UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission file no. 1-14537

Lodgian, Inc.

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 ¨

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

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

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

LODGIAN, INC. AND SUBSIDIARIES

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

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LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements.

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LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

The comprehensive loss for the three months ended March 31, 2004 was $7.1 million.

Accumulated Other Comprehensive Income represents currency translation adjustments.

See notes to condensed consolidated financial statements.

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LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements.

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LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

1. Business Summary

     We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms, as reported by Hotel Business in the 2005 Green Book issue published in December 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 May 1, 2005, we operated 83 hotels with an aggregate of 15,681 rooms, located in 31 states and Canada. Of the 83 hotels, 76 hotels, with an aggregate of 13,718 rooms, are part of our continuing operations, while seven hotels, with an aggregate of 1,963 rooms, are held for sale. Three of the seven hotels with an aggregate of 736 rooms were identified for sale in January 2005. Our current portfolio of 83 hotels consists of:

	•	78 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 (see subsequent events for discussion on buyout of joint venture partner at one of these hotels); 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 May 1, 2005, we operated all but three of our hotels under franchises obtained from nationally recognized hospitality franchisors. We operate 55 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 16 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 9 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). See subsequent events for discussion on buyout of joint venture partner at one of these hotels. 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.

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     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, 2004.

     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. In January 2005, we classified an additional three hotels as held for sale. Between November 1, 2003 and March 31, 2005, we sold the office building, 15 of the 22 hotels and two of the three land parcels. As of March 31, 2005, our hotel portfolio consisted of 83 hotels, 76 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 March 31, 2005 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 March 31, 2005, the results of our operations for the three months ended March 31, 2005 and March 31, 2004 and our cash flows for the three months ended March 31, 2005 and March 31, 2004. 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, 2004.

     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.

Stock-based Compensation

     As we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004, 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 completion of our public offering of common stock on June 25, 2004, 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 completion 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 3,301,058 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 vested on April 9, 2005 and were converted into an equal number of shares of common stock. On July 15, 2004, 22,222 restricted stock units previously issued

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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.

     On January 31, 2005, we signed an employment contract with our newly promoted Chief Financial Officer, and pursuant to the agreement issued options to purchase 25,000 shares of our common stock with an exercise price of $11.72 per share, the average of the opening and closing prices of our shares on the date of the grant.

     We present below a summary of our stock option plan and the restricted stock units activity under the plan for the three months ended March 31, 2005:

     In the following table, we summarize information for options outstanding and exercisable at March 31, 2005:

     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. The income tax benefit, if any, associated with the exercise of stock options is credited to additional paid-in capital. Under APB No. 25, if the exercise price of 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.

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     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:

3. Discontinued Operations

     As discussed above, during 2003, we identified 19 hotels, one office building and three land parcels for sale as part of our portfolio improvement strategy and our efforts to reduce debt and interest costs. In January 2005, we identified three additional hotels as held for sale. Between January 1, 2005 and March 31, 2005, we sold three hotels for an aggregate sales price of $9.5 million. From the sale of these assets, we paid down debt of approximately $9.1 million.

     At December 31, 2004, seven hotels and one land parcel were held for sale. In January 2005, we identified three additional hotels as held for sale. Between January 1, 2005 and March 31, 2005, we sold three of the hotels that were held for sale. Accordingly, at March 31, 2005, seven hotels and one land parcel were held for sale.

     Management considers an asset held for sale when the following criteria per SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) are met:

a)

Management commits to a plan to sell the asset;

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

     Upon designation of a property as an asset held for sale and in accordance with the provisions of SFAS No. 144, the Company records the carrying value of the property at the lower of its carrying value or its estimated fair market value, less estimated selling costs, and the Company ceases depreciation of the asset.

     All losses and gains on assets sold and held for sale (including any related impairment charges) are included in “(Loss) income from discontinued operations before income taxes” in the Consolidated Statement of Operations. All assets held for sale and the liabilities related to these assets are separately disclosed in the Consolidated Balance Sheet. The amount the Company will ultimately realize could differ from the amount recorded in the financial statements.

     In accordance with SFAS No. 144, we have included the hotel assets sold during 2004 and 2005 as well as the hotel assets held for sale at March 31, 2005 (including any related impairment charges) in Discontinued Operations in the Consolidated Statements of Operations. The assets held for sale at March 31, 2005 and December 31, 2004 and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheets.

     The fair value of assets held for sale are based on the estimated selling prices less estimated costs to sell. We determined the estimated selling prices in conjunction with our real estate brokers. The estimated selling costs are based on our experience with similar asset sales. During the three months ended March 31, 2005 and March 31, 2004, we recorded impairment charges of $1.9 million and $2.2 million, respectively, on assets held for sale as follows:

     Consistent with our accounting policy on asset impairment, and in accordance with SFAS No. 144, the reclassification of assets from held for use to held for sale necessitates a determination of fair value less costs of sale. The fair values of the assets held for sale are based on the estimated selling prices less estimated costs to sell. We determined the estimated selling prices in conjunction with our real estate brokers. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down respective hotel asset carrying values if their carrying values exceed the estimated selling prices less costs to sell. The impairment of long-lived assets held for sale of $1.9 million recorded in the first quarter 2005 represents the write-down of four hotels and one land parcel held for sale, the written-off net book value of assets held for sale that were replaced in the first quarter 2005 and adjustments to recapture previously recorded impairment on two hotels as outlined below:

	a)	an additional $0.3 million on the Holiday Inn Express Gadsden, AL to reflect the estimated selling costs of this sale as this hotel was identified for sale in January 2005 and to reflect the write-off of capital improvements spent on this hotel for franchisor compliance that did not add incremental value or revenue generating capacity to the property;
	b)	an additional $1.0 million on the Holiday Inn Rolling Meadows, IL to reflect the lowered estimated selling price of the hotel;
	c)	an additional $0.3 million on the Holiday Inn Morgantown, WV to reflect the reduced selling price and the additional charges to dispose of this hotel in February 2005; and
	d)	an additional $0.4 million on the Mt. Laurel, NJ land parcel to reflect the lowered estimated selling of the land parcel.

     The impairment of long-lived assets held for sale of $2.2 million recorded in first quarter 2004 represents the write-down of five hotels held for sale. As a result of these evaluations, during the first quarter of 2004 we recorded impairment losses as follows:

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	a)	$0.1 million on the Holiday Inn Express Pensacola, FL to record the loss on sale as this hotel was sold in March 2004;
	b)	$0.3 million on the Downtown Plaza Hotel Cincinnati, OH as this hotel was listed for sale in the second quarter 2003. Impairment was recorded to adjust for the further reduction in the estimated selling price of this hotel; and
	c)	$1.7 million on the Holiday Inn Rolling Meadows, IL as this hotel was identified for sale in the second quarter 2003. Impairment was recorded to adjust for the further reduction in the estimated selling price of the hotel.

     We have changed the method for preparing the cash flow statement to combine cash flows for continuing and discontinued operations. All prior periods were changed to reflect this change in presentation. Discontinued operations have not been segregated in the consolidated statement of cash flows.

     Assets related to discontinued operations consist primarily of real estate, net of accumulated depreciation. Liabilities related to discontinued operations consist primarily of mortgage notes payable. The following is a summary of the balance sheet information for discontinued operations:

     The following is a summary of consolidated statements of operations information for discontinued operations:

4. Cash, Restricted

     At March 31, 2005, our $12.3 million of 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:

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     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 550,939 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 months ended March 31, 2005 because their inclusion would have been antidilutive. 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 154,124 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 months ended March 31, 2004 because their inclusion would have been antidilutive.

6. Debt

     At March 31, 2005 and December 31, 2004, long-term liabilities consisted of the following:

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     Substantially all of our property and equipment are pledged as collateral for long-term obligations with the exception of five hotels and one land parcel, of which three of these five 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 March 31, 2005 along with the applicable interest rates and the related carrying values of the property, plant and equipment which collateralize these debts:

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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, as of May 1, 2005, six hotels have since been 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.

     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 23 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.

     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.

     As a result of a modification in the terms of the Floating Rate Loan as outlined in the subsequent events note (see Subsequent Events), the Floating Rate Debt has an initial maturity of January 2007. 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

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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.

          If the Company does 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 its loan agreements and which could materially and adversely affect the Company. If a franchise agreement is terminated, the Company will either select an alternative franchisor or operate the hotel independently of any franchisor. However, terminating or changing the franchise affiliation of a hotel could require the Company to incur significant expenses, including franchise termination payments and capital expenditures associated with the change of a brand. Moreover, the loss of a franchise agreement could have a material adverse effect upon the operations or the underlying value of the hotel covered by the franchise because of the loss of associated guest loyalty, name recognition, marketing support and centralized reservation systems provided by the franchisor. Loss of a franchise agreement may result in a default under, and acceleration of, the related mortgage debt. In particular, the Company would be in default under the Refinancing Debt if the Company experiences either:

	•	multiple franchise agreement defaults and the continuance thereof beyond all notice and grace periods for hotels whose allocated loan amounts total 10% or more of the outstanding principal amount of such Refinancing Debt;
	•	with regards to the Merrill Lynch Mortgage floating rate refinancing debt (“Floating Rate Debt”), either the termination of franchise agreements for more than two properties or the termination of franchise agreements for hotels whose allocated loan amounts represent more than 5% of the outstanding principal amount of the floating rate debt, and such hotels continue to operate for more than five consecutive days without being subject to replacement franchise agreements;
	•	with regards to the Merrill Lynch Mortgage fixed rate refinancing debt (“Fixed Rate Debt”), either the termination of franchise agreements for more than one property or the termination of franchise agreements for hotels whose allocated loan amounts represent more than 5% of the outstanding principal amount of the fixed rate loan, and such hotels continue to operate for more than five consecutive days without being subject to replacement franchise agreements; or
	•	a franchise termination for any hotel currently subject to a franchise agreement that remains without a franchise agreement for more than six months.

          A single franchise agreement termination could materially and adversely affect the Company’s revenues, cash flow and liquidity.

     As of March 31, 2005, 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 may be placed into a restricted cash account, at the option of the lender, 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

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consecutive months. As of March 31, 2005, the lender had not elected to invoke the cash trap provision. Accordingly, as of March 31, 2005, no funds were in the restricted cash account for this purpose.

     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.

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

     As of March 31, 2005, 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 second quarter of 2005. The total investment we are making on the renovation of this property and its rebranding is $5.5 million. In addition, we will be completing capital expenditures of approximately $8.9 million on three other hotels in this loan pool in 2005 and $0.5 million in 2006 to complete the renovation of one of these hotels.

     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 May 1, 2005, the lender has not elected to require revenue for these properties to be deposited into its account.

     Additionally, as of March 31, 2005, the Company was not in compliance with the debt service coverage ratio requirement of the loan from Column Financial secured by one of its hotels in Phoenix, Arizona. The primary reason why the debt service coverage ratio is below the required threshold is due to the property undergoing an extensive renovation in 2004 in order to convert from a Holiday Inn Select to a Crowne Plaza. The renovation caused substantial revenue displacement which, in turn, negatively affected the financial performance of this hotel. Under the terms of the Column Financial loan agreement until the required DSCR is met, the lender is permitted to require the borrower to deposit all revenues from the mortgaged property into an account controlled by the lender. Accordingly, in December 2004, the Company was notified by the lender that it was not in compliance with the debt service coverage ratio requirement and would have to establish a restricted cash account whereby all cash generated by the property be deposited in an account from which all payments of interest, principal, operating expenses and escrows (insurance, property taxes and ground rent) would be disbursed. The lender may apply excess proceeds after payment of expenses to additional principal payments.

     Through our wholly-owned subsidiaries, we owe approximately $10.1 million under industrial revenue bonds secured by the Holiday Inns Lawrence, Kansas and Manhattan, Kansas hotels. For the year ended December 31, 2004, the cash flows of the two hotels were insufficient to meet the minimum debt service coverage ratio requirements. On March 2, 2005, we notified the trustee of the industrial revenue bonds which finance the Holiday Inns in Lawrence, Kansas and Manhattan, Kansas that we would not continue to make debt service payments. The Holiday Inn franchise agreements for both of these hotels expire on August 28, 2005, and each of these properties has a substantial amount of deferred capital expenditures. The failure to make debt service payments is a default under the bond indenture and also a default under the ground leases for these properties. The Company may attempt to restructure the debt on these hotels, but no assurance can be given that a restructuring will be successful. The failure to make the bond payments subjects these hotels to foreclosure and we could be obligated pursuant to a partial guaranty of approximately $1.4 million. In addition, we could be obliged to pay our franchisor liquidated damages in the amount of $0.2 million. We have classified this debt to current liabilities because the debt became callable on March 2, 2005, when we did not make the March 1, 2005 debt service payment.

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     Loan approximating $83.5 million, secured by 20 hotels, were substantially reinstated on their original terms, except for the extension of certain maturities when the Company emerged from Chapter 11 in November 2002. The terms of one other loan, in the amount of $2.5 million and secured by one hotel, were amended to provide for a new interest rate and a new maturity date.

     At March 31, 2005, approximately 82.9% of our continuing operations mortgage debt (including current portion) bears interest at fixed rates and 17.1% bears interest at a floating rate.

7. 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 5 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 2.7% to 6.0% of gross room revenues, advertising/marketing fees generally range from 1.0% to 4.2% of gross room revenues, reservation system fees generally range from 1.0% to 2.6% of gross room revenues and club and restaurant fees range from 0% to 4.5%. In the aggregate, royalty fees, advertising/marketing fees, reservation fees and other ancillary fees for the various brands under which we operate our hotels range from 5.1% to 11.0% 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 months ended March 31, 2005 and March 31, 2004 were as follows:

     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 13, six and seven of our franchise agreements are scheduled to expire in 2005, 2006, and 2007, 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 gross room revenues.

     If we do not comply with the terms of a franchise agreement, following notice and an opportunity to cure, the franchisor has the right to terminate the agreement, which could lead to a default under one or more of our loan agreements, and which could materially and adversely affect us. Prior to terminating a franchise agreement, franchisors are required to notify us of the areas of non-compliance and give us the opportunity to cure the non-

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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 May 1, 2005, we have been notified that we were not in compliance with some of the terms of seven of our franchise agreements and have received default and termination notices from franchisors with respect to an additional seven hotels summarized as follows:

	a)	Two of these hotels are held for sale;
	b)	Seven of the remaining hotels either just completed a major renovation, are undergoing a major renovation or a major renovation is planned. The total cost of the renovations is projected to be $22.3 million of which $10.6 million has been spent;
	c)	One of the remaining hotels has a franchise agreement that expires in 2005 and is expected to be renovated upon selection of a new franchise. The total cost of the renovation will not be known until the franchisor inspects the property;
	d)	One of the remaining hotels is now in full compliance and is awaiting its cure letter; and
	e)	Three of the remaining hotels are currently above the required franchise thresholds. Two of these hotels must remain above those levels until February 2006 to receive a “clean slate” letter, and the other hotel must remain above those levels until July 2005 to receive a “clean slate” letter.

          We cannot be certain that we will be able to complete our action plans, which in aggregate are estimated to cost approximately $8.0 million, of which $1.3 million is reserved with our lenders, to cure the alleged defaults prior to the specified termination dates or any extended time granted to cure any defaults. We believe we are in compliance with our other franchise agreements in all material aspects. While we can give no assurance that the steps taken to date, and planned to be taken the balance of 2005, will return the properties to full compliance, we believe that we will make significant progress and we intend to continue to give franchise agreement compliance a high level of attention. The 14 hotels that are either in default or non-compliance under the respective franchise agreement are part of the collateral security for $337.9 million of mortgage debt at May 1, 2005, due to cross-collateralization provisions.

     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 May 1, 2005, we have not completed the required capital expenditures for 18 hotels in accordance with the stipulations and estimate that completing those improvements will cost $9.4 million of which $5.2 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 15 of these hotels aggregating $8.3 million of the $9.4 million. In addition, one of these hotels is held for sale and represents $0.3 million of the $9.4 million.

     In March 2005, we entered into letter agreements with IHG for our Holiday Inns in Strongsville, OH, Monroeville, PA and Washington-Meadowlands, PA which extend the deadline for us to complete renovations on these hotels. The letter agreements require us to complete various phases of the renovations by agreed upon milestone dates. The capital expenditures related to these three hotels total $10.7 million, $3.5 million of which is reserved with our lenders. The agreed upon completion date for these three hotels is October 31, 2005, and we are subject to monetary penalties if we do not comply with the agreed upon milestone and completion dates. In addition, IHG may elect to terminate the franchise agreements for these three hotels if the renovations have not been completed, and in the event of a termination, we may be subject to liquidated damages. We anticipate that we will be able to meet these milestone and completion deadlines .

     During 2004, we entered into new franchise agreements for all 15 of our Marriott-branded hotels at that time and agreed to pay a fee aggregating approximately $0.5 million, of which $0.1 million has been paid, and $0.4 million is payable in 2007, subject to offsets. In connection with our agreement, Marriott may review the capital improvements we have made at our Marriott franchised hotels during 2004, and may, in its reasonable business

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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, to improve our competitive position in individual markets, and repair hurricane damaged hotels, we plan to spend $88.9 million on our hotels in 2005, which includes committed hurricane repair capital expenditures of approximately $43.7 million, much of which we anticipate will be covered by insurance proceeds. This will substantially complete all of our deferred renovations. We spent $35.2 million on capital expenditures during 2004 on our continuing operations hotels.

	Letters of Credit

     As of March 31, 2005, 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 2005 but may require renewal beyond that date.

	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 March 31, 2005, and December 31, 2004, we had approximately $11.6 million and $11.4 million accrued for these liabilities, respectively.

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

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

	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 (Crowne Plaza West Palm Beach and Holiday Inn Melbourne) remain closed. The Crowne Plaza West Palm Beach and the Holiday Inn Melbourne hotels are expected to reopen in the 2005 third and fourth quarters, respectively. All properties in our portfolio are covered by property casualty and business interruption insurance.

     With regard to physical property damage, we are recognizing repair expenses related to hurricane damage 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 NBV write-offs exceed the relevant insurance deductibles, we have recorded a receivable from the insurance carriers. For the three months ended March 31, 2005, we incurred $0.1 million in hurricane repair charges as we determined we will be subject to another $0.1 million in deductible costs. Hurricane costs incurred to date (including costs incurred September 2004 to December 2004) total $1.9 million for hurricane repair costs, $3.7 million written off in NBV of destroyed assets, and we have recorded a $3.2 million receivable due from the insurance company for amounts that exceed the deductibles, which results in a cumulative $2.4 million casualty loss as a result of the hurricanes. In the first quarter 2005, $15.8 million was released from our insurance carrier ($17.8 million in total) as advances for repairs on our Crowne Plaza West Palm Beach, Holiday Inn Melbourne, Holiday Inn Winter Haven, Holiday Inn Express Pensacola and Holiday Inn Pensacola University Mall hotels. All advances are forwarded to our lenders from which we receive reimbursements as we incur hurricane-repair and capital expenditures. For the three months ended March 31, 2005, we received $5.2 million from our lenders for hurricane related reimbursements. Cumulatively, since September 2004

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when the first hurricane losses occurred through March 31, 2005, we have received $6.6 million from our lenders for hurricane-related reimbursements.

     We have filed business interruption claims for both hotels for the September through December 2004 period and for the January 2005 through March 2005 period. Business interruption claims submitted for the 2004 period totaled $2.1 million and for the first three months of 2005 totaled $3.2 million. None of these amounts have been included in our financial statements, because consistent with GAAP, these amounts cannot be recognized until settled or received.

	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 March 31, 2005, a $2.2 million accrual is recorded in other accrued liabilities for these claims. We have reserved for all claims approved by the Bankruptcy Court which have not yet been paid.

8. New Accounting Pronouncements

     On December 16, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 153, Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29 (“SFAS No. 153”). The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS No. 153 on June 15, 2005 will have a material effect on the Company’s consolidated financial statements.

9. 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 in June 2004. Approximately $26.3 million and $11.1 million of the net proceeds from the common stock 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.

     Until May 1, 2004, we had a revolving loan agreement with OCM Fund II that allowed us to borrow up to $2 million; however, all of our borrowings under that agreement were repaid in full in December 2003. The interest rate on the loan was 10% per annum, and in 2003 we paid $42,222 in interest to OCM Fund II on our borrowings. This revolving loan agreement 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.

10. Subsequent Events

Joint Venture Buyout

     On April 18, 2005, we acquired our joint venture partner’s 40% interest in the Crowne Plaza hotel located in Macon, Georgia. The acquisition price was $0.7 million and was paid in cash at closing. We now have a 100% ownership interest in this property.

Amendment to Merrill Lynch Floating Rate Loan

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     On April 29, 2005, we entered into an amendment with Merrill Lynch to modify certain of the provisions of the Floating Rate Loan. Under the terms of the amendment, Merrill Lynch agreed to allow the release of the Holiday Inn St. Louis, Missouri as collateral under the loan in exchange for payment of $4.8 million for debt pay down. Approximately $2.6 million of the release price was paid through the release of certain reserves held on other properties which were recently sold or are expected to be sold in the near future. We paid the balance of the release price, approximately $2.2 million, from our cash balances. In addition to the release of the St. Louis property from the collateral pool, the amendment provided for the following:

	•	Extension of the initial maturity from June 30, 2006 to January 11, 2007. We still maintain the option, subject to certain conditions, to extend the loan for up to three years from the new initial maturity date in January 2007;
	•	Once the Holiday Inn Select in Niagara Falls, New York is sold, three additional properties in the floating rate pool will be classified as “sale properties.” Once classified as “sale properties,” these hotels will be able to be released from the collateral pool by payment of the greater of (a) 100% of the aggregate allocated loan amount (lowered from 125%) and (b) the net sales proceeds of the property;
	•	The prepayment penalty, which is currently 3% and will drop to 1% in July 2005, has been further reduced for the three additional sale properties after July 2005 to 0.5%;
	•	If we sell the Holiday Inn Select in Niagara Falls, New York by June 30, 2005, Merrill Lynch will be required to purchase an interest rate cap agreement with a LIBOR strike price of 6% which would be effective from the initial maturity date of June 30, 2006 to January 11, 2007. We will be required to purchase an interest rate cap agreement should we elect to extend the maturity of the loan past January 2007 with a LIBOR strike price of 6%, which is an increase of 100 basis points from the requirement in the original loan agreement; and
	•	Certain required capital and environmental repairs under the original Floating Rate Loan have been determined not to be necessary and have been removed as requirements under the loan.

     Had this amendment been in effect as of March 31, 2005, we would have been in compliance with the debt yield covenant under the Floating Rate Loan.

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, 2004.

Executive Overview

     We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms and gross annual revenues, as reported by Hotel Business in the 2005 Green Book issue published in December 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 May 1, 2005, we operated 83 hotels with an aggregate of 15,681 rooms, located in 31 states and Canada. Of the 83 hotels, 76 hotels, with an aggregate of 13,718 rooms, are part of our continuing operations, while seven hotels, with an aggregate of 1,963 rooms are held for sale and classified in discontinued operations. Three of the seven hotels with an aggregate 736 rooms were identified for sale in January 2005. Our current portfolio of 83 hotels consists of:

•

78 hotels that we wholly own and operate through subsidiaries;

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	•	four hotels that we operate in joint ventures in which we have a 50% or greater voting equity interest and exercise control (see subsequent events for discussion of the buyout of the joint venture partner at one of these hotels); and
	•	one hotel that we operate in a joint venture in which we have a 30% non-controlling equity interest.

     We consolidate all of these hotels in our financial statements, other than the one hotel in which we hold a minority interest and which we account for under 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. In January 2005, we identified three additional hotels as held for sale. Between November 1, 2003 and March 31, 2005, we sold the office building, 15 of the 22 hotels and two of the three land parcels. As of May 1, 2005, our portfolio consisted of 83 hotels, 76 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).

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 decreased primarily due to displacement at the two hotels closed for hurricane renovations, three other hotels damaged by the hurricanes and eight hotels under renovation during the quarter. We saw improvements in ADR and RevPAR as compared to the same period in 2004 with negative growth in occupancy as a result of our on-going renovation program.
	•	Operating expenses, including direct hotel and other operating expenses, increased $0.4 million in the first quarter 2005 as compared to the first quarter 2004 primarily as a result of an increase in vacation costs as we revised our process to give us better information to track vacation time for our associates. Corporate overhead expenses increased due to higher costs for professional fees and severance costs. We recorded additional expenses related to the hurricanes as we will be subject to another $0.1 million deductible.
	•	Interest expense was lower as we capitalized more interest due to our renovation program and deferred loan cost amortizations were lower due to the loan refinance in June 2004.
	•	Net loss attributable to common stock was $7.1 million for the first quarter 2005 compared with $7.1 million for the first quarter 2004.

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. In January 2005 we identified three additional hotels as held for sale. Between November 1, 2003 and May 1, 2005, we sold fifteen of the nineteen hotels, the office building, and two of the three land parcels. Summarized below is certain financial data related to the fifteen hotels, the office building, and two land parcels sold between November 1, 2003 and May 1, 2005:

     In accordance with SFAS No. 144, we have included the hotel assets sold during 2004 and 2005 as well as the hotel assets held for sale at March 31, 2005 (including any related impairment charges) in Discontinued Operations

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in the Consolidated Statement of Operations. The assets held for sale at March 31, 2005 and December 31, 2004 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 months ended March 31, 2005, we recorded impairment charges of $1.9 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 March 31, 2005 remain properly classified in accordance with SFAS No. 144.

     The results of operations of the other 75 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, 2004. Also, our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the year ended December 31, 2004, 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 75 consolidated hotels which we plan to retain in our portfolio for the foreseeable future, for the three months ended March 31, 2005 and March 31, 2004. 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, 2004 for a general description of the categorization of our revenues and expenses.

Three Months Ended March 31, 2005 (“First Quarter 2005”) Compared to the Three Months Ended March 31, 2004 (“First Quarter 2004”)

Results of Operations — Continuing Operations

First Quarter 2005 Compared to First Quarter 2004

Revenues – Continuing Operations

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     First quarter 2005 revenues decreased 4.2% primarily due to the continued closure of two hotels (Crowne Plaza West Palm Beach and Holiday Inn Melbourne), displacement related to renovations at three other hurricane damaged hotels and displacement at eight other hotels undergoing renovation during the quarter. Displacement refers to lost revenue and profit due to rooms out of order resulting from renovation or hurricane repairs. First quarter 2004 room revenues for the Crowne Plaza West Palm Beach and Holiday Inn Melbourne were $3.6 million, food and beverage revenues were $1.0 million and other revenues were $0.1 million, for a total of $4.8 million decrease in revenues year over year. First quarter 2005 total revenue displacement, primarily consisting of room revenue displacement, for the three other hurricane-damaged hotels was $0.1 million. The eight hotels under renovation resulted in $0.8 million of displaced room revenues and $1.1 million in total revenues. Accordingly, for the three months ended March 31, 2005, room revenue displacement for the hurricane-damaged or closed hotels and hotels under renovation was $4.6 million and total revenue displacement was $6.0 million.

     Below is a chart that shows our occupancy, ADR, RevPAR and RevPAR Index (market share) for our continuing operations hotels. To illustrate the impact of the two hotels closed due to hurricane damage, the impact of renovations underway and completed, and the impact of branding, we have adjusted this information into seven different subsets. These subsets indicate that our Marriott and Hilton branded hotels outperform our IHG branded hotels. In addition, these subsets indicate that where we have recently completed a major renovation, we see an increase in RevPAR that is greater then the average increase for all of our continuing operations hotels.

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Direct operating expenses – Continuing Operations

     Direct operating expenses were 0.9% lower than in 2004 but as a percentage of revenues increased to 39.5% from 38.2%. Room expenses on a cost per occupied room (POR) basis was $22.68 in the first quarter 2005 as compared to $21.11 in the first quarter 2004. Room payroll and related benefits, on an actual POR basis, were $14.16 in the first quarter 2005 as compared to $13.46 in 2004. Other rooms expenses, on an actual POR basis, were $8.52 in the first quarter 2005 as compared to $7.65 in 2004, partially due to increased costs in linen expense resulting from upgraded linen packages mandated by certain brands. Guest and operating supplies along with guest loyalty expenses also increased. Food and beverage expenses decreased $0.3 million or 2.7% as a result of decreased revenues.

Other operating expenses – Continuing Operations

     Other hotel operating costs increased $0.7 million or 3.0% in the first quarter 2005 as compared to the same period in 2004 due to the following:

	•	Hotel administration costs increased $0.5 million or 8.8% primarily as a result of an increase in vacation pay accruals; and
	•	Utilities increased $0.2 million or 4.0% as a result of the increases in usage and rates.

     Corporate and other costs increased $0.3 million or 7.5% primarily due to severance costs and other professional fees.

     Impairment of long-lived assets charges of $1.7 million represents the $0.1 million write-off of the net book value of assets that were replaced in the first quarter 2005 and a $1.6 million impairment charge on the Holiday Inn Lawrence hotel due to a reduced fair value appraisal on this hotel.

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Non-operating income (expenses) – Continuing Operations