UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(MARK ONE)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

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

COMMISSION FILE NO. 1-14537

LODGIAN, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		52-2093696
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3445 PEACHTREE ROAD N.E., SUITE 700 ATLANTA, GA		30326 (Zip Code)
(Address of principal executive offices)

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

TITLE OF EACH CLASS		NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value per share		NYSE Amex Equities

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

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

     The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the registrant as of June 30, 2009, was $17,339,706 based on the closing price of $1.30 per share on the NYSE Amex Equities on such date. For purposes of this computation, all directors, executive officers and 10% shareholders are treated as affiliates of the registrant.

     The registrant had 21,631,958, shares of Common Stock, par value $.01, outstanding as of March 1, 2010.

 

 

Lodgian, Inc.
Form 10-K
For the Year Ended December 31, 2009

Table of Contents

		Page
PART I.
Item 1. Business			1
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			24
Item 2. Properties			24
Item 3. Legal Proceedings			24
Item 4. Reserved			24
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
Item 6. Selected Financial Data			26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			54
Item 8. Financial Statements and Supplementary Data			56
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			56
Item 9A. Controls and Procedures			56
Item 9B. Other Information			58
PART III.
Item 10. Directors, Executive Officers and Corporate Governance			58
Item 11. Executive Compensation			62
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			85
Item 13. Certain Relationships and Related Transactions, and Director Independence			87
Item 14. Principal Accountant Fees and Services			88
PART IV.
Item 15. Exhibits and Financial Statement Schedules			89
Signatures			90
EX-21
EX-23
EX-31.1
EX-31.2
EX-32

PART I

Item 1. BUSINESS

When we use the terms Lodgian, “we,” “our,” and “us,” we mean Lodgian, Inc. and its subsidiaries.

Our Company

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 according to Hotel Business. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as “Crowne Plaza,”, “Four Points by Sheraton”, “Hilton,” “Holiday Inn,” “Marriott,” and “Wyndham”. As of March 1, 2010, we operated 28 hotels with an aggregate of 5,359 rooms, located in 19 states. Of the 28 hotels, 27 hotels, with an aggregate of 5,230 rooms, were held for use and the results of operations were classified in continuing operations, while 1 hotel, with an aggregate of 129 rooms, was held for sale and the results of operations of the hotel were classified in discontinued operations.

Our portfolio of hotels, all of which we consolidate in our financial statements, consists of:

	•		27 hotels that we wholly own and operate through subsidiaries; and
	•		one hotel that we operate in a joint venture in the form of a limited partnership, in which a Lodgian subsidiary serves as the general partner, has a 51% voting interest and exercises significant control.

Our hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale, upscale and upper upscale market segments of the lodging industry. Most of our hotels are under franchises obtained from nationally recognized hospitality franchisors. We operate 14 of our hotels under franchises obtained from InterContinental Hotels Group as franchisor of the Crowne Plaza, Holiday Inn and Holiday Inn Express brands. We operate 8 of our hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Residence Inn by Marriott, and SpringHill Suites by Marriott brands. We operate another 6 hotels under other nationally recognized brands. We believe that franchising under strong national brands affords us many benefits such as guest loyalty and market share premiums.

Our management consists of an experienced team of professionals with extensive lodging industry experience led by our President and Chief Executive Officer, Daniel E. Ellis, who has over 12 years of experience in the lodging industry and has been a member of the management team at Lodgian since 1999. In addition, our Vice President of Hotel Operations and our Vice President of Asset Management have each been in the hospitality industry for over thirty years.

Our Operations

Our operations team is responsible for the management of our properties. Our Vice President of Hotel Operations is responsible for the supervision of our general managers, who oversee the day-to-day operations of our hotels. Our corporate office is located in Atlanta, Georgia. The centralized management services provided by our corporate office include finance and accounting, information technology, capital investment, human resources, and legal services.

The functions of our treasury, corporate finance and accounting team include internal audit, insurance, payroll and accounts payable processing, credit, tax, property accounting and financial reporting services. The corporate operations team oversees the budgeting and forecasting for our hotels and also identifies new systems and procedures to employ within our hotels to improve efficiency and profitability. The corporate capital investment team oversees the interior design and renovation of all our hotels. The capital investment process includes scoping, budgeting, return on investment analysis, design, procurement, and construction. Capital investment projects are approved when management determines that the appropriate return on investment will be achieved, following thorough planning, diligence, and analysis. The legal team coordinates contract reviews and provides the hotels with legal support as needed.

The information technology team maintains our computer systems, which provide real-time tracking of each hotel’s daily occupancy, average daily rate (“ADR”), room, food, beverage and other revenues, revenue per available room (“RevPAR”) and hotel expenses. By having current information available, we are better able to respond to changes in each market by focusing sales efforts and we are able to make appropriate adjustments to control expenses and maximize profitability as new current information becomes available.

Creating cost and guest service efficiencies in each hotel is a top priority. With centralized purchasing oversight and partnership with a third party vendor for rebate program expertise, we are able to realize significant cost savings by securing volume pricing and administering national rebate programs from our vendors.

The corporate human resources staff works closely with management and employees throughout Lodgian to ensure compliance with employment laws and related government filings, counsel management on employee relations and labor relations matters, design and administer benefit programs, and develop recruiting and retention strategies.

Corporate History

Lodgian, Inc. was formed as a new parent company in a merger of Servico, Inc. and Impac Hotel Group, LLC in December 1998. Servico was incorporated in Delaware in 1956 and was an owner and operator of hotels under a series of different entities. Impac was a private hotel ownership, management and development company organized in Georgia in 1997 through a reorganization of predecessor entities. After the effective date of the merger, our portfolio consisted of 142 hotels.

Between December 1998 and the end of 2001, a number of factors, including our heavy debt load, lack of available funds to maintain the quality of our hotels, a weakening U.S. economy, and the severe decline in travel in the aftermath of the terrorist attacks of September 11, 2001, combined to place adverse pressure on our cash flow and liquidity. As a result, on December 20, 2001, Lodgian and substantially all of our subsidiaries that owned hotels filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. At the time of the Chapter 11 filing, our portfolio consisted of 106 hotels. Following the effective date of our reorganization, we emerged from Chapter 11 with 97 hotels after eight of our hotels were conveyed to a lender in satisfaction of outstanding debt obligations and one hotel was returned to the lessor of a capital lease of the property. Of the 97 hotels, 78 hotels emerged from Chapter 11 on November 25, 2002, 18 hotels emerged from Chapter 11 on May 22, 2003 and one property never filed under Chapter 11. Effective November 22, 2002, the Company adopted fresh start reporting. As a result, all assets and liabilities were restated to reflect their estimated fair values at that time.

Since that time, we have sold hotels that did not fit our business strategy.

Our business is conducted in one reportable segment, which is the hospitality segment.

Planned Merger and Loan Amendment

On January 22, 2010, Lodgian, LSREF Lodging Investments, LLC, (“Purchaser”), and LSREF Lodging Merger Co., Inc., an affiliate of Purchaser (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will be merged with and into Lodgian, with Lodgian being the surviving corporation and continuing its separate existence under the laws of the State of Delaware (the “Merger”).

Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of common stock of Lodgian, other than any shares owned by Purchaser or Merger Sub, by Lodgian as treasury stock, or by any stockholders who are entitled to, and who properly exercise, appraisal rights under Delaware law, will be cancelled and will be converted automatically into the right to receive $2.50 in cash, without interest. The consummation of the Merger is subject to various customary conditions, including the approval of Lodgian’s stockholders.

Concurrently with the execution of the Merger Agreement, on January 22, 2010, Hospitality Mortgage Investments, LLC, a Delaware limited liability company (“Hospitality”), and an affiliate of Purchaser, purchased the lender’s interest in Lodgian’s $130 million mortgage loan facility originally made by Goldman Sachs Commercial Mortgage Capital, L.P. An amendment to the loan was also concurrently entered into by Hospitality and Lodgian’s subsidiary borrowing entities which own the hotels securing the loan. The material terms of the loan amendment are summarized as follows:

	•		Effective immediately, the cash lockbox provisions of the loan were amended to provide that excess cash flow from the mortgaged properties after debt service, reserves and operating expenses, will not be retained by the lender in an excess cash flow reserve account, but will instead be released to the borrowers on a monthly basis, even if the properties do not meet a previously required financial covenant test.
	•		The deadline for Lodgian’s subsidiary which owns the Crowne Plaza Albany, New York, to complete certain renovation work was extended to May 1, 2010.
	•		The allocated loan amounts for each of the properties securing the loan were readjusted.

	•		Effective July 1, 2010, the margin over LIBOR used to determine the interest rate on the loan will be increased from 1.50% to 4.25%.
	•		If the Merger Agreement is validly terminated for any reason other than as a result of a breach by Purchaser of any of its representations, warranties, covenants or agreements contained in the Merger Agreement such that certain of Lodgian’s closing conditions set forth in the Merger Agreement would not be met, Lodgian’s subsidiary borrowing entities on the loan will be required, in their sole discretion, to either pay down the principal balance of the loan by $5 million, or to cause the Holiday Inn Monroeville, Pennsylvania property to be pledged as additional security for the loan. If the Holiday Inn Monroeville, Pennsylvania property is pledged as additional security for the loan, it may be subsequently released from the loan upon payment of a cash release price of $5 million.

Franchise Affiliations

We operate substantially all of our hotels under nationally recognized brands. In addition to benefits in terms of guest loyalty and market share premiums, our hotels benefit from franchisors’ central reservation systems, their global distribution systems and their brand Internet booking sites.

We enter into franchise agreements, generally for terms of 10 to 20 years, with hotel franchisors. 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 the 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 other ancillary charges. As a percentage of gross room revenues, royalty fees range from 3.5% to 6.0% of gross room revenues, advertising/marketing fees range from 1.0% to 2.5%, reservation system fees range from 0.4% to 3.3%, and club and restaurant fees from 0.6% to 3.0%. 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 6.5% to 10.0% of gross room revenues. In addition, we are charged club fees on a per-stay basis. In 2009, franchise fees for our continuing operations were 10.2% of room revenues.

During the term of our 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. As franchise agreements expire, we may apply for franchise renewals. In connection with a renewal, a franchisor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facility, or the franchisor may elect at its sole discretion, not to renew the franchise.

When a hotel does not meet the terms of its franchise license agreement, a franchisor reserves the right to issue a notice of non-compliance to the franchisee. This notice of non-compliance provides the franchisee with a cure period which typically ranges from 3 to 24 months. At the end of the cure period, the franchisor will review the criteria for which the non-compliance notice was issued and either (1) cure the franchise agreement, returning to good standing, or (2) issue a notice of default and termination, giving the franchisee another opportunity to cure the non-compliant issue. At the end of the default and termination period, the franchisor will review the criteria for which the non-compliance notice was issued and either cure the default, issue an extension which will grant the franchisee additional time to cure, or terminate the franchise agreement. Termination of the franchise agreement could lead to a default and acceleration under one or more of our loan agreements, which would materially and adversely affect us. In the past, we have been able to cure most cases of non-compliance and most defaults within the cure periods. If we perform an economic analysis of a hotel and determine it is not economically justifiable to comply with a franchisor’s requirements, we will select an alternative franchisor, operate the hotel without a franchise affiliation, or sell the hotel. Generally, under the terms of our loan agreements, we are not permitted to operate hotels without an approved franchise affiliation. See “Item 1A. Risk Factors.”

As of March 1, 2010, we were not in compliance with the franchise agreement for one hotel due to substandard guest satisfaction scores. If the hotel does not achieve scores above the required thresholds through December 2011, the hotel could be placed in default by the franchisor. Our corporate operations team as well as our hotel’s general manager and associates have focused their efforts to cure this instance of non-compliance. We believe that we will cure the non-compliance, but cannot assure you that we will continue to be in compliance with our other franchise agreements or that we will be able to cure any current or future alleged instances of non-compliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or non-compliance.

If a franchise agreement is terminated, we would expect to select an alternative franchisor, operate the hotel independently of any franchisor or sell the hotel. However, terminating or changing the franchise affiliation of a hotel could require us to incur significant costs, including franchise termination payments and capital expenditures, and in certain circumstances could lead to acceleration of parts of indebtedness. This could materially and adversely affect our business, financial condition and results of operations.

Also, our loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more such agreements. See “Item 1A. Risk Factors.”

Sales and Marketing

We have developed a unique sales and marketing culture that is focused on revenue generation and long term profitability. We developed several key components that we believe set us apart from a typical brand or independent management approach.

The hotel sales, marketing and revenue management efforts are led by each property General Manager, whose team includes a Director of Sales and a Revenue Manager. This streamlined structure, which excludes layers of corporate operations support, provides a distinct advantage as the hotels can proactively and quickly adjust the hotel’s specific marketing plans and business strategies as market conditions change. Support is provided by the brand, the Vice President of Sales and Revenue Management, Corporate Director of E-Commerce, Area Director of Sales, and the Lodgian Councils, a core of seasoned hotel veterans in three different disciplines, including Sales, Catering and Revenue Management. Each council is comprised of five to six individuals who work on property and excel in their area of expertise. They are responsible for developing programs, training, and motivational efforts for the entire organization, as well as creating synergies within the portfolio by sharing best practices and working together with common clients. Every hotel sales associate is armed with sales training administered by each hotel’s respective brand.

In collaboration with the Directors of Sales, each hotel is assigned a Revenue Manager, either on property, working remotely, or via the brand. The Revenue Managers work with the Director of Sales to steer the efforts of the property-level teams, ensuring the appropriate mix of business and pricing for each hotel. We have developed a forecasting tool that provides history by day of week and segment of business. This customized tool provides each hotel with a means to analyze trends from previous years as well as changes in market conditions to forecast rooms sold and ADR by segment of business on a day-by-day basis. The forecast is then used to identify the types of business and periods of time where the sales effort will result in the greatest revenue gains and where changes in current strategy are necessary.

Joint Ventures

As of March 1, 2010, we operated one hotel, the Crowne Plaza West Palm Beach, FL, in a joint venture in which we have a 51% voting equity interest and exercise control.

On March 20, 2007, we acquired our joint venture partner’s 18% interest in the Radisson New Orleans Airport Plaza, LA for $2.9 million. On July 26, 2007, we acquired our joint venture partner’s 50% interest in the Crowne Plaza Melbourne, FL for $13.5 million. As a result, the hotels are now owned by wholly-owned subsidiaries.

Competition and Seasonality

The hotel business is highly competitive. Each of our hotels competes in its market area with numerous other hotel properties operating under various lodging brands. Our competition is comprised of public companies, privately-held equity fund companies, and small independent owners and operators. Competitive factors in the lodging industry include, among others, room rates, quality of accommodation, service levels, convenience of locations and amenities customarily offered to the traveling public. In addition, the development of travel-related Internet websites has increased price awareness among travelers and price competition among comparable hotels. Furthermore, the economic recession has heightened the level of competition as luxury and upper upscale hotels are substantially discounting rates to attract customers in downstream segments.

Demand for accommodations, and the resulting revenues, vary seasonally. The high season tends to be the summer months for hotels located in colder climates and the winter months for hotels located in warmer climates. Aggregate demand for accommodations in our portfolio is lowest during the winter months. Levels of demand are also dependent upon many factors that are beyond our control, including national and local economic conditions and changes in levels of leisure and business-related travel. Our hotels depend on both business and leisure travelers for revenues.

We also compete with other hotel owners and operators with respect to obtaining desirable franchises for upscale, upper upscale and midscale hotels in targeted markets.

The Lodging Industry

In 2009, the U.S. lodging industry experienced a significant downturn with full year RevPAR for the U.S. industry decreasing 16.7% compared to 2008, according to Smith Travel Research as reported in January 2010. The reduction in RevPAR was a result

of a 3.2% increase in supply and a 5.8% decrease in demand. These factors led to declines in both occupancy and average daily rate of 8.7% and 8.8%, respectively, according to Smith Travel Research.

In December 2009, PKF Hospitality Research predicted a 1.1% decline in RevPAR in 2010 for the U.S. lodging industry as a whole. In January 2010, Smith Travel Research projected a 3.2% decrease in RevPAR in 2010, with increases in both supply and demand of 1.8%, flat occupancy, and a decrease in average daily rate of 3.2% for the U.S. hotel industry as a whole.

The economic recession could result in lower than expected results.

Chain-Scale Segmentation

Smith Travel Research classifies the lodging industry into six chain scale segments by brand according to their respective national average daily rate or ADR. The six segments are defined as: luxury, upper upscale, upscale, midscale with food and beverage, midscale without food and beverage and economy. We operate hotel brands in the following four chain scale segments:

	•		Upper Upscale (Hilton and Marriott);
	•		Upscale (Courtyard by Marriott, Crowne Plaza, Four Points by Sheraton, Radisson, Residence Inn by Marriott, SpringHill Suites by Marriott and Wyndham);
	•		Midscale with Food & Beverage (Holiday Inn); and
	•		Midscale without Food & Beverage (Fairfield Inn by Marriott and Holiday Inn Express);

RevPAR for our held for use hotels decreased 18.0% in 2009 as compared to 16.7% for the industry as a whole. We believe that our hotels and brands will continue to perform slightly below the U.S. lodging industry in 2010.

Properties

We own and manage our hotels. Accordingly, we retain responsibility for all aspects of the day-to-day management for each of our hotels. We establish and implement standards for hiring, training and supervising staff, creating and maintaining financial controls, complying with laws and regulations related to hotel operations, and providing for the repair and maintenance of the hotels. Because we own and manage our hotels, we are able to directly control our labor costs, we can negotiate purchasing arrangements without fees to third parties, and as an owner and operator, we are motivated to focus our results on bottom-line profit performance instead of solely on top-line revenue growth. Accordingly, we are focused on maximizing returns for our shareholders.

Dispositions

A summary of our disposition activity is as follows:

		Number of
		Hotels
Owned and operated at December 31, 2007			46
Sold in 2008			(5	)
Owned and operated at December 31, 2008			41
Sold in 2009			(5	)
Deconsolidated in 2009			(2	)
Owned and operated at December 31, 2009			34

In February 2010, we deconsolidated the following six hotels upon surrendering control of the hotels to a court-appointed receiver: Courtyard by Marriott Abilene, TX, Courtyard by Marriott Bentonville, AR, Courtyard by Marriott Florence, KY, Crowne Plaza Houston, TX, Fairfield Inn Merrimack, NH, and Holiday Inn Inner Harbor Baltimore, MD.

The six hotels served as collateral for Merrill Lynch Fixed Rate Pool 3 (“Pool 3”), which had a balance of $45.5 million as of December 31, 2009 and matured on October 1, 2009, following two short-term extensions. The extensions were intended to provide time for us to reach an agreement with the special servicer to modify the loan. Since we were unable to reach a modification agreement, we surrendered control of the six hotels that secured Pool 3 to a court-appointed receiver. As of March 1, 2010, we owned and operated 28 hotels.

Portfolio

Our hotel portfolio, as of March 1, 2010, by franchisor, is set forth below:

																Year of Last Major
						Room Count										Renovation or
Franchisor/Hotel Name		Held for Use				Held for Sale				Total				Location		Construction
InterContinental Hotels Group PLC (IHG)
Crowne Plaza Albany			384								384			Albany, NY		2001
Crowne Plaza Melbourne			270								270			Melbourne, FL		2006
Crowne Plaza Phoenix Airport			295								295			Phoenix, AZ		2004
Crowne Plaza Pittsburgh			193								193			Pittsburgh, PA		2001
Crowne Plaza Silver Spring			231								231			Silver Spring, MD		2005
Crowne Plaza West Palm Beach (51% owned)			219								219			West Palm Beach, FL		2005
Holiday Inn BWI Airport			259								259			Baltimore, MD		2009 - Guestrooms, Commercial space being renovated
Holiday Inn Hilton Head			202								202			Hilton Head, SC		2008
Holiday Inn Meadowlands			138								138			Pittsburgh, PA		2005
Holiday Inn Monroeville			187								187			Monroeville, PA		2005
Holiday Inn Myrtle Beach			133								133			Myrtle Beach, SC		2006
Holiday Inn Santa Fe			130								130			Santa Fe, NM		2003
Holiday Inn Strongsville			303								303			Cleveland, OH		2005
Holiday Inn Express Palm Desert							129				129			Palm Desert, CA		2003
Total IHG Room Count			2,944				129				3,073
Total IHG Hotel Count			13				1				14
Marriott International Inc.
Courtyard by Marriott Buckhead			181								181			Atlanta, GA		2008
Courtyard by Marriott Lafayette			90								90			Lafayette, LA		2004
Courtyard by Marriott Paducah			100								100			Paducah, KY		2004
Courtyard by Marriott Tulsa			122								122			Tulsa, OK		2004
Marriott Denver Airport			238								238			Denver, CO		2008
Residence Inn by Marriott Dedham			81								81			Dedham, MA		2004
Residence Inn by Marriott Little Rock			96								96			Little Rock, AR		2004
SpringHill Suites by Marriott Pinehurst			107								107			Pinehurst, NC		2007
Total Marriott Room Count			1,015				—				1,015
Total Marriott Hotel Count			8				—				8
Hilton Hotels Corporation
Hilton Columbia			152								152			Columbia, MD		2003
Hilton Fort Wayne			244								244			Fort Wayne, IN		Being Renovated
Total Hilton Room Count			396				—				396
Total Hilton Hotel Count			2				—				2
Carlson Companies
Radisson New Orleans Airport Plaza			244								244			New Orleans, LA		2005
Radisson Phoenix			159								159			Phoenix, AZ		2005
Total Carlson Room Count			403				—				403
Total Carlson Hotel Count			2				—				2
Starwood Hotels & Resorts Worldwide, Inc.
Four Points by Sheraton Philadelphia			190								190			Philadelphia, PA		2008
Total Starwood Room Count			190				—				190
Total Starwood Hotel Count			1				—				1
Wyndham Hotels and Resorts, LLC
Wyndham DFW Airport North			282								282			Dallas, TX		2008
Total Wyndham Room Count			282				—				282
Total Wyndham Hotel Count			1				—				1
Grand Total Room Count			5,230				129				5,359
Grand Total Hotel Count			27				1				28

Hotel data by market segment and region

The following four tables include data for all hotels in our portfolio as of December 31, 2009. The number of properties and number of rooms disclosed in the tables are as of the end of the applicable year. Therefore, the tables include the six hotels that we deconsolidated in February 2010 upon surrendering control of the hotels to a court-appointed receiver, as discussed in “Dispositions” above.

The first two tables below present data on occupancy, ADR and RevPAR for the hotels in our portfolio for the years ended December 31, 2009, December 31, 2008, and December 31, 2007 by chain scale segment. The chain scale segments are defined on page 5.

     Combined Continuing and Discontinued Operations — 34 hotels

		2009				2008				2007
Upper Upscale Number of properties			3				3				3
Number of rooms			634				634				634
Occupancy			65.3	%			70.1	%			73.9	%
Average daily rate		$	114.44			$	126.36			$	124.78
RevPAR		$	74.68			$	88.55			$	92.22
Upscale Number of properties			21				21				20
Number of rooms			3,806				3,806				3,616
Occupancy			64.8	%			71.4	%			68.9	%
Average daily rate		$	93.86			$	106.23			$	108.11
RevPAR		$	60.82			$	75.83			$	74.50
Midscale with Food & Beverage Number of properties			8				8				9
Number of rooms			1,717				1,717				1,907
Occupancy			60.5	%			68.5	%			70.3	%
Average daily rate		$	96.77			$	99.15			$	101.65
RevPAR		$	58.55			$	67.92			$	71.46
Midscale without Food & Beverage Number of properties			2				2				2
Number of rooms			244				244				244
Occupancy			45.8	%			52.4	%			58.0	%
Average daily rate		$	78.52			$	90.93			$	90.00
RevPAR		$	36.00			$	47.69			$	52.24
All Hotels Number of properties			34				34				34
Number of rooms			6,401				6,401				6,401
Occupancy			63.0	%			69.8	%			69.4	%
Average daily rate		$	96.30			$	105.92			$	107.33
RevPAR		$	60.64			$	73.89			$	74.49

     Continuing Operations — 33 hotels

		2009				2008				2007
Upper Upscale Number of properties			3				3				3
Number of rooms			634				634				634
Occupancy			65.3	%			70.1	%			73.9	%
Average daily rate		$	114.44			$	126.36			$	124.78
RevPAR		$	74.68			$	88.55			$	92.22
Upscale Number of properties			21				21				20
Number of rooms			3,806				3,806				3,616
Occupancy			64.8	%			71.4	%			68.9	%
Average daily rate		$	93.86			$	106.23			$	108.11
RevPAR		$	60.82			$	75.83			$	74.50
Midscale with Food & Beverage Number of properties			8				8				9
Number of rooms			1,717				1,717				1,907
Occupancy			60.5	%			68.5	%			70.3	%
Average daily rate		$	96.77			$	99.15			$	101.65
RevPAR		$	58.55			$	67.92			$	71.46
Midscale without Food & Beverage Number of properties			1				1				1
Number of rooms			115				115				115
Occupancy			32.2	%			43.7	%			45.8	%
Average daily rate		$	71.31			$	85.87			$	87.74
RevPAR		$	22.94			$	37.55			$	40.20
All Hotels Number of properties			33				33				33
Number of rooms			6,272				6,272				6,272
Occupancy			63.1	%			70.0	%			69.4	%
Average daily rate		$	96.56			$	106.13			$	107.65
RevPAR		$	60.90			$	74.24			$	74.72

The two tables below present data on occupancy, ADR and RevPAR for the hotels in our portfolio for the years ended December 31, 2009, December 31, 2008, and December 31, 2007 by geographic region.

     The regions in the two tables below are defined as:

	•		Northeast: Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania;
	•		Southeast: Florida, Georgia, Kentucky, Louisiana, North Carolina, South Carolina;
	•		Midwest: Arkansas, Indiana, Oklahoma, Texas; and
	•		West: Arizona, California, Colorado, New Mexico.

     Combined Continuing and Discontinued Operations — 34 hotels

		2009				2008				2007
Northeast Region Number of properties			12				12				12
Number of rooms			2,598				2,598				2,598
Occupancy			61.8	%			67.6	%			69.1	%
Average daily rate		$	100.32			$	106.98			$	107.89
RevPAR		$	61.97			$	72.35			$	74.56
Southeast Region Number of properties			10				10				10
Number of rooms			1,624				1,624				1,624
Occupancy			66.5	%			71.4	%			70.0	%
Average daily rate		$	95.78			$	108.69			$	112.31
RevPAR		$	63.67			$	77.57			$	78.61
Midwest Region Number of properties			7				7				7
Number of rooms			1,228				1,228				1,228
Occupancy			57.1	%			68.2	%			62.5	%
Average daily rate		$	89.77			$	98.81			$	98.52
RevPAR		$	51.25			$	67.38			$	61.61
West Region Number of properties			5				5				5
Number of rooms			951				951				951
Occupancy			67.8	%			74.8	%			78.0	%
Average daily rate		$	94.23			$	107.13			$	107.42
RevPAR		$	63.91			$	80.18			$	83.79
All Hotels Number of properties			34				34				34
Number of rooms			6,401				6,401				6,401
Occupancy			63.0	%			69.8	%			69.4	%
Average daily rate		$	96.30			$	105.92			$	107.33
RevPAR		$	60.64			$	73.89			$	74.49

Continuing Operations — 33 hotels

		2009				2008				2007
Northeast Region Number of properties			12				12				12
Number of rooms			2,598				2,598				2,598
Occupancy			61.8	%			67.6	%			69.1	%
Average daily rate		$	100.32			$	106.98			$	107.89
RevPAR		$	61.97			$	72.35			$	74.56
Southeast Region Number of properties			10				10				10
Number of rooms			1,624				1,624				1,624
Occupancy			66.5	%			71.4	%			70.0	%
Average daily rate		$	95.78			$	108.69			$	112.31
RevPAR		$	63.67			$	77.57			$	78.61
Midwest Region Number of properties			7				7				7
Number of rooms			1,228				1,228				1,228
Occupancy			57.1	%			68.2	%			62.5	%
Average daily rate		$	89.77			$	98.81			$	98.52
RevPAR		$	51.25			$	67.38			$	61.61
West Region Number of properties			4				4				4
Number of rooms			822				822				822
Occupancy			69.4	%			77.1	%			79.4	%
Average daily rate		$	95.82			$	108.71			$	109.61
RevPAR		$	66.46			$	83.85			$	87.03
All Hotels Number of properties			33				33				33
Number of rooms			6,272				6,272				6,272
Occupancy			63.1	%			70.0	%			69.4	%
Average daily rate		$	96.56			$	106.13			$	107.65
RevPAR		$	60.90			$	74.24			$	74.72

Hotel Encumbrances

Of the 34 hotels that we owned and consolidated as of December 31, 2009, 32 hotels were pledged as collateral to secure long-term debt. Refer to the table in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, Liquidity and Capital Resources. In addition, see “Item 1A. Risk Factors.”

Insurance

We maintain the following types of insurance:

	•		general liability;
	•		property damage and business interruption (including coverage for terrorism);
	•		flood;
	•		directors’ and officers’ liability;
	•		liquor liability;
	•		workers’ compensation;
	•		fiduciary liability; and
	•		business automobile.

We are self-insured up to certain amounts with respect to our insurance coverages. We establish liabilities for these self-insured obligations annually, based on actuarial valuations and our history of claims. If these claims exceed our estimates, our future financial condition and results of operations would be adversely affected. As of December 31, 2009, we had accrued $8.9 million for these costs (including employee medical coverage). We believe that we have adequate reserves and sufficient insurance coverage for our business.

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 property 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. See “Item 1A. Risk Factors.”

Regulation

Our hotels are subject to certain federal, state and local regulations which require us to obtain and maintain various licenses and permits. These licenses and permits must be periodically renewed and may be revoked or suspended for cause at any time.

Occupancy licenses are obtained prior to the opening of a hotel and may require renewal if there has been a major renovation. The loss of the occupancy license for any of the larger hotels in our portfolio could have a material adverse effect on our financial condition and results of operations. Liquor licenses are required for hotels to be able to serve alcoholic beverages and are generally renewable annually. We believe that the loss of a liquor license for an individual hotel would not have a material effect on our financial condition and results of operations. We are not aware of any reason why we should not be in a position to maintain our licenses.

We are subject to certain federal and state labor laws and regulations such as minimum wage requirements, regulations relating to working conditions, laws restricting the employment of illegal aliens, and the Americans with Disabilities Act (“ADA”). As a provider of restaurant services, we are subject to certain federal, state and local health laws and regulations. We believe that we comply in all material respects with these laws and regulations. We are also subject in certain states to dramshop statutes, which may give an injured person the right to recover damages from us if we wrongfully serve alcoholic beverages to an intoxicated person who causes an injury. We believe that our insurance coverage relating to contingent losses in these areas is adequate.

Our hotels are also subject to environmental regulations under federal, state and local laws. These environmental regulations have not had a material adverse effect on our operations. However, such regulations potentially impose liability on property owners for cleanup costs for hazardous waste contamination. If material hazardous waste contamination problems exist on any of our properties, we would be exposed to liability for the costs associated with the cleanup of those sites. See “Item 1A. Risk Factors.”

Employees

At December 31, 2009, we had 1,686 full-time and 676 part-time employees. We had 37 full-time employees engaged in administrative, operations, and executive activities and the balance of our employees manage, operate and maintain our properties. At December 31, 2009, 161 of our full and part-time employees located at two hotels were covered by collective bargaining agreements. One of these agreements expired on October 31, 2009 and there is a dispute as to which union represents the unionized associates. We are waiting for the National Labor Relations Board to issue an appeal ruling on which union legally represents the union associates before addressing the expired collective bargaining agreement. The remaining collective bargaining agreement expires in April 2010. We consider relations with our employees to be good.

Legal Proceedings

From time to time, as we conduct our business, legal actions and claims are brought against us. The outcome of these matters is uncertain. However, we believe that all currently pending matters will be resolved without a material adverse effect on our results of operations or financial condition.

On January 26, 2010, a putative class action was commenced in the Superior Court of Fulton County, Georgia against us, each of our directors, Purchaser and Merger Sub alleging that our board of directors breached their fiduciary duties to our stockholders in approving and adopting a merger agreement that allegedly contains preclusive deal protection measures and unfair merger consideration. The complaint further alleges that we, Purchaser and Merger Sub aided and abetted our board of directors in allegedly breaching their fiduciary duties. On February 23, 2010, the plaintiff amended his complaint to add claims that the members of our board breached their duties of disclosure by allegedly failing to disclose certain matters in the Schedule 14A Preliminary Proxy. The amended complaint seeks to enjoin the completion of the merger, an award of unspecified monetary damages and to recover certain costs incurred by the plaintiff. In addition, on January 29, 2010, a putative class action was commenced in the Court of Chancery of the State of Delaware by United Capital Corp. against us, each of our directors, Purchaser, Merger Sub and Lone Star Funds, alleging that our board of directors breached their fiduciary duties to our stockholders by allegedly failing to obtain the highest price available for our stockholders, failing to adequately shop the Company and approving and adopting a merger agreement that allegedly contains preclusive deal protection measures. The complaint further alleges that Lone Star Funds aided and abetted our board of directors in allegedly breaching their fiduciary duties. The complaint seeks to enjoin the completion of the merger, an order compelling the board of directors to undertake a new sale process, an award of unspecified monetary damages and costs of litigation. In other papers filed with the Court, United Capital Corp. has asserted that it desires to make a bid for the Company but has not done so because of the allegedly preclusive deal protection measures contained in the merger agreement. We believe both lawsuits to be without merit and intend to defend them vigorously, including opposing any efforts to enjoin the proposed transaction.

SEC Filings and Financial Information

This Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our Proxy Statement on Schedule 14A, and amendments to those reports are available free of charge on our website (www.Lodgian.com) as soon as practicable after they are submitted to the Securities and Exchange Commission (“SEC”).

You may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information about us.

Financial information about our revenues and expenses for the last three fiscal years and assets and liabilities for the last two years may be found in the Consolidated Financial Statements, beginning on page F-1.

Item 1A. RISK FACTORS

This Form 10-K for the year ended December 31, 2009 contains forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, including, among others, statements regarding the anticipated merger, Lodgian’s expectations regarding returning certain hotels to lenders, anticipated cost reductions, optional maturity extensions, property dispositions, future financial position, business strategy, projected performance and financing needs, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lodgian and members of its management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements. Many of these factors are beyond the Lodgian’s ability to control or predict. Such factors include, but are not limited to, any conditions imposed in connection with the merger, approval of the merger agreement by the stockholders of Lodgian, the satisfaction of various other conditions to the closing of the merger contemplated by the merger agreement, the effects of regional, national and international

economic conditions, our ability to refinance or extend maturing mortgage indebtedness, competitive conditions in the lodging industry and increases in room supply, requirements of franchise agreements (including the right of franchisors to immediately terminate their respective agreements if we breach certain provisions), our ability to complete planned hotel dispositions, the ability to realize anticipated cost reductions, the effects of unpredictable weather events such as hurricanes, the financial condition of the airline industry and its impact on air travel, the effect of self-insured claims in excess of our reserves and our ability to obtain adequate insurance at reasonable rates, and other factors discussed below. Lodgian assumes no duty to update these statements.

The Company believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to Lodgian or persons acting on its behalf are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and the company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless otherwise required by law.

Our business is exposed to many risks, difficulties and uncertainties, including the following:

	•		Our ability to refinance or extend the portion of our mortgage indebtedness that is scheduled to mature in 2010 and beyond;
	•		The effects of regional, national and international economic conditions;
	•		Competitive conditions in the lodging industry and increases in room supply;
	•		The effects of actual and threatened terrorist attacks and international conflicts in the Middle East and elsewhere, and their impact on domestic and international travel;
	•		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 franchisors to immediately terminate their respective agreements if we breach certain provisions;
	•		Our ability to complete planned hotel dispositions;
	•		Seasonality of the hotel business;
	•		The effects of unpredictable weather events such as hurricanes;
	•		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;
	•		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;
	•		A downturn in the economy due to several factors, including but not limited to, high energy costs, natural gas and gasoline prices;
	•		The impact of continued disruptions in the credit markets and potential failures of financial institutions on our ability to access capital, and
	•		The risks identified below under “Risks Related to Our Business” and “Risks Related to 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.

The following represents risks and uncertainties which could either individually or together cause actual results to differ materially from those described in the forward-looking statements. If any of the following risks actually occur, our business, financial

condition, results of operations, cash flow, liquidity and prospects could be adversely affected. In that case, the market price of our common stock could decline and you may lose all or part of your investment in our common stock.

Risks Related to Our Business

We may be unable to refinance, extend or repay our substantial mortgage indebtedness maturing in 2010 and beyond, as a result of, among other things, the current condition of the economy, the resulting decline in the lodging industry and the challenging credit markets. If we were unable to extend or refinance such indebtedness, or engage in a strategic transaction, such as the proposed merger, one or more of our subsidiaries or the Company as a whole may be forced to make a Chapter 11 bankruptcy filing to seek protection from our creditors. Even if we were able to refinance or extend our indebtedness, a substantial amount of indebtedness could limit our operational flexibility or otherwise adversely affect our financial condition.

Our ability to successfully refinance or extend our debt is negatively affected by, among other things: (i) the challenging credit markets, (ii) the lower loan-to-value ratios now required in refinancings, (iii) the perception of our Company due to, among other things, our past bankruptcy filing, and (iv) the decrease in the current value of our properties, and the imminent maturities of certain indebtedness. As of December 31, 2009, we had $292.2 million of total mortgage obligations outstanding, including the current portion, and 32 of our consolidated hotels were pledged as collateral for existing mortgage loans. These 32 hotels represented approximately 91% of the book value of our consolidated property and equipment, net, as of December 31, 2009. As a result, we have limited flexibility to sell or finance an unencumbered property to satisfy our cash needs. In addition, our cash flow from operations may be insufficient to make required debt service payments and we may not be able to extend, repay or refinance our maturing indebtedness on favorable terms or at all.

Pool 3 with a balance of $45.5 million as of December 31, 2009, matured on October 1, 2009, following two short-term extensions. The extensions were intended to provide time for us to reach an agreement with the special servicer to modify the loan. Since we were unable to reach a modification agreement, we surrendered control of the six hotels that secure Pool 3 to a court-appointed receiver in February 2010.

Approximately $55.7 million of our mortgage debt, comprised of three mortgage loans secured by six hotels, matures in 2010, and cannot be extended without the approval of the loan servicers. We are pursuing opportunities to extend or refinance these mortgages. A $130.0 million loan, which is secured by 10 hotels, matures in May 2010, and we currently expect to exercise the second of three available one-year extension options in accordance with the extension options set forth in the loan document.

In addition, $26 million and $33 million of our mortgage debt mature in 2011 and 2012, respectively, with no available extension options.

We expect it will remain difficult to refinance the maturing mortgage debt and we cannot predict whether our efforts to extend or refinance the maturing debt will be successful. Our ability to operate as a going concern is dependent upon our ability to extend or refinance our maturing mortgage debt prior to the scheduled maturity dates. For example, a debt default could lead us to sell one or more of our hotels on unfavorable terms or, our lenders could seek to foreclose on the property or properties securing the debt, which could cause the loss of any anticipated income and cash flow from, and our invested capital in, the hotels. Moreover, we could be required to utilize an increasing percentage of our cash flow to service any remaining debt or any new debt incurred with a refinancing, particularly as a result of continued hotel dispositions, which would further limit our cash flow available to fund business operations and our strategic plan. If we are unable to obtain reasonable refinancing for such indebtedness and maintain sufficient cash flow to fund our operations, one or more of our subsidiaries or the Company as a whole may be forced to make a Chapter 11 bankruptcy filing to seek protection from our creditors or we may be forced to surrender certain properties securing our indebtedness in satisfaction of such indebtedness, or both.

Even if we are able to refinance or extend our indebtedness, our indebtedness could still have important consequences to us. It is likely that refinanced or extended debt will contain terms, such as more restrictive operational and financial covenants and higher fees and interest rates, that are less attractive than the terms contained in the debt being refinanced or extended. Our substantial indebtedness may increase our vulnerability to downturns in our business, the lodging industry and the general economy. In addition, we may be required to dedicate a substantial and increasing portion of our cash flow from operations to debt service payments. This could reduce the availability of our cash flow to fund working capital, capital expenditures and other needs, and limit our ability to react to changes in our industry and capitalize on business opportunities. This may also place us at a competitive disadvantage to our competitors that may have greater financial strength than we do.

In addition, we may not be able to fund our future capital needs, including necessary working capital, funds for capital expenditures or acquisition financing from operating cash flow. Consequently, we may have to rely on third-party sources to fund our capital needs. We may be unable to obtain third-party financing on favorable terms or at all, which could materially and

adversely affect our operating results, cash flow and liquidity. Any additional debt would increase our leverage, which would reduce our operational flexibility and increase our risk exposure.

The terms of our debt instruments place many restrictions on us, which reduce operational and financial flexibility and create default risks.

Our outstanding debt instruments subject us to certain operational and financial covenants. Operational covenants include requirements to maintain certain levels of insurance and affiliations with nationally recognized hotel brands. The operational covenants in our debt documents may reduce our flexibility in conducting our operations and may limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with certain of these restrictive covenants, may result in additional interest being due and could constitute an event of default, and in some cases with notice or the lapse of time, if not cured or waived, could result in the acceleration of the defaulted debt and the sale or foreclosure of the affected hotels. Under certain circumstances the termination of a hotel franchise agreement could also result in the same effects. A foreclosure would result in a loss of any anticipated income and cash flow from, and our invested capital in, the affected hotel. No assurance can be given that we will be able to repay, through financings or otherwise, any accelerated indebtedness or that we will not lose all or a portion of our invested capital in any hotels that we sell in such circumstances.

We are also subject to certain financial covenants. As of December 31, 2009, the Company was in compliance with its financial debt covenants, except for the financial ratios related to the Merrill Lynch Fixed Pools 3 and 4, with outstanding principal balances of $45.5 million and $34.6 million, respectively, and the Goldman Sachs loan, with an outstanding principal balance of $130 million. The breach of these covenants, if not cured or waived by the lenders, could lead to the declaration of a “cash trap” by the lenders whereby excess cash flows produced by the mortgaged hotels securing the applicable loans (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) could be held in a restricted cash account. With respect to the Merrill Lynch Fixed Rate loans, the funds held in the restricted cash account may be used for capital expenditures reasonably approved by the loan servicer. The cash trap provisions under the Goldman Sachs loan were waived in conjunction with the loan amendment dated January 22, 2010.

As of December 31, 2009, Pool 4 was operating under the provisions of a cash trap and approximately $0.8 million was held in a restricted cash account. We surrendered control of the six hotels which secure Pool 3 to a court-appointed receiver in February 2010.

Our continued compliance with the financial covenants for the remaining loans depends substantially upon the financial results of our hotels. Given the economic recession, we could breach certain of our financial covenants during 2010.

Furthermore, certain of our indebtedness is included in securitized loan pools, which makes it difficult and costly to remove specific assets from the loan pools. If we are unable to maintain compliance with our financial covenants or maintain sufficient cash flow to fund our operations, one or more of our subsidiaries or the Company as a whole may be forced to make a Chapter 11 bankruptcy filing to seek protection from our creditors or we may be forced to surrender certain properties securing our indebtedness in satisfaction of such indebtedness, or both.

Increases in interest rates could have an adverse effect on our cash flow and interest expense.

A significant portion of our capital needs are fulfilled by borrowings, of which $169.0 million was variable rate debt at December 31, 2009. In the future, we may incur additional indebtedness bearing interest at a variable rate, or we may be required to refinance our existing fixed-rate indebtedness at higher interest rates. Accordingly, increases in interest rates will increase our interest expense and adversely affect our cash flow, reducing the amounts available to make payments on our indebtedness, fund our operations and our capital expenditure program, make acquisitions or pursue other business opportunities.

The value of our hotels and our ability to service our indebtedness is dependent upon the successful operation and cash flows of our hotels. Our ability to generate cash depends on many factors beyond our control and a cash shortfall could adversely affect our ability to fund our operations, planned capital expenditures and other needs.

Our ability to make payments on, extend or refinance our indebtedness and to fund our operations, planned capital expenditures and other needs will depend on our ability to generate cash in the future. In addition, the value of our hotels is heavily dependent on our cash flows. Various factors could adversely affect our ability to generate cash from operations. These risks include the following:

	•		Effects of the economic recession and the weakened conditions of the real estate and banking industries;
	•		Changes in interest rates and changes in the availability, cost and terms of credit;

	•		Cyclical overbuilding in the lodging industry;
	•		Varying levels of demand for rooms and related services;
	•		Competition in our markets from other hotels, motels and recreational properties, some of which may be owned or operated by companies having greater marketing and financial resources than we have;
	•		Loss of franchise affiliations;
	•		Reductions in air travel or other adverse changes in travel patterns;
	•		Fluctuations in operating costs, including but not limited to, labor, food, and energy costs;
	•		The need for renovations and the effectiveness of renovations or repositioning in attracting customers;
	•		Changes in governmental laws and regulations that influence or determine wages or required remedial expenditures;
	•		Natural disasters, including, but not limited to, hurricanes;
	•		Continued sale or surrender of hotels in our portfolio and resulting reduction in cash flow from operations;
	•		Dependence on business and leisure travelers, who have been and continue to be affected by the economic recession, threats of terrorism, or other outbreaks of hostilities, and new laws to counter terrorism which result to some degree in a reduction of foreign travelers visiting the U.S.; and
	•		The perception of the lodging industry and lodging companies in the debt and equity markets.

The economic recession and adverse economic conditions in the specific major metropolitan markets in which we do substantial business could materially and adversely affect our business and results of operations.

We depend in part on consumers spending discretionary funds on travel and leisure activities as well as the general health and volume of airline and business-related travel to generate revenues at our hotels. Because of the weakened state of the general economy and the current unemployment rate, consumer confidence and consumer and business spending have decreased dramatically. Given these current and expected economic conditions and their impact on our occupancy and revenues, we believe there is a significantly increased risk that our operating performance will continue to be materially adversely affected.

In addition to weakness in the general economy, adverse economic conditions in the specific markets in which we have multiple hotels, such as Pittsburgh, Baltimore/Washington, D.C. and Phoenix, could significantly and negatively affect our revenues and results of operations. The eight continuing operations hotels in these markets combined provided 34% of our continuing operations revenues in 2009, 2008, and 2007. As a result of the geographic concentration of these hotels, we are particularly exposed to the risks of downturns in these markets, which could have a material adverse effect on our profitability.

Further, we use significant amounts of electricity, gasoline, natural gas and other forms of energy to operate our hotels. A shortage in supply or a period of sustained high energy costs could negatively affect our results of operations. Additionally, a shortage of supply could impact our ability to operate our hotels and could adversely impact our guests’ experience at our hotels, and ultimately, our guest satisfaction scores and potentially our franchisor affiliations.

We may not be able to meet the requirements imposed by our franchisors in our franchise agreements and therefore could lose the right to operate one or more hotels under a national brand.

We operate all of our hotels pursuant to franchise agreements for nationally recognized hotel brands. The franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. The standards are also subject to change over time. Compliance with any new and existing standards could cause us to incur significant expenses and investment in capital expenditures.

If we do not comply with standards or terms of any of our franchise agreements, those franchise agreements may be terminated after we have been given notice and an opportunity to cure the non-compliance or default. As of March 1, 2010, we were not in compliance with the franchise agreement for one hotel due to substandard guest satisfaction scores. If the hotel does not achieve scores above the required thresholds through December 2011, the hotel could be placed in default by the franchisor. Our corporate

operations team as well as our hotel’s general manager and associates have focused their efforts to cure this instance of non-compliance. We cannot assure you that we will continue to be in compliance with our other franchise agreements or that we will be able to cure any current or future alleged instances of non-compliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or non-compliance. If a franchise agreement is terminated, we may be required to incur significant costs, including franchise termination payments and capital expenditures, which in certain circumstances could lead to acceleration of portions of our indebtedness. Our loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more of our loan agreements. Therefore, the termination of one or more of our franchise agreements could materially and adversely affect our revenues, cash flow and liquidity.

Refer to “Franchise Affiliations” above for specific information regarding the current status of our franchise agreements.

In addition, our current franchise agreements, generally for terms of 10 to 20 years, terminate at various times and have differing remaining terms. As a condition to renewal of the franchise agreements, franchisors frequently contemplate a renewal application process, which may require substantial capital improvements to be made to the hotel and increases in franchise fees. A significant increase in unexpected capital expenditures and franchise fees related to renewal of franchise agreements would adversely affect our financial condition and results of operations. If we are unable to maintain sufficient cash flow to fund our operations and capital expenditures, one or more of our subsidiaries or the Company as a whole may be forced to make a Chapter 11 bankruptcy filing to seek protection from our creditors or we may be forced to surrender certain properties securing our indebtedness in satisfaction of such indebtedness, or both.

Provisions for liquidated damages in our franchise agreements could require us to pay material amounts to our franchisors if we are forced to surrender properties to our lenders.

If we are unable to refinance, extend or repay certain mortgage indebtedness and it becomes necessary to transfer a property to a lender in satisfaction of our obligations, we could be required to pay liquidated damages under the franchise agreement associated with such property. Significant payments of liquidated damages could adversely affect our financial condition and results of operations.

Hotels typically require a higher level of capital expenditures, maintenance and repairs than other building types due in part to property improvement requirements that may be imposed by franchisors. The increasing age of our hotels could result in additional capital expenditures to remain competitive. If we are not able to meet the requirements of our hotels appropriately, our business and operating results will suffer.

In order to maintain our hotels in good condition and attractive appearance, it is necessary to replace furnishings, fixtures and equipment periodically, generally every five to seven years, and to maintain and repair public areas and exteriors on an ongoing basis. When we make needed capital improvements, we can be more competitive in the market and our hotel occupancy and room rates can grow accordingly. Further, the process of renovating a hotel has the potential to be disruptive to operations. It is vital that we properly plan and execute renovations during lower occupancy and/or lower rated months in order to minimize “displacement”, an industry term for a temporary loss of revenues caused by rooms being out of service during a renovation. Additionally, if capital improvements are not made, franchise agreements could be at risk.

Because of the economic recession and its impact on our ability to generate cash flows and access credit, we may not be able to fund the required capital improvements.

If we are not able to execute our strategic initiatives, we may not be able to improve our financial performance.

We believe that the planned merger is the best strategic alternative for the Company. Absent a merger, our strategic initiatives include surrendering certain underperforming hotels to the lenders, improving the operations of our remaining core hotels, exploring the possibility of ceasing to be a public company and continuing to reduce our corporate overhead costs. These initiatives contain several risks, including: (i) the potential for franchisors to claim liquidated damages in connection with the surrender of hotels, (ii) the illiquidity of our stock should we cease to be publicly traded, (iii) the ability to “right-size” our corporate overhead costs with a much smaller number of hotels in our portfolio, and (iv) the ability to improve operations with limited cash flows from operations and lack of available credit.

We have a history of significant losses and we may not be able to successfully improve our performance to achieve profitability.

We had an accumulated deficit of $157.6 million as of December 31, 2009. Our ability to improve our performance to achieve profitability is dependent upon the state of the economy in general and the lodging industry in particular, as well as the successful implementation of our business strategy. Over the past three years, we eliminated numerous positions in the corporate office and

at the hotels. The reduction in staff, particularly at the hotel level, could have a negative impact on our guest satisfaction scores, which could ultimately impact our financial performance and/or result in the loss of one or more franchise agreements. In addition, our failure to improve our performance could have a material adverse effect on our business, results of operations, financial condition, cash flow, liquidity and prospects. Furthermore, Smith Travel Research forecasted a 3.2% decline in RevPAR for the U.S. lodging industry in 2010, while PKF Hospitality Research projected a 1.1% decrease in RevPAR. Rising energy costs, the financial condition of the airline industry in general and continued threats to national security or air travel safety, among other things, could adversely affect the industry, resulting in our inability to meet our internal profit expectations. If we are unable to maintain sufficient cash flow to fund our operations, one or more of our subsidiaries or the Company as a whole may be forced to make a Chapter 11 bankruptcy filing to seek protection from our creditors or we may be forced to surrender certain properties securing our indebtedness in satisfaction of such indebtedness, or both.

Force majeure events, including natural disasters, acts and threats of terrorism, the ongoing war against terrorism, military conflicts and other factors have had and may continue to have a negative effect on the lodging industry and our results of operations.

Force majeure events, including natural disasters, such as Hurricanes Katrina and Ike, which affected the Gulf Coast in August 2005 and September 2008, respectively, the terrorist attacks of September 11, 2001 and the continued threat of terrorism and changing threat levels announced by the U.S. Department of Homeland Security, have had a negative impact on the lodging industry and on our hotel operations. These events can cause a significant decrease in occupancy and ADR due to disruptions in business and leisure travel patterns and concerns about travel safety. In particular, as it relates to terrorism, major metropolitan areas and airport hotels can be adversely affected by concerns about air travel safety and may see an overall decrease in the amount of air travel.

Our expenses may remain constant or increase even if revenues decline.

Certain expenses associated with owning and operating a hotel are relatively fixed and do not proportionately reduce with a decline in revenues. Consequently, during periods when revenues decline, we could continue to incur certain expenses which are fixed in nature. Moreover, we could be adversely affected by:

	•		Rising interest rates;
	•		Tightening of credit available to the lodging industry on favorable terms, or at all;
	•		Rising energy costs, gasoline or heating fuel supply shortages;
	•		Rising insurance premiums;
	•		Rising property tax expenses;
	•		Increase in labor and related costs; and
	•		Changes in, and as a result, increases in the cost of compliance with new governmental regulations, including those governing environmental, usage, zoning and tax matters.

Losses may exceed our insurance coverage or estimated reserves, which could impair our results of operations, financial condition and liquidity.

We are self-insured up to certain amounts with respect to our insurance coverages. Various types of catastrophic losses, including those related to environmental, health and safety matters may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not cover the full current market value or replacement cost of our lost investment or building code upgrades associated with such an occurrence. Inflation, changes in building codes and ordinances, environmental considerations and other factors might cause insurance proceeds to be insufficient to fully replace or renovate a hotel after it has been damaged or destroyed.

We cannot assure you that:

	•		the insurance coverages that we have obtained will fully protect us against insurable losses (i.e., losses may exceed coverage limits); or,
	•		we will not incur losses from risks that are not insurable or that are not economically insurable.

Should a material uninsured loss or a loss in excess of insured limits occur with respect to any particular property, we could lose our capital invested in the property, as well as the anticipated income and cash flow from the property. Any such loss could have an adverse effect on our results of operations, financial condition and liquidity. In addition, if we are unable to maintain insurance that meets our debt and franchise agreement requirements, and if we are unable to amend or waive those requirements, it could result in an acceleration of the related debt and impair our ability to maintain franchise affiliations.

Competition in the lodging industry could have a material adverse effect on our business and results of operations.

The lodging industry is highly competitive. No single competitor or small number of competitors dominates the industry. We generally operate in areas that contain numerous other competitors, some of which may have substantially greater resources than we have. Competitive factors in the lodging industry include, among others, oversupply in a particular market, franchise affiliation, reasonableness of room rates, quality of accommodations, age of the facility, service levels, convenience of locations and amenities customarily offered to the traveling public. There can be no assurance that demographic, geographic or other changes in markets will not adversely affect the future demand for our hotels, or that the competing and new hotels will not pose a greater threat to our business. Any of these adverse factors could materially and adversely affect us.

The lodging business is seasonal.

Demand for accommodations varies seasonally. The high season tends to be the summer months for hotels located in colder climates and the winter months for hotels located in warmer climates. Aggregate demand for accommodations at the hotels in our portfolio is lowest during the winter months. We generate substantial cash flow in the summer months compared to the slower winter months. If adverse factors affect our ability to generate cash in the summer months, the impact on our profitability is much greater than if similar factors were to occur during the winter months.

We are exposed to potential risks of brand concentration.

As of March 1, 2010, we operated 22 of our 28 hotels under the InterContinental Hotels Group and Marriott flags, and therefore, are subject to potential risks associated with the concentration of our hotels under limited brand names. If either of these brands suffered a major decline in popularity with the traveling public, it could adversely affect our revenues and profitability.

We have experienced significant changes in our senior management team and Board of Directors.

Our current Chief Executive Officer has been in this role since June 2009. The Chief Executive Officer role was filled by a member of the Board of Directors on an interim basis from January 2008 until June 2009. Our current Vice President of Hotel Operations assumed the position in December 2008. If our management team is unable to develop and successfully execute our business strategies, achieve our business objectives or maintain effective relationships with employees, suppliers, creditors and customers, our ability to grow our business and successfully meet operational challenges could be impaired.

Our success is dependent on recruiting and retaining high caliber key personnel.

Our future success and our ability to manage future growth will depend in large part on our ability to attract and retain other highly qualified personnel. Competition for qualified personnel is intense, and we may not be successful in attracting and retaining key personnel. The inability to attract and retain highly qualified personnel could hinder our business.

The increasing use of third-party travel websites by consumers may adversely affect our profitability.

Some of our hotel rooms are booked through third-party travel websites such as Travelocity.com, Expedia.com, Priceline.com and Hotels.com. If these Internet bookings increase, these intermediaries may be in a position to demand higher commissions, reduced room rates or induce other significant contract concessions from us. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. Although we expect to continue to derive most of our business through the traditional channels, if the revenues generated through Internet intermediaries increase significantly, room revenues may flatten or decrease and our profitability may be adversely affected.

We will be unable to utilize all of our net operating loss carryforwards.

As of December 31, 2009, we have approximately $244.7 million of net operating loss carryforwards available for federal income tax purposes with a full valuation allowance. To the extent that we do not have sufficient future taxable income to be offset by these net operating loss carryforwards, any unused losses will expire between 2019 and 2029. Our ability to use these net operating loss carryforwards to offset future income is also subject to annual limitations. An audit or review by the Internal Revenue Service could result in a reduction in the net operating loss carryforwards available to us.

Many aspects of our operations are subject to government regulations, and changes in these regulations may adversely affect our results of operations and financial condition.

A number of states and local governments regulate the licensing of hotels and restaurants, including occupancy and liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. Operators of hotels are also subject to the Americans with Disabilities Act, and various employment laws, which regulate minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could increase our operating costs and reduce profitability.

Costs of compliance with environmental laws and regulations could adversely affect operating results.

Under various federal, state, local and foreign environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for non-compliance with applicable environmental and health and safety requirements and for the costs of investigation, monitoring, removal or remediation of hazardous or toxic substances. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances.

The presence of these hazardous or toxic substances on a property could also result in personal injury, property damage or similar claims by private parties. In addition, the presence of contamination, or the failure to report, investigate or properly remediate contaminated property, could adversely affect the operation of the property or the owner’s ability to sell or rent the property or to borrow funds using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of those substances at the disposal or treatment facility, whether or not that facility is or ever was owned or operated by that person.

The operation and removal of underground storage tanks is also regulated by federal, state and local laws. In connection with the ownership and operation of our hotels, we could be held liable for the costs of remedial action for regulated substances and storage tanks and related claims.

Some of our hotels contain asbestos-containing building materials (“ACBMs”). Environmental laws require that ACBMs be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. Third parties may be permitted by law to seek recovery from owners or operators for personal injury associated with exposure to contaminants, including, but not limited to, ACBMs. Operation and maintenance programs have been developed for those hotels which are known to contain ACBMs.

Many, but not all, of our hotels have undergone Phase I environmental site assessments within the past several years, which generally provide a nonintrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental consultant. The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotel owner or others may be responsible. None of the Phase I environmental site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on us. Nevertheless, it is possible that these assessments did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware.

Some of our hotels may contain microbial matter such as mold, mildew and viruses, whose presence could adversely affect our results of operations. In addition, if any hotel in our portfolio is not properly connected to a water or sewer system, or if the integrity of such systems are breached, microbial matter or other contamination might develop. If this were to occur, we could incur significant remedial costs and we might also be subject to private damage claims and awards.

Any liability resulting from noncompliance or other claims relating to environmental matters could have a material adverse effect on us and our insurability for such matters in the future and on our results of operations, financial condition, liquidity and prospects.

We may make acquisitions or investments that are not successful and that adversely affect our ongoing operations.

We may acquire or make investments in hotel companies or groups of hotels that we believe complement our business. If we fail to properly evaluate and execute acquisitions or investments, it may have a material adverse effect on our results of operations. In making or attempting to make acquisitions or investments, we face a number of risks, including:

	•		Significant errors or miscalculations in identifying suitable acquisition or investment candidates, performing appropriate due diligence, identifying potential liabilities and negotiating favorable terms;
	•		Reducing our working capital and hindering our ability to expand or maintain our business, including making capital expenditures and funding operations;
	•		The potential distraction of our management, diversion of our resources and disruption of our business;
	•		Overpaying by competing for acquisition opportunities with resourceful competitors;
	•		Inaccurate forecasting of the financial impact of an acquisition or investment; and
	•		Failure to effectively integrate acquired companies or investments into our Company and the resultant inability to achieve expected synergies.

Risks Related to Our Common Stock

Our stock price may be volatile, and consequently, investors may be unable to resell their common stock at or above their purchase price.

     The market price of our common stock could decline or fluctuate significantly in response to various factors, including:

	•		Actual or anticipated variations in our results of operations;
	•		Announcements of new services or products or significant price reductions by us or our competitors;
	•		Market performance by our competitors;
	•		Future issuances of our common stock, or securities convertible into or exchangeable or exercisable for our common stock, by us directly, or the perception that such issuances are likely to occur;
	•		Sales of our common stock by stockholders or the perception that such sales may occur in the future;
	•		The size of our market capitalization;
	•		Loss of our franchises;
	•		Default on our indebtedness and/or foreclosure of our properties;
	•		Concentration of ownership;
	•		The extent of institutional investor interest in us;
	•		Changes in financial estimates by securities analysts; and
	•		Domestic and international economic, legal and regulatory factors unrelated to our performance.

We may never pay dividends on our common stock, in which event our stockholders’ only return on their investment, if any, will occur on their sale of our common stock.

We have not yet paid any dividends on our common stock, and we do not intend to do so in the foreseeable future. As a result, our stockholders’ only return on their investments, if any, will occur on their sale of our common stock.

Our charter documents, employment contracts and Delaware law may impede attempts to replace or remove our management or inhibit a takeover, which could adversely affect the value of our common stock.

Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent changes in our management or a change of control that you might consider favorable and may prevent you from receiving a takeover premium for your shares. These provisions include, for example:

	•		Authorizing the issuance of preferred stock, the terms of which may be determined at the sole discretion of the board of directors;
	•		Establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at meetings; and
	•		Requiring all stockholder action to be taken at a duly called meeting, not by written consent.

In addition, we have entered into, and could enter into in the future, employment contracts with certain of our employees that contain change of control provisions.

The decline in our common stock price and the threat of delisting or a delisting of our common stock could have materially adverse effects on our business.

The price of our common stock has declined significantly since December 31, 2004. In the event we seek bankruptcy protection, it is possible that the value of our common stock could decline further. A reduction in stock price could have materially adverse effects on our business, including reducing our ability to use our common stock as compensation or to otherwise provide incentives to employees and by reducing our ability to generate capital through stock sales or otherwise use our stock as currency with third parties. In addition, our common stock could be delisted from the NYSE AMEX Equities market. The threat of delisting or a delisting of our common stock from the NYSE AMEX Equities market could have adverse effects by, among other things:

	•		reducing the liquidity and market price of our common stock;
	•		reducing the number of investors willing to hold or acquire our common stock, thereby further restricting our ability to obtain equity financing; and
	•		reducing our ability to retain, attract and motivate our directors, officers and employees.

Risks Related to the Planned Merger

The closing of the Merger is subject to the satisfaction of customary closing conditions, including the approval of the Merger by our stockholders.

The closing of the Merger is subject to the satisfaction of customary closing conditions, including the approval of the Merger by our stockholders. The timing of such approval and the closing of the Merger are subject to factors beyond our control. While our Board of Directors has unanimously recommended that stockholders approve the Merger Agreement, we cannot predict the outcome of the stockholders’ vote. The Merger will not close if approval is not received from the stockholders.

Failure to complete the Merger in a timely manner, or at all, could negatively impact the market price of our common stock and our future financial results and liquidity.

Failure to complete the Merger in a timely manner, or at all, could negatively impact the market price of our common stock to the extent that the current market price reflects an assumption that the Merger will be completed. In addition, such failure could negatively impact our future business and financial results because of, among other things, the disruption that could occur as a result of uncertainties relating to a failure to complete the Merger and the potential inability to recover certain transaction costs related to the Merger, including a $3.25 million termination fee that could be payable to Purchaser under certain conditions.

Moreover, if the Merger Agreement is terminated for any reason other than as a result of certain breaches by Purchaser, Lodgian’s subsidiary borrowing entities would be required to either pay down the principal balance of the $130 million mortgage loan facility owned by Hospitality by $5 million or pledge the Holiday Inn, Monroeville, PA as additional security for the loan. A $5 million

pay down of the principal balance would further weaken our liquidity, while pledging an additional hotel as security would further limit our financial flexibility.

In addition, if the Merger is terminated or is not completed by July 1, 2010, Lodgian would be required to pay a higher interest rate on the $130 million mortgage loan facility owned by Hospitality, which would have a negative impact on our financial results and liquidity.

The Merger could negatively impact our current and future business and financial results.

The Merger Agreement contains customary representations and warranties of Lodgian, Purchaser and Merger Sub. The Merger Agreement also contains customary covenants and agreements, including covenants relating to (a) the conduct of Lodgian’s business between the date of the signing of the Merger Agreement and the closing of the Merger, (b) non-solicitation of competing acquisition proposals and (c) the efforts of the parties to cause the Merger to be completed.

Compliance with the covenants outlined in the Merger Agreement could restrict our ability to operate the business or result in our failure to pursue other opportunities which could be beneficial to our business in the future, should the Merger not be completed. Furthermore, management’s efforts may be focused on completing the Merger and diverted from the operation of the business.

The announcement of the Merger could have a negative impact on our ability to retain and, if necessary, attract key employees, which could in turn have an unfavorable impact on our financial results.

Our success depends significantly on the continued contributions of key employees. The loss of a key employee or the inability to attract and retain experienced employees could harm our operating results.

Litigation has commenced against us in connection with the planned Merger.

On January 26, 2010, a putative class action was commenced in the Superior Court of Fulton County, Georgia against us, each of our directors, Purchaser and Merger Sub alleging that our board of directors breached their fiduciary duties to our stockholders in approving and adopting a merger agreement that allegedly contains preclusive deal protection measures and unfair merger consideration. The complaint further alleges that we, Purchaser and Merger Sub aided and abetted our board of directors in allegedly breaching their fiduciary duties. On February 23, 2010, the plaintiff amended his complaint to add claims that the members of our board breached their duties of disclosure by allegedly failing to disclose certain matters in the Schedule 14A Preliminary Proxy. The amended complaint seeks to enjoin the completion of the merger, an award of unspecified monetary damages and to recover certain costs incurred by the plaintiff. In addition, on January 29, 2010, a putative class action was commenced in the Court of Chancery of the State of Delaware by United Capital Corp. against us, each of our directors, Purchaser, Merger Sub and Lone Star Funds, alleging that our board of directors breached their fiduciary duties to our stockholders by allegedly failing to obtain the highest price available for our stockholders, failing to adequately shop the Company and approving and adopting a merger agreement that allegedly contains preclusive deal protection measures. The complaint further alleges that Lone Star Funds aided and abetted our board of directors in allegedly breaching their fiduciary duties. The complaint seeks to enjoin the completion of the merger, an order compelling the board of directors to undertake a new sale process, an award of unspecified monetary damages and costs of litigation. In other papers filed with the Court, United Capital Corp. has asserted that it desires to make a bid for the Company but has not done so because of the allegedly preclusive deal protection measures contained in the merger agreement. We believe both lawsuits to be without merit and intend to defend them vigorously, including opposing any efforts to enjoin the proposed transaction.

The cost of defending such lawsuits could have an adverse impact on our financial results.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

The information required to be presented in this section is presented in “Item 1. Business.”

Item 3. LEGAL PROCEEDINGS

The information required to be presented in this section is presented in “Item 1. Business.”

Item 4. RESERVED

PART II

Item 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Historical Data

Our common stock is traded on the NYSE Amex Equities under the symbol “LGN”. The following table sets forth the high and low sales prices of our common stock on a quarterly basis for the past two years:

		2008
		High				Low
First Quarter		$	11.93			$	8.26
Second Quarter		$	11.39			$	7.61
Third Quarter		$	9.67			$	6.63
Fourth Quarter		$	7.76			$	1.19

		2009
		High				Low
First Quarter		$	3.46			$	1.41
Second Quarter		$	3.00			$	1.21
Third Quarter		$	2.09			$	1.15
Fourth Quarter		$	2.15			$	1.20

		2010
		High				Low
First Quarter (up to March 1, 2010)		$	2.59			$	1.40

At March 10, 2010, we had approximately 1,975 holders of record of our common stock.

We have not declared or paid any dividends on our common stock, and our board of directors does not anticipate declaring or paying any cash dividends in the foreseeable future. We anticipate that all of our earnings, if any, and other cash resources will be retained to pay principal and interest on our debt, fund our business operations, and build cash reserves and will be available for other strategic opportunities that may develop. Future dividend policy will be subject to the discretion of our board of directors, and will be contingent upon our results of operations, financial position, cash flow, liquidity, capital expenditure plan and requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal and regulatory restrictions on the payment of dividends and other factors that our Board of Directors deems relevant.

Stock Repurchase Programs

In 2007, we repurchased 1.3 million shares at an aggregate cost of $15.2 million under a $30 million share repurchase program, approved by our Board of Directors, which expired in August 2009. In addition, we repurchased 0.1 million shares at an aggregate cost of $1.9 million under a $15 million share repurchase program, approved by our Board of Directors, which expired in May 2007.

In 2008, we repurchased 1.5 million shares at an aggregate cost of $14.9 million, fulfilling the remaining authority under the $30 million share repurchase program. In addition, we repurchased 0.6 million shares at an aggregate cost of $4.4 million under a $10 million share repurchase program, approved by our Board of Directors, which expired in April 2009.

Treasury Stock Repurchases

There were no purchases of our common stock during the three months ended December 31, 2009.

Performance Graph

The following stock performance graph compares the cumulative total stockholder return of our common stock between December 31, 2004 and December 31, 2009, against the cumulative stockholder return during such period achieved by the Dow Jones US Hotels Index and the Dow Jones Wilshire 5000 Index. The graph assumes that $100 was invested on December 31, 2004 in each of the comparison indices and in our common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Lodgian, Inc., The Dow Jones Wilshire 5000 Index
And The Dow Jones US Hotels Index

*$100 invested on 12/31/04 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

Copyright© 2010 Dow Jones & Co. All rights reserved.

		12/04				12/05				12/06				12/07				12/08				12/09
Lodgian, Inc.			100.00				87.24				110.57				91.54				17.32				12.03
Dow Jones Wilshire 5000			100.00				106.38				123.16				130.07				81.64				102.00
Dow Jones US Hotels			100.00				109.15				139.39				118.17				53.58				91.83

Item 6. SELECTED FINANCIAL DATA

Selected Consolidated Financial Data

We present, in the table below, selected financial data derived from our historical financial statements for the five years ended December 31, 2009.

In addition, in accordance with generally accepted accounting principles, our results of operations distinguish between the results of operations of those properties which we plan to retain in our portfolio for the foreseeable future, referred to as continuing operations, and the results of operations of those properties which have been sold or have been identified for sale, referred to as discontinued operations. The historical income statements have been reclassified based on the assets sold or held for sale as of December 31, 2009.

You should read the financial data below in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Item 8. Financial Statements and Supplementary Data” included in this Form 10-K.

The income statement financial data for the years ended December 31, 2009, December 31, 2008, and December 31, 2007, and selected balance sheet data for the years ended December 31, 2009 and December 31, 2008, were extracted from the audited financial statements included in this Form 10-K, which commence on page F-1.

		2009				2008				2007				2006				2005
		($ in thousands, except per share data)
Income statement data:
Revenues — continuing operations		$	188,544			$	228,194			$	229,875			$	214,832			$	175,235
Revenues — discontinued operations			16,367				43,432				88,274				136,939				164,992
Revenues — continuing and discontinued operations			204,911				271,626				318,149				351,771				340,227
Loss — continuing operations			(50,349	)			(8,014	)			(5,236	)			(5,767	)			8,541
(Loss) income — discontinued operations			(3,553	)			(3,970	)			(2,789	)			(9,409	)			3,760
Net (loss) income			(53,902	)			(11,984	)			(8,025	)			(15,176	)			12,301
Net (loss) income attributable to common stock			(52,365	)			(11,984	)			(8,446	)			(15,176	)			12,301
Basic and diluted (loss) earnings per share attributable to common stock:
Loss from continuing operations			(2.29	)			(0.37	)			(0.24	)			(0.24	)			0.35
(Loss) income from discontinued operations			(0.17	)			(0.18	)			(0.11	)			(0.38	)			0.15
Net (loss) income attributable to common stock			(2.46	)			(0.55	)			(0.35	)			(0.62	)			0.50
Basic and diluted weighted average shares			21,315				21,774				24,292				24,617				24,576
Balance sheet data (at period end):
Total assets		$	452,963			$	555,414			$	624,730			$	699,158			$	726,685
Assets held for sale			6,406				33,021				8,009				89,437				14,866
Long-term liabilities			185,132				194,800				355,728				292,301				394,432
Liabilities related to assets held for sale			6,029				16,167				961				68,351				4,610
Total liabilities			319,698				368,009				404,142				446,122				466,424
Total equity			133,265				187,405				220,588				242,114				249,044

Item 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the discussion below in conjunction with the consolidated financial statements and accompanying notes. 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 above under the caption “Risk Factors.”

Executive 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 according to Hotel Business. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as “Crowne Plaza,”, “Four Points by Sheraton”, “Hilton,” “Holiday Inn,” “Marriott,” and “Wyndham”.

As of March 1, 2010, we operated 28 hotels with an aggregate of 5,359 rooms, located in 19 states. Of the 28 hotels, 27 hotels, with an aggregate of 5,230 rooms, were held for use and the results of operations were classified in continuing operations, while 1 hotel, with 129 rooms, was held for sale and the results of operations were classified in discontinued operations.

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

Our RevPAR declined 18.0% in 2009 compared to a RevPAR decline of 16.7% for the U.S. Lodging industry as a whole according to Smith Travel Research. We recognize the need to protect market share in these difficult economic conditions, especially given the intensely competitive environment, and our sales and revenue management teams are focused on retaining our existing customers and attracting new business.

This year, we have significantly reduced our cost structure. We have reduced headcount, implemented a freeze on merit increases, reduced or eliminated certain employee benefits, reduced or eliminated cash bonuses at the corporate level, restructured the bonus program at the hotel level, and eliminated discretionary spending in several areas. We will continue to look for opportunities to lower costs in the future.

To strengthen our balance sheet, we conducted a portfolio analysis in 2009. In July 2009, we surrendered control of the Holiday Inn Phoenix, AZ to a court-appointed receiver. In November 2009, we surrendered control of the Crowne Plaza Worcester, MA to a court-appointed receiver. We believed that the hotels were worth substantially less than the $9.4 million and $16.3 million, respectively, of mortgage debt encumbering the hotels and that it was unlikely that the value of the hotels would increase in the near or intermediate term. The hotels were deconsolidated upon surrender of control and, as a result, the assets and liabilities, including the related loan balances, were excluded from our balance sheet as of December 31, 2009.

As of December 31, 2009, we had $292.2 million of total mortgage obligations outstanding, including the current portion of $102.5 million. This mortgage indebtedness is secured by interests in certain of our hotel properties. Merrill Lynch Fixed Rate Pool 3 (“Pool 3”) with a balance of $45.5 million as of December 31, 2009, matured on October 1, 2009, following two short-term extensions. The extensions were intended to provide time for us to reach an agreement with the special servicer to modify the loan because we determined that the cash flow generated by the hotels that secure Pool 3 was not sufficient to fund the debt service requirements. Since we were unable to reach a modification agreement, we began negotiations with the servicer of Pool 3 in 2009 to surrender control of these six hotels. We were required to perform a fair value assessment of the six hotels in 2009 in accordance with U.S. GAAP and we concluded that the book value of the six hotels exceeded fair value and recorded impairment charges totaling $27.8 million. In February 2010, we surrendered control of the six hotels that secure Pool 3 to a court-appointed receiver. The Pool 3 loan is non-recourse, except in certain limited circumstances (which we believe are remote) and is not cross-collateralized with any other mortgage debt. Refer to “Liquidity and Capital Resources” for additional information.

$55.7 million of mortgage debt is scheduled to mature in 2010 and cannot be extended without the approval of the loan servicers. To address the pending maturities, we are pursuing opportunities to refinance or extend the maturing mortgage debt. To date, we have been unable to secure financing and, in light of the current credit markets generally and the real estate credit markets specifically, we expect it will remain difficult to refinance the mortgage debt prior to the 2010 maturity dates. We cannot currently predict whether our efforts to refinance or extend the maturing debt will be successful. If we are unable to refinance or extend the maturing mortgage debt, one or more of our subsidiaries or the Company as a whole may be forced to make a Chapter 11 bankruptcy filing to seek protection from our creditors or we may be forced to surrender certain properties securing our indebtedness in satisfaction of such indebtedness, or both. See “Item 1A. Risk Factors” for additional information.

We negotiated with the special servicer for Merrill Lynch Fixed Rate Pool 1 (“Pool 1”) and agreed to two six-month extensions of the maturity date for this indebtedness. The principal balance of Pool 1 was $34.5 million as of December 31, 2009 and we exercised the second six-month extension, extending the maturity date of Pool 1 to July 1, 2010. We are pursuing opportunities to extend or refinance Pool 1 in anticipation of the 2010 maturity date. The interest rate on Pool 1 remains fixed at 6.58% during the term of the extension. In July 2009, we paid the special servicer an extension fee of approximately $0.2 million. Additionally, in July 2009, we made a principal reduction payment of $2.0 million. In December 2009, we paid the special servicer an extension fee of approximately $0.3 million. Additionally, in December 2009, we made a principal reduction payment of $1.0 million. To date, we have been unable to secure refinancing and, in light of the current credit markets generally and the real estate credit markets specifically, we expect it to remain difficult to refinance the mortgage debt prior to the July 2010 maturity date. We cannot currently predict whether these efforts will be successful. We have classified this loan as current in the Consolidated Balance Sheet as of December 31, 2009. Pool 1 is secured by four hotels.

Merrill Lynch Fixed Rate Pool 4 (“Pool 4”), with a principal balance of $34.6 million as of December 31, 2009, was successfully extended to a maturity date of July 1, 2012. The interest rate on Pool 4 will remain fixed at 6.58%. In connection with this agreement, we paid an extension fee of approximately $0.2 million and made a principal reduction payment of $0.5 million in July 2009. The parties also have agreed to revise the allocated loan amounts for each property serving as collateral for Pool 4 and to allow partial prepayments of the indebtedness. Pursuant to this agreement, we may release individual assets from Pool 4 by paying the lender specified amounts (in excess of the allocated loan amounts) in connection with a property sale or refinancing. We also agreed to pay the lender an “exit fee” upon a full or partial repayment of Pool 4. The amount of this fee will increase each year but, assuming Pool 4 is held for the full three year term, the fee will effectively increase the current interest rate by 100 basis points per annum. We also have issued a full recourse guaranty of Pool 4 in connection with this amendment. We have classified Pool 4 as long-term in the Consolidated Balance Sheet as of December 31, 2009. Pool 4 is secured by six hotels.

Certain other mortgage debt will mature in 2010, but each has available extension options as discussed in further detail in “Liquidity and Capital Resources”.

Total assets decreased from $555.4 million at December 31, 2008 to $453.7 million at December 31, 2009. The reduction was primarily due to an impairment charge of $27.8 million related to Pool 3, the deconsolidation of the Crowne Plaza Worcester, MA and Holiday Inn Phoenix, AZ upon surrender of control to court-appointed receivers, and the sale of five of our held for sale hotels in 2009.

Long-term liabilities decreased from $194.8 million at December 31, 2008 to $185.1 million at December 31, 2009, mainly as a result of the deconsolidation of two hotels upon surrender of control and the reclassification of maturing debt from long-term liabilities to current liabilities offset in part by the extension of the maturity date of Pool 4 to 2012.

Planned Merger and Loan Amendment

On January 22, 2010, Lodgian, Purchaser, and Merger Sub, entered into the Merger Agreement. Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of common stock of Lodgian, other than any shares owned by Purchaser or Merger Sub, by Lodgian as treasury stock, or by any stockholders who are entitled to, and who properly exercise, appraisal rights under Delaware law, will be cancelled and will be converted automatically into the right to receive $2.50 in cash, without interest. The consummation of the Merger is subject to various customary conditions, including the approval of Lodgian’s stockholders.

Concurrently with the execution of the Merger Agreement, on January 22, 2010, Hospitality, an affiliate of Purchaser, purchased the lender’s interest in Lodgian’s $130 million mortgage loan facility originally made by Goldman Sachs Commercial Mortgage Capital, L.P. An amendment to the loan was also concurrently entered into by Hospitality and Lodgian’s subsidiary borrowing entities which own the hotels securing the loan. The material terms of the loan amendment are summarized as follows:

	•		Effective immediately, the cash lockbox provisions of the loan were amended to provide that excess cash flow from the mortgaged properties after debt service, reserves and operating expenses, will not be retained by the lender in an excess cash flow reserve account, but will instead be released to the borrowers on a monthly basis, even if the properties do not meet a previously required financial covenant test.
	•		The deadline for Lodgian’s subsidiary which owns the Crowne Plaza Albany, New York, to complete certain renovation work was extended to May 1, 2010.
	•		The allocated loan amounts for each of the properties securing the loan were readjusted.
	•		Effective July 1, 2010, the margin over LIBOR used to determine the interest rate on the loan will be increased from 1.50% to 4.25%.
	•		If the Merger Agreement is validly terminated for any reason other than as a result of a breach by Purchaser of any of its representations, warranties, covenants or agreements contained in the Merger Agreement such that certain of Lodgian’s closing conditions set forth in the Merger Agreement would not be met, Lodgian’s subsidiary borrowing entities on the loan will be required, in their sole discretion, to either pay down the principal balance of the loan by $5 million, or to cause the Holiday Inn Monroeville, Pennsylvania property to be pledged as additional security for the loan. If the Holiday Inn Monroeville, Pennsylvania property is pledged as additional security for the loan, it may be subsequently released from the loan upon payment of a cash release price of $5 million.

We believe that the planned merger is the best strategic alternative for the Company. Absent a merger, our strategic initiatives include surrendering certain underperforming hotels to the lenders, improving the operations of our remaining core hotels, exploring the possibility of ceasing

to be a public company and continuing to reduce our corporate overhead costs.

Overview of Continuing Operations

Below is a summary of our results of continuing operations for the 33 hotels that were classified as held for use as of December 31, 2009 (including the six hotels that secure Pool 3, which were subsequently surrendered to a court-appointed receiver in February 2010), presented in more detail in “Results of Operations-Continuing Operations”:

	•		Revenues decreased $39.7 million, or 17.4%. Rooms revenues decreased $31.3 million, or 18.3%, as ADR fell 9.0% and occupancy decreased 9.9%. Food and beverage revenues decreased $7.6 million, or 15.2%, driven largely by lower banquet revenues.
	•		As previously discussed, we conducted a portfolio analysis to strengthen our balance sheet. As of December 31, 2009, we had surrendered control of two hotels to court-appointed receivers. In 2009, we began negotiations with the servicer of Pool 3 to surrender control of the six hotels that secure Pool 3 to a court-appointed receiver because the cash flows generated by these hotels were not sufficient to fund the debt service requirements. We were required to perform a fair value assessment of the six hotels in 2009 in accordance with U.S. GAAP and we concluded that the book value of the six hotels exceeded fair value and recorded impairment charges totaling $27.8 million. In February 2010, we surrendered control of the six hotels that secure Pool 3 to a court-appointed receiver.
	•		Excluding impairment, operating income decreased $20.1 million to a loss of $6.7 million. We realized the benefits of several cost containment initiatives as total operating expenses excluding impairment decreased $19.6 million. However, these initiatives did not fully offset the $39.7 million decline in revenues, since many of our operating costs are fixed in nature.

Overview of Discontinued Operations

In 2009, we sold 5 of our held for sale hotels and surrendered control of two hotels to court-appointed receivers. For the five hotels sold and two hotels surrendered in 2009, total revenues were $14.1 million, direct operating expenses were $7.1 million, and other hotel operating expenses were $5.4 million for the year ended December 31, 2009, respectively.

The consolidated statements of operations for discontinued operations for the years ended 2009, 2008 and 2007 include the results of operations for all properties that have been sold or otherwise disposed in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC 360 Property, Plant, and Equipment (“FASB ASC 360”).

The assets held for sale at December 31, 2009 and December 31, 2008 and the liabilities related to these assets are separately disclosed in the Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that our held for sale hotel as of December 31, 2009 remains properly classified in accordance with FASB ASC 360.

Where the carrying values of the assets held for sale exceeded the estimated fair values, net of selling costs, we reduced the carrying values and recorded impairment charges. During the year ended December 31, 2009, we recorded impairment charges of $13.9 million on assets held for sale.

Our continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria of FASB ASC 360. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). As we prepare our financial statements, we make estimates and assumptions which affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates.

These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as discussed in “Item 1A. Risk Factors”, approximately $101.2 million of outstanding mortgage debt as of December 31, 2009 has matured, or is scheduled to mature in 2010 without available extension options and the economic recession has negatively impacted our operating results, which affects operating cash flows as well as our ability to refinance the maturing indebtedness. In the absence of an extension, refinancing or repayment of the debt, these factors raise substantial doubt as to our ability to continue as a going concern. We surrendered control of the six hotels that secure Pool 3 to a court-appointed receiver in February 2010. Pool 3 had an outstanding balance of $45.5 million at December 31, 2009. We are pursuing opportunities to extend or refinance the debt maturing in 2010, which totaled $55.7 million at December 31, 2009. However, we can provide no assurance that we will be able to refinance or extend the debt. The financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities or any other adjustments that may be necessary if we are unable to continue as a going concern.

A summary of our significant accounting policies is included in Note 1 of the notes to our consolidated financial statements. We consider the following to be our critical accounting policies and estimates:

Consolidation policy —All of our hotels are owned by operating subsidiaries. We consolidate the assets, liabilities and results of operations of those hotels where we own at least 50% of the voting equity interest and we exercise significant control. All of the subsidiaries are wholly-owned except for one joint venture, which meets the criteria for consolidation.

Noncontrolling interest — Noncontrolling interest represents the minority stockholder’s proportionate share of equity of the joint venture that we consolidate and is shown as “noncontrolling interest” in the Consolidated Balance Sheet. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“FASB ASC 810” formerly referenced as Statement of Financial Accounting Standards (“SFAS”) SFAS No. 160, Noncontrolling Interest in Consolidate Financial statements — An Amendment of ARB No. 51), we allocate to the noncontrolling interest its share of any profits or losses in accordance with the provisions of the applicable agreements.

Deferral policy —We defer franchise application fees on the acquisition or renewal of a franchise as well as loan origination costs related to new or renewed loan financing arrangements. Deferrals relating to the acquisition or renewal of a franchise are amortized on a straight-line basis over the period of the franchise agreement. We amortize deferred financing costs over the term of the loan using the effective interest method. The effective interest method incorporates the present values of future cash outflows and the effective yield on the debt in determining the amortization of loan fees. At December 31, 2009, these deferrals totaled $1.5 million for our held for use hotels. If we were to write-off these expenses in the year of payment, our operating expenses in those years would be significantly higher and lower in other years covered in the related agreement.

Asset impairment —We invest significantly in real estate assets. Property and equipment for our held for use assets represented 84.3% of the total assets on our consolidated balance sheet at December 31, 2009. Accordingly, our policy on asset impairment is considered a critical accounting estimate. We periodically evaluate property and equipment to determine whether events or changes in circumstances indicate that a possible impairment in the carrying values of the assets has occurred. As part of this evaluation, and in accordance with FASB ASC 360 Property, Plant, and Equipment, we classify our properties into two categories: “assets held for sale” and “assets held for use”.

We consider an asset held for sale when the following criteria per FASB ASC 360 are met:

	1.		Management commits to a plan to sell the asset;
	2.		The asset is available for immediate sale in its present condition;
	3.		An active marketing plan to sell the asset has been initiated at a reasonable price;
	4.		The sale of the asset is probable within one year; and
	5.		It is unlikely that significant changes to the plan to sell the asset will be made.

Upon designation of an asset as held for sale, we record the carrying value of the asset at the lower of its carrying value or its estimated fair value less estimated selling costs, and we cease depreciation of the asset. Our estimate of the fair value of an asset is generally based on a number of factors, including letters of intent or other indications of value from prospective buyers, or, in the absence of such, the opinions of third-party brokers or appraisers. While we may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, our estimate is ultimately based on our determination and we remain responsible for the impact of the estimate on the financial statements. The estimated selling costs are

generally based on our experience with similar asset sales. We record impairment charges and write down respective hotel assets if their carrying values exceed the estimated selling prices less costs to sell.

With respect to assets held for use where impairment indicators exist, we estimate the undiscounted cash flows to be generated by these assets. We then compare the estimated undiscounted cash flows for each hotel with their respective carrying values to determine if there are indicators of impairment. The carrying value of a long-lived asset is considered for impairment when the estimated undiscounted cash flows to be generated by the asset over its estimated useful life are less than the asset’s carrying value. For those assets where there are indicators of impairment, we determine the estimated fair values of these assets by taking into consideration indicators of value including broker valuations or appraisals. While we may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, our estimate is ultimately based on our determination and we remain responsible for the impact of the estimate on the financial statements. The broker valuations of fair value normally use the “cap rate” approach of estimated cash flows, a “per key” approach or a “room revenue multiplier” approach for determining fair value. If the estimated fair value exceeds the asset’s carrying value, no adjustment is generally recorded. Additionally, if an asset is replaced prior to the end of its useful life, the remaining net book value is recorded as an impairment loss.

Accrual of self-insured obligations —We are self-insured up to certain amounts for employee medical, property insurance, general liability insurance, personal injury claims, workers’ compensation, automobile liability and other coverages. We establish reserves for our estimates of the loss that we will ultimately incur on reported claims as well as estimates for claims that have been incurred but not yet reported. Our reserves, which are reflected in other accrued liabilities on our consolidated balance sheet, are based on actuarial valuations and our history of claims. Our actuaries incorporate historical loss experience and judgments about the present and expected levels of costs per claim. Trends in actual experience are an important factor in the determination of these estimates. We believe that our estimated reserves for such claims are adequate; however, actual experience in claim frequency and amount could materially differ from our estimates and adversely affect our results of operations, cash flow, liquidity and financial condition. As of December 31, 2009, our reserve balance related to these self-insured obligations was $8.9 million.

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 last three years for the 33 hotels that, as of December 31, 2009, are classified as assets held for use.

Revenues

We categorize our revenues into the following three categories:

	•		Rooms revenues — derived from guest room rentals;
	•		Food and beverage revenues — derived from hotel restaurants, room service, hotel catering and meeting room rentals; and
	•		Other revenues — derived from guests’ long-distance telephone usage, laundry services, parking services, in-room movie services, vending machine commissions, leasing of hotel space and other miscellaneous revenues.

Transient revenues, which accounted for approximately 43% of our 2009 room revenues, are revenues derived from individual guests who stay only for brief periods of time without a long-term contract. Demand from corporate clients was 28% of our 2009 room revenues, groups made up approximately 22% of our 2009 room revenues while our contract revenues (such as contracts with airlines for crew rooms) accounted for the remaining 7%.

We believe revenues in the hotel industry are best explained by the following key performance indicators:

	•		Occupancy — computed by dividing total room nights sold by the total available room nights. To obtain available room nights for a particular period, we multiply the number of rooms in each hotel by the number of days the hotel was open;
	•		Average Daily Rate (ADR) — computed by dividing total room revenues by total room nights sold; and
	•		Revenue per available room (RevPAR) — computed by dividing total room revenues for a particular period by the total available room nights over the same period. Our calculation of total room revenues and the number of available rooms is adjusted, as appropriate, for the opening and closing of hotels in our portfolio. Our RevPAR can also be calculated by multiplying our occupancy for a particular period by our average daily rate over the same period.

These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of our hotels experience lower occupancy levels in the fall and winter months, November through February, which generally results in lower revenues, lower net income and less cash flow during these months.

Operating expenses

Operating expenses fall into the following categories:

•

Direct operating expenses — these expenses tend to vary with available rooms and occupancy. However, hotel level expenses contain significant elements of fixed costs and, therefore, do not decline proportionately with revenues. Direct expenses are further categorized as follows:

	o		Rooms expenses — expenses incurred in generating room revenues;
	o		Food and beverage expenses — expenses incurred in generating food and beverage revenues; and
	o		Other direct expenses — expenses incurred in generating the revenue activities classified in “other revenues.”

			We use certain “non-GAAP financial measures,” which are measures of our historical financial performance that are not calculated and presented in accordance with GAAP, within the meaning of applicable SEC rules. For instance, we use the term direct operating contribution to mean revenues less direct operating expenses as presented in the consolidated statement of operations. We assess profitability by measuring changes in our direct operating contribution and direct operating contribution percentage, which is direct operating contribution as a percentage of the applicable revenue source. These measures assist us in distinguishing whether increases or decreases in revenues and/or expenses are due to growth or decline of operations or from other factors. We believe that direct operating contribution, when combined with the presentation of GAAP operating income, revenues and expenses, provide useful information to us.
	•		Other hotel operating expenses — these expenses include salaries for hotel management, advertising and promotion, franchise fees, repairs and maintenance and utilities;
	•		Property and other taxes, insurance and leases — these expenses include equipment, ground and building rentals, insurance, and property, franchise and other taxes;
	•		Corporate and other — these expenses include corporate salaries and benefits, legal, accounting and other professional fees, directors’ fees, costs for office space and information technology costs. Also included are costs related to compliance with Sarbanes-Oxley legislation;
	•		Casualty (gains) losses, net — these expenses include hurricane and other repair costs and charges related to the assets written off that were damaged, netted against any gains realized on the final settlement of property damage claims;
	•		Depreciation and amortization — depreciation of fixed assets (primarily hotel assets) and amortization of deferred franchise fees; and
	•		Impairment of long-lived assets — charges required to write down the carrying values of long-lived assets to the fair values of assets where the estimated undiscounted cash flows over the life of the asset were less than the carrying value of the asset. Also included is the write-off of assets that were replaced and had remaining net book value.

Non-operating items

     Non-operating items include:

	•		Interest expense includes interest incurred on our debt as well as amortization of deferred loan costs and changes in the fair value of interest rate caps;
	•		Interest income; and
	•		Loss on debt extinguishment.

Results of Operations — Continuing Operations

Results of operations for the years ended December 31, 2009 and December 31, 2008

     Revenues — Continuing Operations

		For the Years Ended December 31,
		2009				2008				Increase (decrease)
		($ in thousands)
Revenues:
Rooms		$	139,501			$	170,752			$	(31,251	)			(18.3	%)
Food and beverage			42,191				49,741				(7,550	)			(15.2	%)
Other			6,852				7,701				(849	)			(11.0	%)
Total revenues		$	188,544			$	228,194			$	(39,650	)			(17.4	%)
Occupancy			63.1	%			70.0	%							(9.9	%)
ADR		$	96.56			$	106.13			$	(9.57	)			(9.0	%)
RevPar		$	60.90			$	74.24			$	(13.34	)			(18.0	%)

Rooms revenues decreased $31.3 million, or 18.3%, driven by a 9.9% decrease in occupancy and a 9.0% decrease in ADR. The decline in rooms revenues was the result of deteriorating economic conditions. We slightly underperformed when compared to the U.S. lodging industry as a whole in 2009 as our RevPAR decreased 18.0%, compared to a decrease of 16.7% for the U.S. lodging industry, according to Smith Travel Research. The loss of occupancy created pricing pressures, resulting in a 9.0% decline in ADR.

Food and beverage revenues decreased $7.6 million, or 15.2%, driven largely by a decrease in our banquet revenues as businesses reduced their spending on conferences and other events. Other revenues decreased $0.8 million, or 11.0%, due largely to fees for canceled events in 2008 that did not recur in 2009.

Revenue growth was negatively impacted by displacement. Displacement refers to lost revenues and profits due to rooms being out of service as a result of renovation. Revenue is considered “displaced” only when a hotel has sold all available rooms and denies additional reservations due to rooms out of service. We feel this method is conservative, as it does not include estimated “soft” displacement costs associated with a renovation. During a renovation, there is significant disruption of normal business operations. In many cases, renovations result in the relocation of front desk operations, restaurant and bar services, and meeting rooms. In addition, the construction activity itself can be disruptive to our guests. As a result, guests may depart earlier than planned due to the disruption caused by the renovation work, local customers or frequent guests may choose an alternative hotel during the renovation, and local groups may not solicit the hotel to house their groups during renovations. These “soft” displacement costs are difficult to quantify and are excluded from our displacement calculation. Total revenue displacement during the year ended December 31, 2009 for the three hotels under renovation was $1.0 million. Total revenue displacement for the eleven hotels under renovation during the year ended December 31, 2008 was $2.1 million.

     Direct operating expenses — Continuing Operations

																			% of total revenues
		2009				2008				Increase (decrease)								2009				2008
		($ in thousands)
Direct operating expenses:
Rooms		$	39,438			$	44,330			$	(4,892	)			(11.0	%)			20.9	%			19.4	%
Food and beverage			29,444				34,293				(4,849	)			(14.1	%)			15.6	%			15.0	%
Other			4,730				5,467				(737	)			(13.5	%)			2.5	%			2.4	%
Total direct operating expenses		$	73,612			$	84,090			$	(10,478	)			(12.5	%)			39.0	%			36.9	%
Direct operating contribution (by revenue source):
Rooms		$	100,063			$	126,422			$	(26,359	)			(20.9	%)
Food and beverage			12,747				15,448				(2,701	)			(17.5	%)
Other			2,122				2,234				(112	)			(5.0	%)
Total direct operating contribution		$	114,932			$	144,104			$	(29,172	)			(20.2	%)
Direct operating contribution % (by revenue source):
Rooms			71.7	%			74.0	%
Food and beverage			30.2	%			31.1	%
Other			31.0	%			29.0	%
Total direct operating contribution			61.0	%			63.1	%

Total direct operating expenses decreased $10.5 million, or 12.5%. To react to declining revenues, we implemented several initiatives to reduce our cost structure including a reduction in labor costs (both headcount and hours worked) as well as a reduction in certain non-essential costs. However, because a portion of our costs are fixed, we experienced some erosion in direct operating contribution. As a percentage of total revenues, direct operating contribution decreased from 63.1% in 2008 to 61.0% in 2009.

Rooms expenses decreased $4.9 million, or 11.0%, driven primarily by lower payroll costs of $2.4 million, or 9.4%, as a result of decreased occupancy and cost control measures, as well as decreased travel agent and credit card commissions of $1.2 million on lower rooms sold. Room expenses on a cost per occupied room (“POR”) basis declined from $27.32 in 2008 to $27.24 in 2009 as a result of our cost control measures.

Food and beverage expenses decreased $4.8 million, or 14.1%. Labor costs decreased $2.6 million and cost of goods decreased $1.7 million due to a decline in sales. In addition, audio and visual equipment expenses decreased $0.2 million as a result of fewer events in 2009.

Other expenses decreased $0.7 million, or 13.5%. We insourced the management of a parking facility at one of our hotels, which resulted in a $0.3 million reduction in costs. Telephone costs decreased $0.1 million on reduced telephone revenues.

     Other operating expenses — Continuing Operations

																		% of total revenues
		2009				2008				Increase (decrease)								2009				2008
		($ in thousands)
Other operating expenses:
Other hotel operating costs
General and administrative		$	12,335			$	14,209			$	(1,874	)			(13.2	%)			6.5	%			6.2	%
Advertising and promotion			9,328				11,869				(2,541	)			(21.4	%)			4.9	%			5.2	%
Franchise fees			14,255				16,372				(2,117	)			(12.9	%)			7.6	%			7.2	%
Repairs and maintenance			9,982				11,064				(1,082	)			(9.8	%)			5.3	%			4.8	%
Utilities			11,051				12,370				(1,319	)			(10.7	%)			5.9	%			5.4	%
Other expenses			58				337				(279	)			(82.8	%)			0.0	%			0.1	%
Other hotel operating costs			57,009				66,221			$	(9,212	)			(13.9	%)			30.2	%			29.0	%
Property and other taxes, insurance, and leases			16,387				15,769				618				3.9	%			8.7	%			6.9	%
Corporate and other			14,769				16,289				(1,520	)			(9.3	%)			7.8	%			7.1	%
Casualty losses, net			119				1,095				(976	)			(89.1	%)			0.1	%			0.5	%
Depreciation and amortization			33,323				31,306				2,017				6.4	%			17.7	%			13.7	%
Impairment of long-lived assets			30,674				4,512				26,162				579.8	%			16.3	%			2.0	%
Total other operating expenses		$	152,281			$	135,192			$	17,089				12.6	%			80.8	%			59.2	%
Total operating expenses		$	225,893			$	219,282			$	6,611				3.0	%			119.8	%			96.1	%
Operating income		$	(37,349	)		$	8,912			$	(46,261	)			(519.1	%)			(19.8	%)			3.9	%