FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2009


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

For the transition period from to

Commission file no. 1-14537

Lodgian, Inc.

(Exact name of registrant as specified in its charter)


Delaware		52-2093696
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3445 Peachtree Road, N.E., Suite 700,
Atlanta, GA		30326
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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


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

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

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

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


Class		Outstanding as of May 1, 2009
Common		21,689,590

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31, 2009			December 31, 2008
	(Unaudited in thousands, except share data)
ASSETS

Current assets:
Cash and cash equivalents	$	19,064		$	20,454
Cash, restricted		8,110			8,179
Accounts receivable (net of allowances: 2009 - $300; 2008 - $263)		9,491			7,115
Inventories		3,044			2,983
Prepaid expenses and other current assets		17,178			21,257
Assets held for sale		30,513			33,021


Total current assets		87,400			93,009

Property and equipment, net		446,438			447,366
Deposits for capital expenditures		9,171			11,408
Other assets		5,218			3,631

	$	548,227		$	555,414


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	7,297		$	7,897
Other accrued liabilities		23,220			22,897
Advance deposits		2,196			1,293
Current portion of long-term liabilities		124,133			124,955
Liabilities related to assets held for sale		16,562			16,167


Total current liabilities		173,408			173,209

Long-term liabilities		194,455			194,800


Total liabilities		367,863			368,009

Stockholders’ equity:
Common stock, $.01 par value, 60,000,000 shares authorized; 25,144,364 and 25,075,837 issued at March 31, 2009 and December 31, 2008, respectively		252			251
Additional paid-in capital		331,077			330,785
Accumulated deficit		(112,168	)		(105,246	)
Accumulated other comprehensive income		1,051			1,262
Treasury stock, at cost, 3,825,417 and 3,806,000 shares at March 31, 2009 and December 31, 2008, respectively		(39,688	)		(39,647	)

Total stockholders’ equity attributable to common stock		180,524			187,405
Noncontrolling interest		(160	)		—


Total stockholders’ equity		180,364			187,405


	$	548,227		$	555,414

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended March 31,
	2009			2008
	(Unaudited in thousands,
	except per share data)
Revenues:

Rooms	$	36,635		$	43,848
Food and beverage		10,838			12,062
Other		1,703			2,062

Total revenues		49,176			57,972


Direct operating expenses:
Rooms		10,082			11,183
Food and beverage		7,638			8,819
Other		1,298			1,388

Total direct operating expenses		19,018			21,390

		30,158			36,582

Other operating expenses:
Other hotel operating costs		15,628			17,879
Property and other taxes, insurance, and leases		4,211			4,352
Corporate and other		3,605			5,885
Casualty losses, net		81			—
Depreciation and amortization		8,493			7,469
Impairment of long-lived assets		465			2,141

Total other operating expenses		32,483			37,726

Operating loss		(2,325	)		(1,144	)

Other income (expenses):
Interest income and other		45			390
Interest expense		(3,779	)		(5,172	)

Loss before income taxes and noncontrolling interest		(6,059	)		(5,926	)
Provision for income taxes — continuing operations		(72	)		(63	)

Loss from continuing operations		(6,131	)		(5,989	)


Discontinued operations:
Loss from discontinued operations before income taxes		(927	)		(1,357	)
Provision for income taxes — discontinued operations		(24	)		(172	)

Loss from discontinued operations		(951	)		(1,529	)


Net loss		(7,082	)		(7,518	)
Less: Net loss attributable to noncontrolling interest		160			—

Net loss attributable to common stock	$	(6,922	)	$	(7,518	)


Basic and diluted net loss per share attributable to common stock	$	(0.32	)	$	(0.33	)

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Attributable to Common Stock
											Accumulated								Total
					Additional						Other								Attributable						Total
	Common Stock				Paid-In			Accumulated			Comprehensive			Treasury Stock					to Common			Noncontrolling			Stockholders’
	Shares		Amount		Capital			Deficit			Income			Shares		Amount			Stock			Interest			Equity
	(Unaudited in thousands, except share data)
Balance, December 31, 2008		25,075,837	$	251	$	330,785		$	(105,246	)	$	1,262			3,806,000	$	(39,647	)	$	187,405		$	—		$	187,405
Amortization of unearned stock compensation		—		—		293			—			—			—		—			293			—			293
Issuance and vesting of nonvested shares		68,527		1		(1	)		—			—			—		—			—			—			—
Repurchases of treasury stock		—		—		—			—			—			19,417		(41	)		(41	)		—			(41	)
Comprehensive loss:
Net loss		—		—		—			(6,922	)		—			—		—			(6,922	)		(160	)		(7,082	)
Currency translation adjustments (related taxes estimated at nil)		—		—		—			—			(211	)		—		—			(211	)		—			(211	)

Total comprehensive loss																				(7,133	)		(160	)		(7,293	)

Balance, March 31, 2009		25,144,364	$	252	$	331,077		$	(112,168	)	$	1,051			3,825,417	$	(39,688	)	$	180,524		$	(160	)	$	180,364

Total comprehensive loss for the three months ended March 31, 2008 was $8.2 million. Accumulated other comprehensive income is comprised of currency translation adjustments.

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	March 31, 2009			March 31, 2008
	(unaudited in thousands)
Operating activities:
Net loss	$	(7,082	)	$	(7,518	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		8,493			7,481
Impairment of long-lived assets		1,220			2,464
Stock compensation expense		293			342
Casualty loss, net		81			—
Amortization of deferred financing costs		335			353
Changes in operating assets and liabilities:
Accounts receivable, net of allowances		(2,386	)		(3,027	)
Inventories		(46	)		(107	)
Prepaid expenses and other assets		3,715			202
Accounts payable		2,490			3,919
Other accrued liabilities		1,033			105
Advance deposits		920			837

Net cash provided by operating activities		9,066			5,051

Investing activities:
Capital improvements		(11,529	)		(15,587	)
Proceeds from sale of assets, net of related selling costs and note receivable from buyer		217			—
Withdrawals for capital expenditures		2,237			676
Payments related to casualty damage, net		(81	)		(133	)
Net decrease (increase) in restricted cash		69			(227	)
Other		(3	)		—

Net cash used in investing activities		(9,090	)		(15,271	)

Financing activities:
Proceeds from exercise of stock options		—			17
Principal payments on long-term debt		(1,244	)		(1,262	)
Purchases of treasury stock		(41	)		(13,043	)
Payments of deferred financing costs		(54	)		—
Other		—			(2	)

Net cash used in financing activities		(1,339	)		(14,290	)

Effect of exchange rate changes on cash		(27	)		(35	)

Net decrease in cash and cash equivalents		(1,390	)		(24,545	)
Cash and cash equivalents at beginning of year		20,454			54,389

Cash and cash equivalents at end of year	$	19,064		$	29,844


Supplemental cash flow information:
Cash paid during the year for:
Interest, net of the amounts capitalized shown below	$	3,747		$	5,612
Interest capitalized		77			136
Income taxes, net of refunds		185			51
Supplemental disclosure of non-cash investing and financing activities:
Treasury stock repurchases traded, but not settled		—			879
Purchases of property and equipment on account		2,921			3,657
Note receivable from buyer of sold hotel		1,850			—

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Business Summary

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

As of March 31, 2009, the Company operated 40 hotels with an aggregate of 7,448 rooms, located in 22 states and Canada. Of the 40 hotels, 35 hotels, with an aggregate of 6,655 rooms, were held for use, while 5 hotels with an aggregate of 793 rooms, were held for sale. The Company consolidated all of these hotels in its financial statements. All hotels were wholly owned and operated through subsidiaries, except for one hotel that was operated in a joint venture in the form of a limited partnership, in which a Lodgian subsidiary served as the general partner, had a 51% voting interest and exercised significant control.

As of March 31, 2009, the Company operated all but one of its hotels under franchises obtained from nationally recognized hospitality franchisors. The Company operated 20 hotels under franchises obtained from InterContinental Hotels Group (“IHG”) as franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn Express brands. The Company operated 12 hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, SpringHill Suites by Marriott and Residence Inn by Marriott brands. The Company operated an additional seven hotels under other nationally recognized brands.

2. General

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

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

In Management’s opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position as of March 31, 2009, the results of operations for the three months ended March 31, 2009 and March 31, 2008 and cash flows for the three months ended March 31, 2009 and March 31, 2008. The Company’s results for interim periods are not necessarily indicative of the results for the entire year. You should read these financial statements in conjunction with the consolidated financial statements and related notes included in the Form 10-K.

These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as discussed in Note 7, approximately $128 million of the Company’s outstanding mortgage debt is scheduled to mature in July 2009 and the current severe economic recession has negatively impacted the Company’s operating results, which affects operating cash flows as well as the ability to refinance the maturing indebtedness. In the absence of an extension, refinancing or repayment of the July 2009 debt, these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s management has engaged mortgage bankers to facilitate the refinancing process and to assist in negotiations with prospective lenders. Management is also negotiating to extend the maturing mortgage debt. However, management can provide no assurance that the Company 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 the Company is unable to continue as a going concern.

In the preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP), the Company makes estimates and assumptions which affect:

	•		the reported amounts of assets and liabilities;

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

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

Actual results could differ from those estimates.

3. Stock-Based Compensation

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

The following schedule summarizes the activity for the three months ended March 31, 2009:


	Issued Under the Stock
	Incentive Plan
Available under the plan, less previously issued as of December 31, 2008		2,499,921
Nonvested stock issued February 4, 2009		(286,503	)
Nonvested stock issued February 12, 2009		(20,000	)
Shares of nonvested stock withheld from awards to satisfy tax withholding obligations		19,417
Nonvested shares forfeited in 2009		67

Available for issuance, March 31, 2009		2,212,902

Stock Options

The outstanding stock options generally vest in three equal annual installments and expire ten years from the grant date. As of March 31, 2009, all outstanding stock options were fully vested. The exercise price of the awards is the average of the high and low market prices on the date of the grant. The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes-Merton option pricing model. There was no stock option activity during the three months ended March 31, 2009.

A summary of options outstanding and exercisable (vested) at March 31, 2009 is as follows:


	Options Outstanding and Exercisable
			Weighted Average		Weighted
			Remaining Life		Average
Range of prices	Number		(In Years)		Exercise Price
$7.83 to $9.39		73,663		6.1	$	9.05
$9.40 to $10.96		72,587		5.3	$	10.51
$10.97 to $15.66		28,661		4.4	$	15.21

		174,911		5.5	$	10.66

The aggregate intrinsic value of stock options outstanding and exercisable at March 31, 2009 was nil.

Nonvested Stock

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

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

On March 16, 2009, the Committee approved the Lodgian, Inc. Executive Incentive Plan (the “Revised Plan”), which supersedes and replaces the Lodgian, Inc. Amended and Restated Executive Incentive Plan adopted by the Company on April 11, 2008 (the “Previous Plan”). The Revised Plan provides for potential nonvested stock awards to certain of the Company’s key employees, as determined by the Committee. The potential awards for the 2009 calendar year will be awarded on or before March 15, 2010 and vest in two equal annual installments. The potential awards are divided into three categories. The first category of awards will be awarded upon the employee satisfying certain service conditions. The second category will be awarded dependent upon the Company’s stock price performance in relation to a peer group of selected companies. The third category will be awarded dependent upon the Company’s achievement of certain performance conditions. The Company recorded compensation expense totaling $6,000 during the three months ended March 31, 2009 based upon the assumed issuance of 243,342 shares of nonvested stock, with an estimated grant-date fair value of $2.10 per share.

A summary of nonvested stock activity during the three months ended March 31, 2009 is as follows:


				Weighted
				Average
	Nonvested			Grant Date
	Stock			Fair Value
Balance, December 31, 2008		133,474		$	10.41
Granted		306,503			2.62
Forfeited		(67	)		8.90
Vested		(68,527	)		10.71

Balance, March 31, 2009		371,383		$	3.93

The aggregate fair value of nonvested stock awards that vested during the three months ended March 31, 2009 was $0.1 million.

A summary of unrecognized compensation expense and the remaining weighted-average amortization period as of March 31, 2009 is as follows:


	Unrecognized		Weighted-Average
	Compensation		Amortization
Type of Award	Expense ($000’s)		Period (in years)
	(unaudited in thousands)
Nonvested Stock	$	1,076		1.41
Revised Plan Nonvested Stock Awards		434		2.96

Total	$	1,510		1.86

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Accounting for Stock-Based Compensation”, the Company records compensation expense based on estimated forfeitures and revises compensation expense, if necessary, in subsequent periods if actual forfeitures differ from those estimates. During the three months ended March 31, 2009, the Company determined that the actual forfeiture rate for certain stock awards was lower than previously estimated. As a result, the Company recorded a $45,000 adjustment to increase compensation expense related to those stock awards.

Compensation expense for the three months ended March 31, 2009 and 2008 is summarized below:


	Three Months Ended March 31, 2009				Three Months Ended March 31, 2008
	Compensation		Income Tax		Compensation		Income Tax
Type of Award	Expense		Benefit		Expense		Benefit
	(unaudited in thousands)
Stock Options	$	—	$	—	$	74	$	29
Nonvested Stock		287		111		268		104
Revised Plan Nonvested Stock Awards		6		2		—		—

Total	$	293	$	113	$	342	$	133

4. Treasury Stock

During the three months ended March 31, 2009, 68,527 shares of nonvested stock awards vested, of which 19,417 shares were withheld to satisfy tax obligations and were included in the treasury stock balance of the Company’s balance sheet. The aggregate cost of these shares was approximately $41,000.

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

5. Dispositions and Discontinued Operations

Dispositions

On March 4, 2009, the Company sold the Holiday Inn in East Hartford, CT for a gross sales price of $3.5 million. In accordance with the terms of the agreement, the Company extended seller financing totaling $1.9 million and paid $1.6 million to acquire the land from the lessor.

Assets Held for Sale and Discontinued Operations

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

	a)		Management commits to a plan to sell the asset;

	b)		The asset is available for immediate sale in its present condition;

	c)		An active marketing plan to sell the asset at a reasonable price has been initiated;

	d)		The sale of the asset is probable within one year; and

	e)		It is unlikely that significant changes to the plan to sell the asset will be made.

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

In accordance with SFAS No. 144, the Company has included the hotel assets sold as well as the hotel assets held for sale (including any related impairment charges) in Discontinued Operations in the related Condensed Consolidated Statements of Operations. The assets held for sale at March 31, 2009 and December 31, 2008 and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheets. All losses and gains on assets sold and held for sale (including any related impairment charges) are included in “Income (loss) from discontinued operations before income taxes” in the Condensed Consolidated Statement of Operations. The amount the Company will ultimately realize on these asset sales could differ from the amount recorded in the financial statements.

Consistent with the accounting policy on asset impairment, and in accordance with SFAS No. 144, the reclassification of assets from held for use to held for sale requires a determination of fair value less costs of sale. The fair value of the held for sale asset is based on the estimated selling price less estimated costs to sell. Management’s estimate of the fair value of an asset is generally based on a number of factors, including letters of intent or other indications of value from prospective buyers, or, in the absence of such, the opinions of third-party brokers or appraisers. While management may consider one or more opinions or appraisals in arriving at an asset’s estimated fair value, the estimate is ultimately based on management’s determination and management remains responsible for the impact of the estimate on the financial statements. The estimated selling costs are generally based on the Company’s experience

with similar asset sales. The Company records impairment charges and writes down respective hotel assets if their carrying values exceed the estimated selling prices less costs to sell.

The impairment of long-lived assets held for sale of $0.8 million recorded during the three months ended March 31, 2009 included the following (amounts below are individually rounded):

	•		$0.7 million on the Holiday Inn Select in Windsor, Ontario, Canada to reflect the current estimated selling price, net of selling costs; and

	•		$0.1 million to record the disposal of replaced assets at various hotels.

The impairment of long-lived assets held for sale of $0.3 million recorded during the three months ended March 31, 2008 related to the Hilton Northfield, MI to reflect the estimated selling price, net of selling costs.

Assets held for sale consist primarily of property and equipment, net of accumulated depreciation. Liabilities related to assets held for sale consist primarily of accounts payable, other accrued liabilities and long term debt. At March 31, 2009, the held for sale portfolio consisted of the following 5 hotels:

	•		French Quarter Suites Memphis, TN

	•		Hilton Northfield, MI

	•		Holiday Inn Cromwell Bridge, MD

	•		Holiday Inn Phoenix, AZ

	•		Holiday Inn Select Windsor, Ontario, Canada

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


	March 31, 2009		December 31, 2008
	(Unaudited in thousands)
Property and equipment, net	$	28,910	$	31,351
Other assets		1,603		1,670

Assets held for sale	$	30,513	$	33,021


Other liabilities	$	7,335	$	6,886
Long-term debt		9,227		9,281

Liabilities related to assets held for sale	$	16,562	$	16,167

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


	Three Months Ended March 31,
	2009			2008
	(Unaudited in thousands)
Total revenues		4,226			9,587
Total expenses		(4,178	)		(10,155	)
Impairment of long-lived assets		(755	)		(323	)
Interest income and other		1			9
Interest expense		(221	)		(475	)
Provision for income taxes		(24	)		(172	)

Loss from discontinued operations	$	(951	)	$	(1,529	)

In addition to the assets held for sale listed above, the hotels that were sold prior to March 31, 2009 were included in the statement of operations for discontinued operations for 2008.

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

6. Income (Loss) Per Share

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


	Three Months Ended March 31,
	2009			2008
	(Unaudited in thousands,
	except per share data)
Numerator:
Loss from continuing operations	$	(6,131	)	$	(5,989	)
Less: Net loss attributable to noncontrolling interest		160			—

Loss from continuing operations attributable to common stock		(5,971	)		(5,989	)
Loss from discontinued operations		(951	)		(1,529	)

Net loss attributable to common stock	$	(6,922	)	$	(7,518	)


Denominator:
Basic and diluted weighted average shares		21,301			22,644


Basic and diluted loss per common share:
Loss from continuing operations	$	(0.28	)	$	(0.26	)
Loss from discontinued operations		(0.04	)		(0.07	)

Net loss attributable to common stock	$	(0.32	)	$	(0.33	)

For the three months ended March 31, 2009, the Company did not include the shares associated with the assumed exercise of stock options (options to acquire 174,911 shares of common stock), the assumed conversion of 371,383 shares of nonvested stock, the assumed issuance of 243,342 shares of Revised Plan nonvested stock awards, and the assumed conversion of Class B warrants (rights to acquire 343,122 shares of common stock) because their inclusion would have been antidilutive.

For the three months ended March 31, 2008, the Company did not include the shares associated with the assumed exercise of stock options (options to acquire 197,910 shares of common stock), the assumed conversion of 160,144 shares of nonvested stock, and the assumed conversion of Class B warrants (rights to acquire 343,122 shares of common stock) because their inclusion would have been antidilutive.

7. Long-Term Liabilities

As of March 31, 2009, 35 of the Company’s 40 hotels are pledged as collateral for long-term obligations. Certain mortgage notes are subject to prepayment, yield maintenance, or defeasance obligations if the Company repays them prior to their maturity. Approximately 49% of the mortgage debt bears interest at fixed rates and approximately 51% of the mortgage debt is subject to floating rates of interest.

The mortgage notes also subject the Company to certain financial covenants, including leverage and coverage ratios. As of March 31, 2009, the Company was in compliance with all of its financial debt covenants, except for the debt yield ratios related to the Merrill Lynch Fixed Pools 3 and 4, with outstanding principal balances of $52.7 million and $35.8 million, respectively. The breach of these covenants, if not cured or waived by the lender, could lead to the declaration of a “cash trap” by the lender whereby excess cash flows produced by the mortgaged hotels securing the applicable loans (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) could be placed in a restricted cash account. The funds held in the restricted cash account may be used for capital expenditures reasonably approved by the loan servicer.

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

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


	March 31, 2009									December 31, 2008
	Number			Property, plant			Long-term			Long-term
	of Hotels			and equipment, net			obligations			obligations			Interest rates at March 31, 2009
							($ unaudited in thousands)
Mortgage Debt
Goldman Sachs		10		$	122,713		$	130,000		$	130,000		LIBOR plus 1.50%; capped at 8.50%
Merrill Lynch Mortgage Lending, Inc. Fixed Pool 1		4			67,237			39,016			39,372		6.58%
Merrill Lynch Mortgage Lending, Inc. Fixed Pool 3		7			81,459			52,747			53,031		6.58%
Merrill Lynch Mortgage Lending, Inc. Fixed Pool 4		6			83,551			35,775			35,984		6.58%
IXIS		3			19,064			20,903			20,977		LIBOR plus 2.95%; capped at 7.45%
IXIS		1			16,476			18,471			18,530		LIBOR plus 2.90%; capped at 7.90%
Wachovia		1			12,672			16,412			16,501		6.04%
Wachovia		1			7,942			9,427			9,478		6.03%
Wachovia		1			5,603			5,736			5,767		6.04%
Wachovia		1			5,863			2,971			2,988		5.78%

Total		35			422,580			331,458			332,628		4.38% ⁽¹⁾

Long-term liabilities — other
Tax notes issued pursuant to our Joint Plan of Reorganization		—			—			16			42
Other		—			—			1,288			1,342

		—			—			1,304			1,384

Property, plant and equipment — Unencumbered		5			52,768			—			—

		40			475,348			332,762			334,012
Held for sale		(5	)		(28,910	)		(14,174	)		(14,257	)

Held for use (2)		35		$	446,438		$	318,588		$	319,755


(1)		The rate represents the annual effective weighted average cost of debt at March 31, 2009.

(2)		Long-term debt obligations at March 31, 2009 and December 31, 2008 include the current portion of $124.1 million and $125.0 million, respectively.

The Merrill Lynch loans, with an aggregate principal balance of $127.5 million as of March 31, 2009, mature in July 2009. As such, the Company has classified these loans as current in the Condensed Consolidated Balance Sheet as of March 31, 2009. The Merrill Lynch loans are scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. To address the pending maturities in July 2009, the Company is also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. To date, the Company has been unable to secure refinancing and, in light of the current credit markets generally and the real estate credit markets specifically, management expects it to remain difficult to refinance the mortgage debt prior to the July 2009 maturity date. Management cannot currently predict whether these efforts will be successful. See Note 2 for additional discussion regarding this debt.

The Goldman Sachs loan, with a principal balance of $130.0 million as of March 31, 2009, matures in May 2009. However, the loan agreement provides the Company with the option to extend the loan for three additional one-year periods, based upon certain conditions. The Company exercised the first option on the loan, which extended the term to May 2010 and as such has classified this loan as long term in the Condensed Consolidated Balance Sheet as of March 31, 2009.

The Company has two mortgage loans with IXIS. One of these loans, with a principal balance of $18.5 million as of March 31, 2009, matured in December 2007. The Company exercised the first and second of three available one-year extensions, which extended the maturity date of the loan to December 9, 2009. The Company has the ability and the intent to exercise the remaining extension option, which would extend the maturity date to December 2010. As such, the Company has classified this loan as long term in the Condensed Consolidated Balance Sheets as of March 31, 2009. The second mortgage loan with IXIS, with a principal balance of $20.9 million as of March 31, 2009, matured in March 2008. The Company exercised the first and second of three available one-year extensions, which extended the maturity date of the loan to March 2010. The Company has the ability and intent to exercise the remaining extension option, which would extend the maturity date to March 2011. As such, the Company has classified this loan as long term in the Condensed Consolidated Balance Sheet as of March 31, 2009.

8. Commitments and Contingencies

Franchise Agreements and Capital Expenditures

The Company benefits from the superior brand qualities of Crowne Plaza, Holiday Inn, Marriott, Hilton and other brands. Included in the benefits of these brands are their reputations for quality and service, revenue generation through their central reservation systems, access to revenue through the global distribution systems, guest loyalty programs and brand Internet booking sites.

To obtain these franchise affiliations, the Company has entered into franchise agreements with various hotel chains which require annual payments for license fees, reservation services and advertising fees. The license agreements generally have original terms of 10 to 20 years. As part of the franchise agreements, the Company is generally required to pay a royalty fee, an advertising/marketing fee, a fee for the use of the franchisor’s nationwide reservation system and certain ancillary charges. These costs vary with revenues and are not fixed commitments. Franchise fees incurred (which are reported in other hotel operating costs in the Condensed Consolidated Statement of Operations) for the three months ended March 31, 2009 and 2008 were as follows:


	Three Months Ended March 31,
	2009		2008
	(Unaudited in thousands)
Continuing operations	$	3,677	$	4,077
Discontinued operations		343		756

	$	4,020	$	4,833

During the terms of the franchise agreements, the franchisors may require the Company to upgrade facilities to comply with current standards. The Company’s franchise agreements terminate at various times and have differing remaining terms. For example, the terms of one, two and two of the franchise agreements for the held for use hotels are scheduled to expire in each of 2009, 2010, and 2011, respectively. Two franchise agreements for the held for sale hotels are scheduled to expire in 2009. In connection with renewals, the franchisor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facilities, or the franchisor may elect not to renew the franchise. The costs incurred in connection with these agreements are primarily monthly payments due to the franchisors based on a percentage of gross room revenues.

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

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

	•		One hotel is not in compliance of the franchise agreement because of substandard guest satisfaction scores. If the Company does not achieve scores above the required thresholds by July 2009, this hotel could be placed in default by the franchisor. However, since the Company recently completed some renovations at the hotel and is following an action plan for improvement, the Company anticipates that it will cure the failure by the required date.

	•		One hotel is in default of the franchise agreement for failure to complete a Property Improvement Plan. If the Company does not cure the default by June 2009, the hotel’s franchise agreement could be terminated by the franchisor. This hotel is also in default of the franchise agreement because of substandard guest satisfaction scores. If the Company does not achieve scores above the required thresholds by June 2009, the hotel’s franchise agreement could be subject to termination by the franchisor. However, since the hotel is currently under renovation, the Company anticipates that it will be given additional time to cure the default.

	•		One hotel is in default with some of the terms of the franchise agreement because of substandard guest scores. If the Company does not achieve scores above the required quality thresholds by July 2009, the hotel’s franchise agreement could be subject to termination by the franchisor. However, the Company has met with the franchisor, is following a specific action plan for improvement, and anticipates that it will cure the failure by the required cure date.

•

The Company is anticipating cure letters for two hotels to be delivered no later than February 2010.

The corporate operations team, as well as each property’s general manager and associates, have focused their efforts to cure each of these non-compliance or default issues through enhanced service and product improvements by the required cure date. The Company believes that it will cure the non-compliance and defaults for continuing operations hotels for which the franchisors have given notice before the applicable termination dates, except for one hotel which is in default for failure to complete a Property Improvement Plan. The Company will continue to work with the franchisor to extend the default cure period, if necessary. The Company cannot provide assurance that it will be able to complete the action plans (which are estimated to cost approximately $2.5 million for the capital improvements portion of the action plans of which $1.0 million had been spent as of March 31, 2009) to cure the alleged instances of noncompliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or noncompliance.

Also, the Company’s loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more such agreements. The three hotels that are in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of $199.2 million of mortgage debt as of March 31, 2009.

To comply with the requirements of its franchisors and to improve its competitive position in individual markets, the Company plans to spend between $22 and $24 million on its hotels in 2009, depending on the determined courses of action following our ongoing diligence and analysis.

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

Letters of Credit

As of March 31, 2009, the Company had three irrevocable letters of credit totaling $5.0 million which were fully collateralized by cash. The cash is classified as restricted cash in the accompanying Condensed Consolidated Balance Sheets. The letters of credit serve as guarantees for self-insured losses and certain utility and liquor bonds and will expire in September 2009, November 2009, and January 2010, but may be renewed beyond those dates.

Self-insurance

The Company is self-insured up to certain limits with respect to employee medical, employee dental, general liability insurance, personal injury claims, workers’ compensation and auto liability. The Company establishes liabilities for these self-insured obligations annually, based on actuarial valuations and its history of claims. If these claims escalate beyond the Company’s expectations, this could have a negative impact on its future financial condition and results of operations. At March 31, 2009 and December 31, 2008, the Company had accrued $10.3 million and $10.4 million, respectively, for these liabilities.

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

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

Casualty gains (losses) and business interruption insurance

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

Litigation

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

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

9. Income Taxes

For the year ended December 31, 2008, the Company has an estimated taxable loss of $3.4 million. Because the Company has net operating losses available for federal income tax purposes and preference item deductions related to the sale of properties, no federal income taxes or alternative minimum taxes are anticipated for the year ended December 31, 2008. A net loss was reported for federal income tax purposes for the year ended December 31, 2007 and no federal income taxes were paid. At December 31, 2008, net operating loss carryforwards of $377.7 million were available for federal income tax purposes of which $223.0 million were available for use. The net operating losses will expire in years 2018 through 2028. The 2002 reorganization under Chapter 11 and 2004 secondary stock offering resulted in “ownership changes,” as defined in Section 382 of the Internal Revenue Code. As a result of the most recent Section 382 ownership change, the Company’s ability to utilize net operating loss carryforwards generated prior to June 24, 2004 is subject to an annual limitation of $8.3 million. Net operating loss carryforwards generated during the 2004 calendar year after June 24, 2004 as well as those generated during the 2005 calendar year, are generally not subject to Section 382 limitations to the extent the losses generated are not recognized built in losses. At the June 24, 2004 ownership change date the Company had a Net Unrealized Built in Loss “NUBIL” of $150 million. As of December 31, 2008, $95.7 million of the NUBIL has been recognized. The amount of losses subject to Section 382 limitations is $ 171.5 million; losses not subject to 382 limitations are $51.5 million. No ownership changes have occurred during the period June 25, 2004 through December 31, 2008.

In 2009, the Company may be subject to Federal income tax under the alternative minimum tax system. The current year’s taxable income, if applicable, would be sheltered by net operating loss carryforwards subject to limitation.

Furthermore, at December 31, 2008, a valuation allowance of $64.1 million fully offset the Company’s net deferred tax asset. At March 31, 2009, net operating loss carryforwards of $223.0 million were reported for federal income tax purposes, which will expire in years 2018 through 2028 and reflect only those losses available for use.

The Company was required to adopt the provisions of FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes” with respect to all the Company’s tax positions as of January 1, 2007. While FIN 48 was effective on January 1, 2007, the new standards apply to all open tax years. The only major tax jurisdiction in which the Company files income taxes is Federal. The tax years which are open for examination are calendar years ended 1992, 1998, 1999, 2000, 2001 and 2003, due to losses generated that may be utilized in current or future filings. Additionally, the statutes of limitation for calendar years ended 2004, 2005, 2006 and 2007 remain open. The Company has no significant unrecognized tax benefits; therefore, the adoption of FIN 48 had no impact on the Company’s financial statements. Additionally, no increases in unrecognized tax benefits are expected in the year 2009. Interest and penalties on unrecognized tax benefits will be classified as income tax expense if recorded in a future period. In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which is a revision of SFAS 141 “Business Combinations”. SFAS No. 141(R) significantly changes the accounting for business combinations as described in Note 10. The Company has $64.1 million of deferred tax assets fully offset by a valuation allowance. The balance of the $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the effective date for SFAS 141(R), such reduction will affect the income tax provision in the period of release.

10. Recent Accounting Pronouncements

Recently Adopted Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 was effective in financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position FAS 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted the provisions of SFAS No. 157 for financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements at least annually. Since the Company’s existing fair value measurements are consistent with

the provisions of SFAS No. 157, and are not significant, the partial adoption did not have a material impact on the Company’s financial statements.

The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as follows:


Level 1		Quoted prices for identical instruments in active markets at the measurement date.

Level 2		Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.

Level 3		Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The Company adopted the deferred portion of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities on January 1, 2009. The adoption did not have a material impact on the Company’s financial statements.

The following table outlines, for each major category of assets and liabilities measured at fair value on a nonrecurring basis, the fair value as of March 31, 2009, as defined by the SFAS No. 157 hierarchy:

Fair Value Measurements at Reporting Date Using

(unaudited in thousands)

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Total Gains

Description

March 31, 2009

(Level 1)

(Level 2)

(Level 3)

(Losses)

Real Estate Assets — Held for Sale Hotels

14,405

—

5,605

8,800

(660

)

The Company recorded fair value measurement adjustments of ($0.7) million at March 31, 2009, to reflect the current fair market value of its held for sale assets. Consistent with the accounting policy on asset impairment, and in accordance with SFAS No. 144, the classification of assets from held for use to held for sale requires a determination of fair value less costs of sale. The fair values of the assets held for sale are based on the estimated selling prices less estimated costs to sell. The Company’s estimate of the fair value of an asset is based a number of factors, including letters of intent or other indications of value from prospective buyers (Level 2 inputs), or, in the absence of such, the opinions of third-party brokers or appraisers (Level 3 inputs). The estimated selling costs are based on the Company’s experience with similar asset sales. The Company records an impairment charge and writes down a hotel asset’s carrying value if the carrying value exceeds the estimated selling price less costs to sell.

In December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141(R) significantly changes the accounting for business combinations. Under this statement, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Additionally, SFAS No. 141(R) includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted SFAS No. 141(R) on January 1, 2009. The adoption did not have a material impact on the results of operations and financial condition. The balance of the $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the effective date for SFAS 141(R), such reduction will affect the income tax provision in the period of release.

is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company adopted the provisions of SFAS No. 160 on January 1, 2009. As a result of the adoption, the Company recorded noncontrolling interest as a component of equity in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Stockholders’ Equity, and the net loss attributable to noncontrolling interests has been separately recorded in the Condensed Consolidated Statement of Operations.

The following table illustrates the effect (in thousands, except per share amounts) on net income and earnings per share for the three months ended March 31, 2008 as if the provisions of SFAS No. 160 were applied:


Loss from continuing operations	$	(5,989	)
Less: Net income attributable to noncontrolling interest		(225	)

Loss from continuing operations attributable to common stock		(6,214	)
Loss from discontinued operations		(1,529	)

Net loss attributable to common stock	$	(7,743	)

Denominator
Basic and diluted weighted average shares		22,644


Basic and diluted loss per common share:
Loss from continuing operations	$	(0.27	)
Loss from discontinued operations		(0.07	)

Net loss attributable to common stock	$	(0.34	)

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment to SFAS No. 133.” The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. The Statement is effective for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the provisions of SFAS 161 on January 1, 2009. The adoption did not have a material impact on the results of operations and financial condition.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”) to address whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as specified in FASB Statement No. 128, “Earnings per Share”. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company adopted the provisions of FSP EITF 03-6-1 on January 1, 2009. The adoption did not have a material impact on its results of operations and financial condition.

In June 2008, the FASB issued FASB Staff Position No. FAS 133-1 and FIN 45-4 “Disclosures about Credit Derivatives and Certain Guarantees — An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP No. FAS 133-1”) to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also clarifies the FASB’s intent about the effective date of SFAS No. 161. This FSP clarifies the FASB’s intent that the disclosures required by Statement 161 should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008. FSP No. FAS 133-1 is effective for financial statements issued for fiscal years ending after November 15, 2008. The Company adopted the provisions of FSP No. FAS 133-1 on January 1, 2009. The adoption did not have a material impact on its disclosures, results of operations and financial condition.

In April 2009, the FASB issued FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”), which amends the guidance in FASB Statement No. 141 (Revised December 2007), “Business Combinations”, to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB Statement No. 5, “Accounting for Contingencies”, and FASB Interpretation (FIN) No. 14, “Reasonable Estimation of the Amount of a Loss”. Further, the FASB decided to remove the subsequent accounting guidance for assets and liabilities arising from contingencies from Statement 141R, and carry forward without significant revision the guidance in FASB Statement No. 141, “Business Combinations”. FSP FAS 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the provisions of FSP FAS 141(R)-1 as of January 1, 2009. The adoption did not have a material impact on its results of operations and financial condition.

Recently Issued Pronouncements

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”), which provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. The Company is in the process of evaluating the impact the adoption of FSP 157-4 will have on the results of operations and financial condition.

In April 2009, the FASB issued FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which changes existing guidance for determining whether an impairment is other than temporary to debt securities. FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4. The Company is in the process of evaluating the impact the adoption of FSP FAS 115-2 and FAS 124-2 will have on the results of operations and financial condition.

In April 2009, the FASB issued FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. However, an entity may early adopt these interim fair value disclosure requirements only if it also elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. The Company is in the process of evaluating the impact the adoption of FSP FAS 107-1 and APB 28-1 will have on the results of operations and financial condition.

11. Subsequent Events

On April 21, 2009, the Company sold the Holiday Inn Select Windsor, Ontario, Canada for a gross sales price of $5.6 million. The net proceeds, after paying settlement costs, were used for general corporate purposes.

On April 27, 2009, the Company notified the lender for the Holiday Inn Phoenix, AZ that it intends to surrender the hotel to the lender as it is the Company’s belief that the hotel is worth less than the $9.4 million of mortgage debt encumbering the hotel. Management believes it is unlikely that the value of the hotel will increase in the near or intermediate term. To date, the Company’s efforts to sell this hotel have been unsuccessful, and the hotel’s operating performance continues to decline, primarily due to oversupply in the local market. The mortgage debt on this hotel is non-recourse to Lodgian, except in certain limited circumstances and is not cross-collateralized with any other of the Company’s mortgage debt.

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

You should read the discussion below in conjunction with the unaudited condensed consolidated financial statements and accompanying notes, set forth in “Item I. Financial Statements” included in this Form 10-Q. Also, the discussion which follows contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in our Form 10-K for the year ended December 31, 2008. The terms “Company”, “we”, “us” and “our” mean Lodgian and its wholly owned subsidiaries.

Executive Overview

We are one of the largest independent hotel owners and operators in the United States in terms of our number of guest rooms, according to Hotel Business. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as “Crowne Plaza”, “Four Points by Sheraton”, “Hilton”, “Holiday Inn”, “Marriott” and “Wyndham”. Our hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale, upscale and upper upscale market segments of the lodging industry. We believe that these strong national brands afford us many benefits such as guest loyalty and market share premiums.

As of March 31, 2009, we operated 40 hotels with an aggregate of 7,448 rooms, located in 22 states and Canada. Of the 40 hotels, 35 hotels, with an aggregate of 6,655 rooms, were held for use, while 5 hotels with an aggregate of 793 rooms, were held for sale. We consolidated all of these hotels in our financial statements. All of our hotels were wholly-owned and operated through subsidiaries, except for one hotel that we operated in a joint venture in the form of a limited partnership, in which a Lodgian subsidiary served as the general partner, had a 51% voting interest and exercised significant control.

As of March 31, 2009, we operated all but one of our hotels under franchises obtained from nationally recognized hospitality franchisors. We operated 20 hotels under franchises obtained from InterContinental Hotels Group (“IHG”) as franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select, and Holiday Inn Express brands. We operated 12 hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, Springhill Suites by Marriott, and Residence Inn by Marriott brands. We operated an additional seven hotels under other nationally recognized brands.

As of March 31, 2009, we had $331.5 million of total mortgage obligations outstanding, including the current portion. This mortgage indebtedness is secured by interests in certain of our hotel properties. Approximately $128 million of this mortgage debt is scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. To address the pending maturities, we are also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. 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 July 2009 maturity date. We cannot currently predict whether our efforts to refinance or extend the maturing debt will be successful. See “Part II. Other Information, Item 1A. Risk Factors” for additional information.

Overview of Continuing Operations

Below is an overview of our results of operations for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008, which are presented in more detail in “Results of Operations — Continuing Operations:”

	•		First quarter revenues decreased $8.8 million or 15.2%. Rooms revenues decreased $7.2 million, or 16.5%, as occupancy and average daily rate decreased 7.8% and 8.3%, respectively. Food and beverage revenues declined $1.2 million, driven largely by fewer banquets.

	•		Operating loss increased $1.2 million. We realized the benefits of several cost containment initiatives as total operating expenses decreased $7.6 million, or 12.9%. However, these initiatives did not fully offset the $8.8 million decline in revenues since many of our operating costs are fixed in nature.

Overview of Discontinued Operations

The Condensed Consolidated Statements of Operations for discontinued operations for the three months ended March 31, 2009 and 2008 include the results of operations for the five hotels classified as held for sale at March 31, 2009, as well as all properties that have been sold in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).

The assets held for sale at March 31, 2009 and December 31, 2008 and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it

within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of March 31, 2009 remain properly classified in accordance with SFAS No. 144.

Where the carrying values of the assets held for sale exceeded the estimated fair values, net of selling costs, we reduced the carrying values and recorded impairment charges. During the three months ended March 31, 2009, we recorded impairment charges of $0.8 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 in SFAS No. 144. 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 GAAP. As we prepare our financial statements, we make estimates and assumptions which affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, approximately $128 million of outstanding mortgage debt is scheduled to mature in July 2009 and the current severe economic recession has negatively impacted our operating results, which affects operating cash flows as well as our ability to refinance the maturing indebtedness. In the absence of an extension, refinancing or repayment of the July 2009 debt, these factors raise substantial doubt as to our ability to continue as a going concern. We have engaged mortgage bankers to facilitate the refinancing process and to assist in negotiations with prospective lenders. Management is also negotiating to extend the maturing mortgage debt. However, management 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 included in our Annual Report on Form 10-K for the year ended December 31, 2008 (“Form 10-K”). In addition, our critical accounting policies and estimates are discussed in Item 7 of our Form 10-K, and we believe no material changes have occurred, except as discussed below.

In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS No. 160”), which is an amendment to ARB No. 51 “Consolidated Financial Statements”. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company adopted the provisions of SFAS No. 160 on January 1, 2009. As a result of the adoption, the Company recorded noncontrolling interest as a component of equity in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Stockholders’ Equity, and the net loss attributable to noncontrolling interests has been separately recorded in the Condensed Consolidated Statement of Operations.


Loss from continuing operations	$	(5,989	)
Less: Net income attributable to noncontrolling interest		(225	)

Loss from continuing operations attributable to common stock		(6,214	)
Loss from discontinued operations		(1,529	)

Net loss attributable to common stock	$	(7,743	)


Denominator
Basic and diluted weighted average shares		22,644


Basic and diluted loss per common share:
Loss from continuing operations	$	(0.27	)
Loss from discontinued operations		(0.07	)

Net loss attributable to common stock	$	(0.34	)

Income Statement Overview

The discussion below relates to our 35 continuing operations hotels for the three months ended March 31, 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Income Statement Overview” in our Form 10-K for a general description of the categorization of our revenues and expenses.

Results of Operations — Continuing Operations

The analysis below compares the results of operations for the three months ended March 31, 2009 and 2008.

Revenues — Continuing Operations


	Three Months Ended March 31,
	2009			2008			Increase (decrease)
	(unaudited in thousands)
Revenues:
Rooms	$	36,635		$	43,848		$	(7,213	)	(16.5	%)
Food and beverage		10,838			12,062			(1,224	)	(10.1	%)
Other		1,703			2,062			(359	)	(17.4	%)

Total revenues	$	49,176		$	57,972		$	(8,796	)	(15.2	%)


Occupancy		61.1	%		66.3	%				(7.8	%)
ADR	$	100.16		$	109.17		$	(9.01	)	(8.3	%)
RevPar	$	61.17		$	72.37		$	(11.20	)	(15.5	%)

Revenues for the first quarter of 2009 decreased $8.8 million or 15.2%. RevPAR decreased 15.5%. The decline in rooms revenues was the result of lower occupancy and ADR, driven by the economic recession. In spite of the challenging economic environment, we outperformed the U.S. lodging industry as a whole in the first quarter of 2009 as our RevPAR decreased 15.5%, compared to a decrease of 17.7% for the U.S. lodging industry, according to Smith Travel Research. Food and beverage revenues decreased 10.1%, driven by lower occupancy and a decline in banquet bookings as businesses reduced their spending on conferences and other events.

The first quarter of 2009 was adversely affected 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. The Company feels 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 first quarter of 2009 for three hotels under renovation was $0.7 million. In the first quarter of 2008, five hotels were under renovation, causing total revenue displacement of $0.9 million.

Direct operating expenses — Continuing Operations


												% of total revenues
	Three Months Ended March 31,											Three Months Ended March 31,
	2009			2008			Increase (decrease)					2009			2008
	(unaudited in thousands)
Direct operating expenses:
Rooms	$	10,082		$	11,183		$	(1,101	)	(9.8	%)		20.5	%		19.3	%
Food and beverage		7,638			8,819			(1,181	)	(13.4	%)		15.5	%		15.2	%
Other		1,298			1,388			(90	)	(6.5	%)		2.6	%		2.4	%

Total direct operating expenses	$	19,018		$	21,390		$	(2,372	)	(11.1	%)		38.7	%		36.9	%


Direct operating contribution (by revenue source):
Rooms	$	26,553		$	32,665		$	(6,112	)	(18.7	%)
Food and beverage		3,200			3,243			(43	)	(1.3	%)
Other		405			674			(269	)	(39.9	%)

Total direct operating contribution	$	30,158		$	36,582		$	(6,424	)	(17.6	%)


Direct operating contribution % (by revenue source):
Rooms		72.5	%		74.5	%
Food and beverage		29.5	%		26.9	%
Other		23.8	%		32.7	%

Total direct operating contribution		61.3	%		63.1	%

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 Securities and Exchange Commission (“SEC”) rules. For instance, we use the term direct operating contribution to mean total revenues less total direct operating expenses as presented in the Condensed 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 management 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, provides useful information to management.

Total direct operating expenses decreased $2.4 million, or 11.1%. 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. We also benefited from a reduction in medical and workers compensation insurance costs driven largely by lower claims. 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 61.3% in 2009.

Rooms expenses decreased $1.1 million, or 9.8%. Labor costs declined $0.5 million and medical and workers compensation insurance costs decreased $0.3 million. In addition, travel agent commissions declined $0.2 million and supplies decreased $0.1 million, due largely to lower occupancy.

Food and beverage expenses decreased $1.2 million or 13.4%, driven by lower payroll costs of $0.8 million, lower cost of goods of $0.2 million driven by a decline in sales, and a reduction in medical and workers compensation insurance costs of $0.2 million.

Other operating expenses and operating income — Continuing Operations


												% of total revenues
	Three Months Ended March 31,											Three Months Ended March 31,
	2009			2008			Increase (decrease)					2009			2008
	(unaudited in thousands)
Other operating expenses:
Other hotel operating costs
General and administrative	$	3,485		$	3,999		$	(514	)	(12.9	%)		7.1	%		6.9	%
Advertising and promotion		2,619			3,460			(841	)	(24.3	%)		5.3	%		6.0	%
Franchise fees		3,677			4,077			(400	)	(9.8	%)		7.5	%		7.0	%
Repairs and maintenance		2,634			2,866			(232	)	(8.1	%)		5.4	%		4.9	%
Utilities		3,194			3,303			(109	)	(3.3	%)		6.5	%		5.7	%
Other expenses		19			174			(155	)	(89.1	%)		0.0	%		0.3	%

Other hotel operating costs		15,628			17,879		$	(2,251	)	(12.6	%)		31.8	%		30.8	%

Property and other taxes, insurance, and leases		4,211			4,352			(141	)	(3.2	%)		8.6	%		7.5	%
Corporate and other		3,605			5,885			(2,280	)	(38.7	%)		7.3	%		10.2	%
Casualty losses, net		81			—			81		n/m			0.2	%		0.0	%
Depreciation and amortization		8,493			7,469			1,024		13.7	%		17.3	%		12.9	%
Impairment of long-lived assets		465			2,141			(1,676	)	(78.3	%)		0.9	%		3.7	%

Total other operating expenses	$	32,483		$	37,726		$	(5,243	)	(13.9	%)		66.1	%		65.1	%



Total operating expenses	$	51,501		$	59,116		$	(7,615	)	(12.9	%)		104.7	%		102.0	%



Operating loss	$	(2,325	)	$	(1,144	)	$	(1,181	)	(103.2	%)		(4.7	%)		(2.0	%)

Operating loss increased $1.2 million. We realized the benefits of several cost containment initiatives as total operating expenses decreased $7.6 million, or 12.9%. However, these initiatives did not fully offset the $8.8 million decline in revenues since many of our operating costs are fixed in nature.

Other hotel operating costs decreased $2.3 million, or 12.6%. The decrease in other hotel operating costs was a result of the following factors:

	•		Hotel general and administrative costs decreased $0.5 million, or 12.9%. The decrease was primarily the result of lower labor costs of $0.2 million driven by initiatives to reduce our cost structure, a decline in medical and workers compensation insurance costs of $0.1 million, and a $0.1 million reduction in travel costs.

	•		Advertising and promotion costs decreased $0.8 million, or 24.3%, because of lower payroll costs of $0.5 million and lower costs associated with our medical and workers compensation insurance programs of $0.1 million. The remaining decrease was largely the result of cost containment initiatives.

	•		Repairs and maintenance decreased $0.2 million, or 8.1%, compared to the prior year primarily due to lower labor costs of $0.1 million and lower fuel costs of $0.1 million.

	•		Utilities decreased $0.1 million, or 3.3%, due to reduced consumption.

	•		Other expenses decreased $0.2 million. In the first quarter of 2008, we incurred costs associated with a hotel brand conversion. Such costs were not incurred in the first quarter of 2009.

Corporate and other costs decreased $2.3 million, or 38.7%. Corporate costs decreased $1.8 million, of which $1.1 million related to severance and related costs incurred in 2008 associated with the resignation of our former President and Chief Executive Officer. The remaining $0.7 million decrease in corporate costs was due largely to reductions in corporate staffing. Other costs decreased $0.5 million. In 2008, the Company paid a fee to its financial advisors, who were engaged to assist the Company in its review of strategic alternatives. The fee, which was allocated to the related hotels, allows the Company to sell those hotels without further obligation to its financial advisors.

Depreciation and amortization increased $1.0 million, or 13.7%, due primarily to the completion of certain renovation projects in 2008.

Impairment of long-lived assets decreased $1.7 million as a result of a decrease in the write-off of assets that were replaced during hotel renovations driven largely by fewer renovation projects.

Property and other taxes, insurance and leases decreased $0.1 million, or 3.2%. The decrease was almost entirely attributable to lower insurance costs as a result of lower claims and premiums.

Non-operating income (expenses) — Continuing Operations


	Three Months Ended March 31,
	2009			2008			Increase (decrease)
	(unaudited in thousands)
Non-operating income (expenses):
Interest income and other	$	45		$	390		$	(345	)	(88.5	%)
Interest expense		(3,779	)		(5,172	)		(1,393	)	(26.9	%)

Interest income decreased $0.3 million because of lower interest rates and lower average cash balances. Interest expense declined $1.4 million due to lower interest rates on our variable rate debt.

Results of Operations — Discontinued Operations

We recorded impairment on assets held for sale in the three months ended March 31, 2009 and 2008. The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down the carrying value of an asset if the carrying value exceeds the estimated selling price less costs to sell.

The impairment of long-lived assets held for sale of $0.8 million recorded during the three months ended March 31, 2009 included the following (amounts below are individually rounded):

	•		$0.7 million on the Holiday Inn Select in Windsor, Ontario, Canada to reflect the current estimated selling price, net of selling costs; and

	•		$0.1 million to record the disposal of replaced assets at various hotels.

Income Taxes

For the year ended December 31, 2008, we have an estimated taxable loss of $3.4 million. Because we had net operating losses available for federal income tax purposes and preference item deductions related to the sale of properties, no federal income tax or alternative minimum taxes were due for the year ended December 31, 2008. A net loss was reported for federal income tax purposes for the year ended December 31, 2007 and no federal income taxes were paid. At December 31, 2008, net operating loss carryforwards of $377.7 million were available for federal income tax purposes of which $223.0 million were available for use. The net operating losses will expire in years 2018 through 2028,. The 2002 reorganization under Chapter 11 and 2004 secondary stock offering resulted in “ownership changes,” as defined in Section 382 of the Internal Revenue Code. As a result of the most recent Section 382 ownership change, our ability to utilize net operating loss carryforwards generated prior to June 24, 2004 is subject to an annual limitation of $8.3 million. Net operating loss carryforwards generated during the 2004 calendar year after June 24, 2004 as well as those generated during the 2005 calendar year, are generally not subject to Section 382 limitations to the extent the losses generated are not recognized built in losses. At the June 24, 2004 ownership change date the Company had a Net Unrealized Built in Loss “NUBIL” of $150 million. As of December 31, 2008 $95.7 million of the NUBIL has been recognized. The amount of losses subject to Section 382 limitations is $171.4 million; losses not subject to 382 limitations are $51.5 million. No ownership changes have occurred during the period June 25, 2004 through December 31, 2008.

In 2009, we may be subject to Federal income tax under the alternative minimum tax system. The current year’s taxable income, if applicable, would be sheltered by net operating loss carryforwards subject to limitations.

Furthermore, at December 31, 2008, a valuation allowance of $64.1 million fully offset our net deferred tax asset. At March 31, 2009, net operating loss carryforwards of $223.0 million were reported for federal income tax purposes, which will expire in years 2018 through 2028 and reflect only those losses available for use.

We were required to adopt the provisions of FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes” with respect to all of our tax positions as of January 1, 2007. While FIN 48 was effective on January 1, 2007, the new standards apply to all open tax years. The only major tax jurisdiction in which we file income taxes is Federal. The tax years which are open for examination are calendar years ended 1992, 1998, 1999, 2000, 2001 and 2003, due to losses generated that may be utilized in current or future filings. Additionally, the statutes of limitation for calendar years ended 2004, 2005, 2006 and 2007 remain open. We have no significant unrecognized tax benefits; therefore, the adoption of FIN 48 had no impact on the Company’s financial statements. Additionally, no increases in unrecognized tax benefits are expected in the year 2009. Interest and penalties on unrecognized tax benefits will be classified as income tax expense if recorded in a future period. In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which is a revision of SFAS 141 “Business Combinations”. SFAS No. 141(R) significantly changes the accounting for business combinations. Under this statement, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Additionally, SFAS No. 141(R) includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. We have $64.1 million of deferred tax assets fully offset by a valuation allowance. The balance of the $64.1 million is primarily attributable to pre-emergence deferred tax assets. If the reduction of the valuation allowance attributable to pre-emergence deferred tax assets occurs subsequent to the effective date for SFAS 141(R), such reduction will affect the income tax provision in the period of release.

Additional Financial Information Regarding Quarterly Results of Our Continuing Operations

The following table presents certain quarterly data for our continuing operations for the eight quarters ended March 31, 2009. The data were derived from our unaudited condensed consolidated financial statements for the periods indicated. Our unaudited condensed consolidated financial statements were prepared on substantially the same basis as our audited consolidated financial statements and include all adjustments, consisting primarily of normal recurring adjustments we consider to be necessary to present fairly this information when read in conjunction with our consolidated financial statements. The results of operations for certain quarters may vary from the amounts previously reported on our Forms 10-Q filed for prior quarters due to timing of our identification of assets held for sale during the course of the previous eight quarters. The allocation of results of operations between our continuing operations and discontinued operations, at the time of the quarterly filings, was based on the assets held for sale, if any, as of the dates of those filings. This table represents the comparative quarterly operating results for the 35 hotels classified as held for use at March 31, 2009:


	2009			2008												2007
	First			Fourth			Third			Second			First			Fourth			Third			Second
	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter
	(unaudited in thousands)
Revenues:
Rooms	$	36,635		$	38,732		$	46,679		$	49,364		$	43,848		$	40,730		$	46,942		$	49,224
Food and beverage		10,838			13,532			12,545			15,404			12,062			14,429			12,857			15,323
Other		1,703			1,886			2,176			2,138			2,062			1,819			2,134			2,131

		49,176			54,150			61,400			66,906			57,972			56,978			61,933			66,678

Direct operating expenses:
Rooms		10,082			11,026			12,200			12,179			11,183			10,497			11,997			11,725
Food and beverage		7,638			9,015			9,070			9,851			8,819			9,054			9,432			9,918
Other		1,298			1,333			1,548			1,537			1,388			1,288			1,512			1,462

		19,018			21,374			22,818			23,567			21,390			20,839			22,941			23,105

		30,158			32,776			38,582			43,339			36,582			36,139			38,992			43,573
Other operating expenses:
Other hotel operating costs		15,628			16,075			18,287			17,719			17,879			16,285			17,847			17,603
Property and other taxes, insurance and leases		4,211			4,223			4,226			3,760			4,352			4,334			4,087			4,418
Corporate and other		3,605			3,063			4,373			3,484			5,885			4,248			5,575			5,906
Casualty losses (gain), net		81			1,152			(57	)		—			—			—			—			—
Restructuring		—			—			—			—			—			(25	)		1,258			—
Depreciation and amortization		8,493			8,352			8,120			7,989			7,469			7,464			7,226			7,098
Impairment of long-lived assets		465			354			1,393			5,580			2,141			796			512			155

Other operating expenses		32,483			33,219			36,342			38,532			37,726			33,102			36,505			35,180

Operating (loss) income		(2,325	)		(443	)		2,240			4,807			(1,144	)		3,037			2,487			8,393

Other income (expenses):
Interest income and other		45			147			241			276			390			912			1,312			807
Other interest expense		(3,779	)		(4,577	)		(4,821	)		(4,775	)		(5,172	)		(5,790	)		(5,958	)		(6,044	)
Loss on debt extinguishment		—			—			—			—			—			—			—			(3,330	)

(Loss) income before income taxes		(6,059	)		(4,873	)		(2,340	)		308			(5,926	)		(1,841	)		(2,159	)		(174	)
(Provision) benefit for income taxes — continuing operations		(72	)		(74	)		81			(24	)		(63	)		(2,262	)		1,027			372

(Loss) income from continuing operations		(6,131	)		(4,947	)		(2,259	)		284			(5,989	)		(4,103	)		(1,132	)		198

Discontinued operations:
(Loss) income from discontinued operations before income taxes		(927	)		199			(3,870	)		5,986			(1,357	)		(5,824	)		1,818			(248	)
(Provision) benefit for income taxes		(24	)		98			(54	)		97			(172	)		1,854			(639	)		(157	)

(Loss) income from discontinued operations		(951	)		297			(3,924	)		6,083			(1,529	)		(3,970	)		1,179			(405	)


Net (loss) income	$	(7,082	)	$	(4,650	)	$	(6,183	)	$	6,367		$	(7,518	)	$	(8,073	)	$	47		$	(207	)
Less: Net loss (income) attributable to noncontrolling interest		160			—			—			—			—			—			—			(56	)

Net (loss) income attributable to common stock		(6,922	)		(4,650	)		(6,183	)		6,367			(7,518	)		(8,073	)		47		$	(263	)

Hotel data by market segment and region

The following four tables include comparative data on occupancy, ADR and RevPAR for hotels in our portfolio as of March 31, 2009, except for the French Quarter Suites Memphis, TN, a held for sale (discontinued operations) hotel, which is closed. The number of properties and number of rooms disclosed in the tables are as of the end of the applicable period.

The market segment categories in the first two tables are based on the Smith Travel Research Chain Scales and are defined as:

	•		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, Holiday Inn Select; and

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

Combined Continuing and Discontinued Operations — 39 hotels (excludes the Memphis hotel)


	Three months ended
	March 31, 2009			March 31, 2008
Upper Upscale
Number of properties		4			4
Number of rooms		825			825
Occupancy		60.2	%		64.4	%
Average daily rate	$	112.27		$	119.02
RevPAR	$	67.60		$	76.68

Upscale
Number of properties		22			22
Number of rooms		4,049			4,049
Occupancy		66.5	%		69.3	%
Average daily rate	$	101.13		$	114.93
RevPAR	$	67.26		$	79.59

Midscale with Food & Beverage
Number of properties		11			11
Number of rooms		2,225			2,225
Occupancy		50.7	%		63.5	%
Average daily rate	$	90.71		$	91.97
RevPAR	$	45.95		$	58.37

Midscale without Food & Beverage
Number of properties		2			2
Number of rooms		244			244
Occupancy		44.4	%		55.6	%
Average daily rate	$	94.38		$	116.38
RevPAR	$	41.92		$	64.67

All Hotels
Number of properties		39			39
Number of rooms		7,343			7,343
Occupancy		60.3	%		66.5	%
Average daily rate	$	99.56		$	108.78
RevPAR	$	60.00		$	72.34

The regions in the following two tables are defined as:

	•		Northeast: Canada, Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania;

	•		Southeast: Florida, Georgia, Kentucky, Louisiana, North Carolina, South Carolina;

	•		Midwest: Arkansas, Indiana, Michigan, Oklahoma, Texas; and

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

Combined Continuing and Discontinued Operations — 39 hotels (excludes the Memphis hotel)


	Three months ended
	March 31, 2009			March 31, 2008
Northeast Region
Number of properties		15			15
Number of rooms		3,205			3,205
Occupancy		53.3	%		60.1	%
Average daily rate	$	101.42		$	104.77
RevPAR	$	54.04		$	63.00

Southeast Region
Number of properties		10			10
Number of rooms		1,624			1,624
Occupancy		65.4	%		68.5	%
Average daily rate	$	97.81		$	114.56
RevPAR	$	63.93		$	78.43

Midwest Region
Number of properties		8			8
Number of rooms		1,419			1,419
Occupancy		58.5	%		66.8	%
Average daily rate	$	91.91		$	98.00
RevPAR	$	53.81		$	65.43

West Region
Number of properties		6			6
Number of rooms		1,095			1,095
Occupancy		75.3	%		81.9	%
Average daily rate	$	105.69		$	121.55
RevPAR	$	79.64		$	99.51

All Hotels
Number of properties		39			39
Number of rooms		7,343			7,343
Occupancy		60.3	%		66.5	%
Average daily rate	$	99.56		$	108.78
RevPAR	$	60.00		$	72.34

Liquidity and Capital Resources

Working Capital

We use our cash flows primarily for operating expenses, debt service, and capital expenditures. Currently, our principal sources of liquidity consist of cash flows from operations, proceeds from the sale of assets, and existing cash balances.

Cash flows from operations may be adversely affected by factors such as the current severe economic recession, which is causing a reduction in demand for lodging, and displacement from large scale renovations being performed at our hotels. To the extent that significant amounts of our accounts receivable are due from airline companies, a further downturn in the airline industry also could materially and adversely affect the collectibility of our accounts receivable, and hence our liquidity. At March 31, 2009, airline receivables represented approximately 30% of our consolidated gross accounts receivable. A further downturn in the airline industry could also affect our revenues by decreasing the aggregate levels of demand for travel. Cash flows from operations may also be adversely affected if we are unable to extend or refinance our maturing mortgage debt, as discussed below. If we are unable to extend or refinance our maturing mortgage debt, we could trigger a default under the terms of the applicable mortgage debt agreement, forcing us to surrender the encumbered assets to the lender. This would, in turn, result in a decrease in our cash flows from operations. In addition, if we are able to extend or refinance our maturing mortgage debt, the terms of the extension could result in significantly higher debt service payments. We expect that the sale of certain assets will provide additional cash to pay down outstanding debt, fund a portion of our capital expenditures and provide additional working capital. At March 31, 2009, we had 5 hotels classified as held for sale. However, because of the deteriorating economic conditions, the proceeds from the sale of these assets could be lower than currently anticipated.

As of March 31, 2009, the Company was in compliance with all of its financial debt covenants, except for the debt yield ratios related to the Merrill Lynch Fixed Pools 3 and 4, with outstanding principal balances of $52.7 million and $35.8 million, respectively. The breach of these covenants, if not cured or waived by the lender, could lead to the declaration of a “cash trap” by the lender whereby excess cash flows produced by the mortgaged hotels securing the applicable loans (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) could be placed in a restricted cash account. The funds held in the restricted cash account may be used for capital expenditures reasonably approved by the loan servicer. This could negatively impact our cash flows.

Our ability to make scheduled debt service payments and fund operations and capital expenditures depends on our future performance and financial results, the successful implementation of our business strategy, as well as the general condition of the lodging industry and the general economic, political, financial, competitive, legislative and regulatory environment. In addition, our ability to refinance or extend our maturing mortgage debt depends to a certain extent on these factors. Many factors affecting our future performance and financial results, including the severity and duration of macro-economic downturns, are beyond our control. See “Item 1A. Risk Factors” of our Form 10-K.

Assuming we are able to extend or refinance the mortgage debt that matures in July 2009, we intend to continue to use our cash flow to fund operations, scheduled debt service payments, and capital expenditures. At this point in time, we do not intend to pay dividends on our common stock.

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

At March 31, 2009, we had a working capital deficit (current assets less current liabilities) of ($86.0) million compared to a deficit of ($80.2) million at December 31, 2008. $127.5 million of our outstanding mortgage debt is scheduled to mature in July 2009, without contractual extension options available to us. In addition, the current severe economic recession has negatively impacted our operating results, which affects operating cash flows as well as our ability to refinance the maturing indebtedness. In the absence of an extension, refinancing or repayment of the July 2009 debt, there is substantial doubt as to our ability to continue as a going concern. We have engaged mortgage bankers to facilitate the refinancing process and to assist in negotiations with prospective lenders. The terms of any refinancing or new borrowing would be determined by then-current market conditions and other factors, and could

impose significant burdens on the Company’s financial condition and operating flexibility. In addition, the cost of such new financing is likely to be higher than the cost of the existing financing due to the unfavorable condition of the current markets. Management is also negotiating with the servicers of the loans to extend the terms. However, management can provide no assurance that we will be able to refinance or extend the debt based on the state of the credit market during, or preceding, July, 2009.

Certain other mortgage debt will mature in 2009, but each has extension options available to us based upon certain conditions. Specifically, the loan with IXIS Real Estate Capital Inc. (“IXIS”) secured by the Holiday Inn in Hilton Head Island, SC was scheduled to mature on December 9, 2007. However, we exercised the first and second one-year extension options, which extended the maturity to December 9, 2009. In order to exercise the remaining one-year extension option, there must not be an existing event of default under the loan documents, we must purchase an interest rate protection agreement capping LIBOR at 6.05% and we must pay an extension fee equal to 0.25% of the outstanding principal. The outstanding loan balance at March 31, 2009 was $18.5 million. We have classified this loan as long-term in the Condensed Consolidated Balance Sheet as of March 31, 2009.

Additionally, we are a party to another loan agreement with IXIS secured by the Radisson and Crowne Plaza hotels located in Phoenix, AZ and the Crowne Plaza Pittsburgh Airport hotel. The original term of the loan expired on March 9, 2008. However, we exercised the first of three one-year extension options, which extended the maturity date of the loan to March 9, 2009. In March 2009, we exercised the second extension option, which extended the loan maturity to March 9, 2010. We contemporaneously entered into an interest rate cap agreement, which effectively caps the interest rate at 7.45%. This loan has one remaining extension option that, if exercised, would extend the loan maturity to March 9, 2011. In order to successfully extend the loan, there must be no existing event of default under the loan documents, the Company must purchase an interest rate protection agreement capping LIBOR at 6.00%, and the Company must pay an extension fee equal to 0.25% of the outstanding principal. The outstanding loan balance at March 31, 2009 was $20.9 million. We have classified this loan as long-term in the Condensed Consolidated Balance Sheet as of March 31, 2009.

We are also a party to a loan agreement with Goldman Sachs Commercial Mortgage Capital, L.P which is secured by 10 hotels. The initial term of this loan matures on May 1, 2009. However, three extensions of one year each are available to us. In order to exercise the first extension, which will extend the maturity date to May 1, 2010, there must not be an existing event of default under the loan documents and we must purchase an interest rate protection agreement capping LIBOR at 7.00%. No extension fee is payable in connection with the first extension option. In addition to the requirements above, an extension fee of 0.125% of the principal balance is payable in connection with the second and third extension options. The outstanding loan balance at March 31, 2009 was $130.0 million. We exercised the first extension option, which extended the term to May 2010, and as such, have classified this loan as long-term in the Condensed Consolidated Balance Sheet as of March 31, 2009.

While we believe that we will be able to extend the mortgage loans that contain extension options as described above, there can be no assurance that we will be able to do so.

During 2009, we expect to spend between $22 and $24 million in capital expenditures, depending on the determined courses of action following our ongoing diligence and analysis. The planned capital expenditures relate largely to the completion of renovations associated with our recent franchise license renewals and other necessary projects including brand-mandated enhancements. We intend to use operating cash flows, when available, proceeds from asset sales and capital expenditure reserves with our lenders to fund these capital expenditures.

Our ability to meet our short-term and long-term cash needs is dependent on a number of factors, including the current severe economic recession, but most immediately our ability to extend or refinance our maturing mortgage indebtedness. As discussed above, $127.5 million of our mortgage debt is scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. To address the pending maturities in July 2009, we are also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. 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 will remain difficult to refinance the mortgage debt prior to the July 2009 maturity date. As a result, our ability to meet our cash needs over the next 12 months and to operate as a going concern is dependent upon our ability to extend, refinance or repay our July 2009 mortgage debt prior to or upon its maturity. Moreover, our ability to extend or refinance our other mortgage debt in the future and to fund our long-term financial needs and sources of working capital are similarly subject to uncertainty. We can provide no assurance that we will have sufficient liquidity to be able to meet our operating expenses, debt service and principal payments, and planned capital expenditures over the next 12 months.

In the short term, we continue to diligently monitor our costs in response to the economic recession and will pursue our plan to refinance or extend the maturing mortgage debt as described above. Additionally, other factors will impact our ability to meet short-term and long-term cash needs. These factors include the severe global recession, market conditions in the lodging industry, improving our operating results, the successful implementation of our portfolio improvement strategy, our ability to extend the maturity dates of our other mortgage debt as it matures and our ability to obtain third party sources of capital on favorable terms as needed.

If we default on our mortgage debt our lenders could seek to foreclose on the properties securing the debt, which could cause our loss of any anticipated income and cash flow from, and our invested capital in, the hotels. Similarly, we could lose the right to operate hotels under nationally recognized brand names, and one or more of our franchise agreements could be terminated leading to additional defaults and acceleration under other loan agreements as well as obligations to pay liquidated damages if we do not find a suitable replacement franchisor. In addition, 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, which would further limit our cash flow available to fund business operations and our strategic plan. If we are unable to refinance or extend the maturity of our mortgage debt and maintain sufficient cash flow to fund our operations, we may be forced to restructure or significantly curtail our operations or to seek protection from our lenders. See “Item 1A. Risk Factors” of our Form 10-K for further discussion of conditions that could adversely affect our estimates of future liquidity needs and sources of working capital.

Cash Flow

Discontinued operations were not segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the balance sheets and related statements of operations.

Operating activities

Operating activities generated cash of $9.1 million in the first three months of 2009, compared to $5.1 million for the same period in 2008. The increase in cash generated by operations was largely attributable to the timing of insurance and real estate tax prepayments and the release of certain escrow balances.

Investing activities

Investing activities used cash of $9.1 million in the first three months of 2009. We expended $11.5 million for capital improvements and we withdrew $2.2 million from the capital expenditure reserves with our lenders. We received proceeds of $0.2 million from the sale of a hotel, net of selling costs and a note receivable from the buyer.

Investing activities used cash of $15.3 million in the first three months of 2008. Capital improvements were $15.6 million and we withdrew $0.7 million from the capital expenditure reserves with our lenders. We deposited $0.2 million in our restricted cash accounts.

Financing activities

Financing activities used cash of $1.3 million in the first three months of 2009. We made principal payments of $1.2 million and paid $0.1 million in deferred financing costs.

Financing activities used cash of $14.3 million in the first three months of 2008. We purchased $13.0 million of treasury stock and made principal payments of $1.3 million.

Debt and Contractual Obligations

See discussion of our Debt and Contractual Obligations in our Form 10-K and Notes 7 and 8 to our Condensed Consolidated Financial Statements in this report.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Market Risk

We are exposed to interest rate risks on our variable rate debt. At March 31, 2009 and December 31, 2008, we had outstanding variable rate debt (including debt secured by assets held for sale) of approximately $169.4 million and $169.5 million, respectively. Without regard to additional borrowings under those instruments or scheduled amortization, the annualized effect of a twenty-five basis point increase in LIBOR as of March 31, 2009 would be a reduction in income before income taxes of approximately $0.4 million.

We have interest rate caps in place for all of our variable rate debt loan agreements in an effort to manage our exposure to fluctuations in interest rates. The aggregate fair value of the interest rate caps as of March 31, 2009 was approximately nil. The fair values of the interest rate caps are recorded on the balance sheet in other assets. Adjustments to the carrying values of the interest rate caps are

recorded in interest expense. As a result of having interest rate caps, we believe that our interest rate risk at March 31, 2009 and December 31, 2008 was not material. The impact on annual results of operations of a hypothetical one percentage point interest rate reduction as of March 31, 2009 would be a reduction in income before income taxes of approximately nil.

The nature of our fixed rate obligations does not expose us to fluctuations in interest payments. The impact on the fair value of our fixed rate obligations of a hypothetical one percentage point interest rate increase on the outstanding fixed-rate debt at March 31, 2009 would be approximately $1.0 million.

Forward-looking Statements

We make forward looking statements in this report and other reports we file with the SEC. In addition, management may make oral forward-looking statements in discussions with analysts, the media, investors and others. These statements include statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “projects,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current views with respect to future events and the impact of these events on our business, financial condition, results of operations and prospects. 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 2009;

	•		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 stock and credit markets and potential failures of financial institutions on our ability to access capital; and

•

The risks identified in our Form 10-K 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.

Inflation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Based on an evaluation of our disclosure controls and procedures carried out as of March 31, 2009, our President and Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. There were no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the foregoing evaluation that occurred during the quarter ended March 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. 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.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, except as discussed below.

The terms of our debt instruments place many restrictions on us, which reduce operational 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, including leverage and coverage ratios. As of March 31, 2009, the Company was in compliance with all of its financial debt covenants, except for the debt yield ratios related to the Merrill Lynch Fixed Pools 3 and 4, with outstanding principal balances of $52.7 million and $35.8 million, respectively. The breach of these covenants, if not cured or

waived by the lender, could lead to the declaration of a “cash trap” by the lender whereby excess cash flows produced by the mortgaged hotels securing the applicable loans (after funding of required reserves, principal and interest, operating expenses, management fees and servicing fees) could be placed in a restricted cash account. The funds held in the restricted cash account may be used for capital expenditures reasonably approved by the loan servicer.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to the Company’s purchases of common stock made during the three months ended March 31, 2009.


					Total Number of		Maximum Dollar Amount of
					Shares Purchased as		Shares That May Yet Be
	Total Number of				Part of Publicly		Purchased Under the
	Shares		Average Price		Announced Plans or		Publicly Announced Plans or
Period	Purchased (1)		Paid Per Share		Programs		Programs
January 2009		15,189	$	2.20		—	$	5,599,458
February 2009		—	$	—		—	$	5,599,458
March 2009		4,228	$	1.72		—	$	5,599,458

		19,417	$	2.10		—


(1)		The total number of shares purchased represents shares of employee nonvested stock awards withheld by the

Company to satisfy employee tax obligations and repurchased by the Company at an aggregate cost of $41,000.

Item 6. Exhibits

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

EXHIBIT INDEX


Exhibit
Number		Description

3.1		Certificate of Correction to the Second Amended and Restated Certificate of Incorporation and Second Amended and Restated Certificate of Incorporation of Lodgian, Inc. (Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-113410), filed on June 4, 2004).

3.2		Amended and Restated Bylaws of Lodgian, Inc. (Incorporated by reference to Exhibit 3.4 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

4.1		Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-113410), filed on June 6, 2004).

4.2		Class B Warrant Agreement, dated as of November 25, 2002, between Lodgian, Inc. and Wachovia Bank, N.A. (Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

10.1		Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-14537), filed on February 10, 2009).

10.2		Form of Lodgian Executive Incentive Plan (Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K (File No. 1-14537), filed on March 16, 2009).

31.1		Sarbanes-Oxley Section 302 Certification by the CEO.**

31.2		Sarbanes-Oxley Section 302 Certification by the CFO.**

32		Sarbanes-Oxley Section 906 Certification by the CEO and CFO.**


**		Filed herewith.


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008 (unaudited)		3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and March 31, 2008 (unaudited)		4
Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2009 (unaudited)		5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and March 31, 2008 (unaudited)		6
Notes to Condensed Consolidated Financial Statements (unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		35
Item 4. Controls and Procedures		35

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		35
Item 1A. Risk Factors		35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 6. Exhibits		36
Signatures		37
EX-31.1
EX-31.2
EX-32


	LODGIAN, INC.
	By:	/s/ PETER T. CYRUS
		Peter T. Cyrus
Date: May 7, 2009		Interim President and Chief Executive Officer


	By:	/s/ JAMES A. MACLENNAN
		James A. MacLennan
Date: May 7, 2009		Executive Vice President and Chief Financial Officer (Principal Accounting Officer)



Date: May 7, 2009	By:	/s/ Peter T. Cyrus
		PETER T. CYRUS
		Interim President and Chief Executive Officer

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	1)		I have reviewed this quarterly report on Form 10-Q of Lodgian, Inc.;

	2)		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3)		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4)		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	1.		The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	2.		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.