a result of the increase in room revenues and the increased cost of brand loyalty programs.

	•		Repairs and maintenance costs increased $0.5 million primarily as a result of our continuing increased emphasis on preventive maintenance programs and renovations projects.

	•		Utility costs increased $0.5 million as a result of increased occupied rooms and rate and consumption increases. POR costs for 2004 were $6.08 as compared to $6.03 in 2003, an increase of 0.8%.

	•		The $1.9 million net cost of the swaption contract to hedge against rising interest rates until the Fixed Rate Loans’ interest rate was locked;

	•		Prepayment penalties paid to Merrill Lynch Mortgage of $1.9 million on the Senior Loan and $0.8 million on the Mezzanine Loan (not including $0.2 million of prepayment penalties allocated to discontinued operations) with the extinguishment of Merrill Lynch Exit Financing debt;

	•		The write-off of $6.7 million in deferred loan costs ($3.3 million for Lehman, $3.4 million for Merrill Lynch and nil for Macon), not including $0.7 million in deferred loan costs allocated to discontinued operations, as a result of the extinguishment of the Merrill Lynch Mortgage, Lehman Debt and Macon Debt;

	•		The $0.8 million loan origination costs incurred as a part of the Refinancing Debt (not including $0.3 million of origination costs allocated to discontinued operations); and

	•		For the nine months ended September 30, 2004 there are no revenues and expenses in the table for the hotel and office building sold during 2003. The hotel was sold in November 2003 and the office building was sold in December 2003. However, the nine months ended September 30, 2003 results reflect the full period’s operations for these two properties. For the nine months ended September 30, 2003, revenues for these two properties were $2.2 million and direct operating expenses were $1.0 million in aggregate.

	•		Less than nine month’s revenues and expenses are included in the results for the nine months ended September 30, 2004 for the nine hotels and two land parcels sold at various intervals during the period.

	•		Interest expense increased as a result of the Lehman Financing which was executed in May 2003 and which replaced debt on which we were not required to pay interest while the related hotels were in Chapter 11.

	•		The gain on asset dispositions of $9.2 million represents the gain on sale of seven of the nine hotels sold during the nine months ended September 30, 2004.

	•		Upper Upscale: Hilton and Marriott;

	•		Upscale: Courtyard by Marriott, Crowne Plaza, Radisson and Residence Inn by Marriott;

	•		Midscale with Food & Beverage: Clarion, DoubleTree, Four Points, Holiday Inn, Holiday Inn Select, Holiday Inn SunSpree Resort and Quality Inn

	•		Midscale without Food & Beverage Fairfield Inn by Marriott and Holiday Inn Express

	•		Northeast: Canada, Connecticut, Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania, Vermont, West Virginia;

	•		Southeast: Alabama, Florida, Georgia, Kentucky, Louisiana, South Carolina, Tennessee;

	•		Midwest: Arkansas, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Oklahoma, Texas; and

	•		West: Arizona, California, Colorado, New Mexico.

	•		Franchise fees — Substantially all of our franchise fees vary with our revenues. Franchise fees expense for the three and nine months ended September 30, 2004 and September 30, 2003 relating to our continuing operations and discontinued operations are shown in Note 8. Commitments and Contingencies, “Franchise Agreements and Capital Expenditures”;

	•		Equipment rentals and costs relating to our maintenance contracts - These items are of a short term nature and are cancelable by us. For the three and nine months ended September 30, 2004, costs relating to equipment rentals and maintenance contracts for our continuing operations were approximately $1.1 million and $3.6 million, respectively; and

	•		Other purchase obligations — As of September 30, 2004, we had no other material purchase obligations.

	•		The effects of regional, national and international economic conditions, including the magnitude and duration of the economic recovery in the United States;

	•		Competitive conditions in the lodging industry and increases in room capacity;

	•		The effects of actual and threatened terrorist attacks and international conflicts and their impact on domestic and international travel, including the potentially marked decrease in travel in connection with military action in Iraq or elsewhere;

	•		The effectiveness of changes in management and our ability to retain qualified individuals to serve in senior management positions;

	•		Requirements of franchise agreements, including the right of some franchisors to immediately terminate their respective agreements if we breach certain provisions;

	•		Seasonality of the hotel business;

	•		The financial condition of the airline industry and its impact on air travel;

	•		The effect that Internet reservation channels may have on the rates that we are able to charge for hotel rooms;

	•		Increases in the cost of debt and our continued compliance with the terms of our loan agreements;

	•		Our high level of secured debt;

	•		Our ability to complete planned hotel and land parcel dispositions;

	•		Our ability to meet the continuing listing requirements of the American Stock Exchange;

	•		The effect of self-insured claims in excess of our reserves, or our ability to obtain adequate property and liability insurance to protect against losses, or to obtain insurance at reasonable rates;

	•		Potential litigation and/or governmental inquiries and investigations;

	•		Laws and regulations applicable to our business, including federal, state or local hotel, resort, restaurant or land use regulations, employment, labor or disability laws and regulations;

	•		The short time that the public market for our new securities has existed;

	•		The risks identified under “Risks Related to Our Business” and “Risks Relating to Our Common Stock” in our Annual Report on Form 10-K for the year ended December 31, 2003; and

	•		Our ability to collect insurance proceeds for both property damage and business interruption claims related to damage caused by hurricanes to certain hotels.

	•		If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we and our auditors may not be able to render the required attestation concerning our assessment and the effectiveness of the internal controls over financial reporting, we may be subject to investigation and/or sanctions by regulatory authorities, such as the Securities Exchange Commission or the American Stock Exchange, and our reputation may be harmed. Any such action could adversely affect our financial results and the market price of our common stock.


		LODGIAN, INC.

Date: November 19, 2004		By: /s/ W. THOMAS PARRINGTON W. Thomas Parrington President and Chief Executive Officer

Date: November 19, 2004		By: /s/ MANUEL ARTIME Manuel Artime Executive Vice President and Chief Financial Officer


Exhibit
No.		Description
31.1	-	Sarbanes — Oxley Section 302 certification by the CEO
31.2	-	Sarbanes — Oxley Section 302 certification by the CFO
32	-	Sarbanes — Oxley Section 906 certification by the CEO and CFO