10-K 1 g12081e10vk.htm LODGIAN, INC. LODGIAN, INC.
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2007
or
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
  30326
Atlanta, GA
  (Zip Code)
(Address of principal executive offices)
   
 
Registrant’s telephone number, including area code:
(404) 364-9400
 
Securities registered pursuant to Section 12(b) of the Act
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $.01 par value per share
  American Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act
Title of Each Class
Class A warrants
Class B warrants
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o      No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Act).  Yes o     No þ
 
The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the registrant as of June 30, 2007, was $374,303,858 based on the closing price of $15.03 per share on the American Stock Exchange on such date. For purposes of this computation, all directors, executive officers and 10% shareholders are treated as affiliates of the registrant.
 
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
 
The registrant had 22,553,516, shares of Common Stock, par value $.01, outstanding as of March 1, 2008.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the proxy statement for the 2008 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III of this Form 10-K.
 


 

 
LODGIAN, INC.
Form 10-K
For the Year Ended December 31, 2007

TABLE OF CONTENTS
 
             
        Page
 
      Business   1
      Risk Factors   14
      Unresolved Staff Comments   23
      Properties   23
      Legal Proceedings   24
      Submission of Matters to a Vote of Security Holders   24
 
PART II.
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   24
      Selected Financial Data   28
      Management’s Discussion and Analysis of Financial Condition and Results of Operation   29
      Quantitative and Qualitative Disclosures About Market Risk   56
      Financial Statements and Supplementary Data   57
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   57
      Controls and Procedures   57
 
PART III.
      Directors, Executive Officers and Corporate Governance   59
      Executive Compensation   59
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   59
      Certain Relationships, Related Transactions and Director Independence   59
      Principal Accountant Fees and Services   59
 
PART IV.
      Exhibits, Financial Statement Schedules   59
Signatures   60
 EX-21 SUBSIDIARIES OF LODGIAN, INC.
 EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
 EX-32 SECTION 906, CERTIFICATION OF THE CEO AND CFO


Table of Contents

 
PART I
 
Item 1.   Business
 
When we use the terms Lodgian, “we,” “our,” and “us,” we mean Lodgian, Inc. and its subsidiaries.
 
Our Company
 
We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms, as reported by Hotel Business in the 2008 Green Book published in December 2007. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as “Crowne Plaza,”, “Four Points by Sheraton”, “Hilton,” “Holiday Inn,” “Marriott,” and “Wyndham”. As of March 1, 2008, we operated 46 hotels with an aggregate of 8,432 rooms, located in 24 states and Canada. Of the 46 hotels, 35 hotels, with an aggregate of 6,608 rooms, are held for use and the results of operations are classified in continuing operations, while 11 hotels, with an aggregate of 1,824 rooms, are held for sale and the results of operations of those hotels are classified in discontinued operations. Our portfolio of hotels, all of which we consolidate in our financial statements, consists of:
 
  •  45 hotels that we wholly own and operate through subsidiaries; and
 
  •  one hotel that we operate in a joint venture in the form of a limited partnership, in which a Lodgian subsidiary serves as the general partner, has a 50% voting interest and exercises significant control.
 
Our hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale and upscale market segments of the lodging industry. Most of our hotels are under franchises obtained from nationally recognized hospitality franchisors. We operate 25 of our hotels under franchises obtained from InterContinental Hotels Group as franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn Express brands. We operate 12 of our hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, Residence Inn by Marriott, and SpringHill Suites by Marriott brands. We operate another 7 hotels under other nationally recognized brands and two hotels are non-branded. We believe that franchising under strong national brands affords us many benefits such as guest loyalty and market share premiums.
 
Our management consists of an experienced team of professionals with extensive lodging industry experience led by our Interim President and Chief Executive Officer, Peter T. Cyrus, who has over 30 years of experience in the lodging industry. In addition, our Vice President of Hotel Operations and our Vice President of Asset Management have been in the hospitality industry for over twenty years each.
 
Our Operations
 
Our operations team is responsible for the management of our properties. Our vice president of hotel operations is responsible for the supervision of our regional and general managers, who oversee the day-to-day operations of our hotels. Our corporate office is located in Atlanta, Georgia. The centralized management services provided by our corporate office include sales and marketing, purchasing, finance and accounting, information technology, capital investment, human resources, and legal services.
 
Our corporate finance and accounting team coordinates the financial and accounting functions of our business. These functions include internal audit, insurance, payroll and accounts payable processing, credit, tax, property accounting and financial reporting services. The corporate operations team oversees the budgeting and forecasting for our hotels and also identifies new systems and procedures to employ within our hotels to improve efficiency and profitability. The corporate capital investment team oversees the interior design and renovation of all our hotels. Each hotel’s product quality and the refurbishment of existing properties are also managed from our corporate headquarters. The capital investment process includes scoping, budgeting, return on investment analysis, design, procurement, and construction. Capital investment projects are approved when management determines that the appropriate return on investment will be achieved, following thorough planning, diligence, and analysis. The corporate sales and marketing team coordinates the sales forces for our hotels, designs sales training programs,


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tracks future business under contract and identifies, employs and monitors marketing programs aimed at specific target markets. The legal team coordinates all contract reviews and provides the hotels with legal support as needed.
 
The information technology team maintains our computer systems, which provide real-time tracking of each hotel’s daily occupancy, average daily rate (“ADR”), room, food, beverage and other revenues, revenue per available room (“RevPAR”) and all hotel expenses. By having current information available, we are better able to respond to changes in each market by focusing sales efforts and we are able to make appropriate adjustments to control expenses and maximize profitability as new current information becomes available.
 
Creating cost and guest service efficiencies in each hotel is a top priority. Our centralized purchasing team is able to realize significant cost savings by securing volume pricing from our vendors.
 
The corporate human resources staff works closely with management and employees throughout the Company to ensure compliance with employment laws and related government filings, counsel management on employee relations and labor relations matters, design and administer benefit programs, and develop recruiting and retention strategies.
 
Corporate History
 
Lodgian, Inc. was formed as a new parent company in a merger of Servico, Inc. and Impac Hotel Group, LLC in December 1998. Servico was incorporated in Delaware in 1956 and was an owner and operator of hotels under a series of different entities. Impac was a private hotel ownership, management and development company organized in Georgia in 1997 through a reorganization of predecessor entities. After the effective date of the merger, our portfolio consisted of 142 hotels.
 
Between December 1998 and the end of 2001, a number of factors, including our heavy debt load, lack of available funds to maintain the quality of our hotels, a weakening U.S. economy, and the severe decline in travel in the aftermath of the terrorist attacks of September 11, 2001, combined to place adverse pressure on our cash flow and liquidity. As a result, on December 20, 2001, Lodgian and substantially all of our subsidiaries that owned hotels filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. At the time of the Chapter 11 filing, our portfolio consisted of 106 hotels. Following the effective date of our reorganization, we emerged from Chapter 11 with 97 hotels after eight of our hotels were conveyed to a lender in satisfaction of outstanding debt obligations and one hotel was returned to the lessor of a capital lease of the property. Of the 97 hotels, 78 hotels emerged from Chapter 11 on November 25, 2002, 18 hotels emerged from Chapter 11 on May 22, 2003 and one property never filed under Chapter 11. Effective November 22, 2002, the Company adopted fresh start reporting. As a result, all assets and liabilities were restated to reflect their estimated fair values at that time.
 
During 2003, we identified 19 hotels, one office building and three land parcels for sale as part of our portfolio improvement strategy and our efforts to reduce debt and interest costs. During 2003, we sold one hotel and the office building. During 2004, we sold 11 hotels and two land parcels. During 2005, we identified an additional five hotels for sale and sold eight hotels.
 
In the first 10 months of 2006, we identified 15 additional hotels for sale, and sold four hotels and one land parcel. We also surrendered two Holiday Inn hotels, located in Lawrence and Manhattan, KS, to a bond trustee pursuant to the settlement agreement entered into in August 2005. Further, a venture in which we own a minority interest and which owned the Holiday Inn City Center Columbus, OH transferred the hotel to the lender in full satisfaction of the outstanding mortgage debt on that property.
 
In November 2006, we announced a strategic initiative to reconfigure our hotel portfolio. In accordance with this initiative, we sold two hotels and identified 12 additional hotels for sale in November and December 2006. During 2007, we sold 23 hotels which had previously been identified for sale.
 
In December 2007, the Company announced that it had identified an additional 9 hotels to be sold. These hotels did not meet the held for sale criteria of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, until January 2008. Accordingly, as of December 31, 2007, we owned 46 hotels, 2 of which were classified as held for sale and 44 of which were classified


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as held for use. As of March 1, 2008, we owned 46 hotels, 11 of which were held for sale and 35 of which were held for use.
 
Our business is conducted in one reportable segment, which is the hospitality segment. During 2007, we derived approximately 98% of our revenues from hotels located within the United States and the balance from our one hotel located in Windsor, Canada.
 
Franchise Affiliations
 
We operate substantially all of our hotels under nationally recognized brands. In addition to benefits in terms of guest loyalty and market share premiums, our hotels benefit from franchisors’ central reservation systems, their global distribution systems and their brand Internet booking sites. Reservations made by means of these franchisor facilities generally accounted for approximately 38% of our total reservations in 2007.
 
We enter into franchise agreements, generally for terms of 10 to 20 years, with hotel franchisors. The franchise agreements typically authorize us to operate the hotel under the franchise name, at a specific location or within a specified area, and require that we operate the hotel in accordance with the standards specified by the franchisor. As part of our franchise agreements, we are generally required to pay a royalty fee, an advertising/marketing fee, a fee for the use of the franchisor’s nationwide reservation system and certain other ancillary charges. Royalty fees range from 2.7% to 6.0% of gross room revenues, advertising/marketing fees range from 1.0% to 4.0%, reservation system fees range from 0.4% to 3.2%, and club and restaurant fees from 0.1% to 3.3%. In the aggregate, royalty fees, advertising/marketing fees, reservation fees and other ancillary fees for the various brands under which we operate our hotels range from 7.0% to 10.8% of gross room revenues. In 2007, franchise fees for our continuing operations were 9.5% of room revenues.
 
During the term of our franchise agreements, the franchisors may require us to upgrade facilities to comply with their current standards. Our current franchise agreements terminate at various times and have differing remaining terms. As franchise agreements expire, we may apply for franchise renewals. In connection with a renewal, a franchisor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facility, or the franchisor may elect at its sole discretion, not to renew the franchise.
 
When a hotel does not meet the terms of its franchise license agreement, a franchisor reserves the right to issue a notice of non-compliance to the franchisee. This notice of non-compliance provides the franchisee with a cure period which typically ranges from 3 to 24 months. At the end of the cure period, the franchisor will review the criteria for which the non-compliance notice was issued and either (1) cure the franchise agreement, returning to good standing, or (2) issue a notice of default and termination, giving the franchisee another opportunity to cure the non-compliant issue. At the end of the default and termination period, the franchisor will review the criteria for which the non-compliance notice was issued and either cure the default, issue an extension which will grant the franchisee additional time to cure, or terminate the franchise agreement. Termination of the franchise agreement could lead to a default and acceleration under one or more of our loan agreements, which would materially and adversely affect us. In the past, we have been able to cure most cases of non-compliance and most defaults within the cure periods. If we perform an economic analysis of a hotel and determine it is not economically justifiable to comply with a franchisor’s requirements, we will select an alternative franchisor, operate the hotel without a franchise affiliation, or sell the hotel. Generally, under the terms of our loan agreements, we are not permitted to operate hotels without an approved franchise affiliation. See “Risk Factors — Risks Related to Our Business.”
 
As of March 1, 2008, the Company has been or expects to be notified that it is not in compliance with some of the terms of six of its franchise agreements and is in default with respect to the agreement for two hotels, summarized as follows:
 
  •  Six hotels are in non-compliance or failure of the franchise agreements because of substandard guest satisfaction scores or failed operational reviews, but are being granted additional time to cure these low scores by the franchisors. If the Company does not achieve scores above the required thresholds by the designated dates, these hotels could be subject to subsequent default and termination notices on the franchise agreements. Two of these six hotels are held for sale as of March 1, 2008.


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  •  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 30, 2008, the hotel’s franchise agreement could be terminated by the franchisor. However, the Company has met with the franchisor and is planning capital improvements to improve guest satisfaction for which the franchisor is expected to extend the default cure period. This hotel is held for sale as of March 1, 2008.
 
  •  One hotel is in default because of substandard guest satisfaction scores. However, the franchisor has granted a six-month extension, following the completion of major guest room renovations.
 
The corporate operations team, as well as each property’s general manager and associates, have focused their efforts to cure each of these instances of non-compliance or default through enhanced service, increased cleanliness, and product improvements by the required cure dates.
 
The Company believes that it will cure the non-compliance and defaults for which the franchisors have given notice on or before the applicable termination dates, but the Company cannot provide assurance that it will be able to complete the action plans (which are estimated to cost approximately $4.6 million for the capital improvements portion of the action plans) 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. 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, and in certain circumstances could lead to acceleration of parts of indebtedness. This could adversely affect the Company.
 
Also, our loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more such agreements. Six of the eight hotels that are in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of $300.8 million of mortgage debt as of March 1, 2008.
 
Sales and Marketing
 
We have developed a unique sales and marketing culture that is focused on revenue generation and long term profitability. We developed several key components that we believe set us apart from a typical brand or independent management approach.
 
The hotel sales effort is supported by a core of seasoned hotel sales veterans. The Regional Directors of Sales are strategically aligned and assigned to support property-level sales and company wide revenue generation. These efforts include direct sales as well as support and direction to the property sales teams. Every hotel sales associate is armed with sales training administered by each hotel’s respective brand. The Regional Directors of Sales are able to further leverage the global brand initiatives but more importantly Company-specific initiatives, customized for each hotel’s needs. This structure provides a distinct advantage as the hotels proactively adjust the hotel specific marketing plans and business strategies as market conditions change.
 
In collaboration with the Regional Directors of Sales, the Regional Revenue Managers steer the efforts of the property-level teams, ensuring the appropriate mix of business for each hotel. We have developed an industry-leading forecasting tool that provides history by day of week and segment of business. This customized tool provides each hotel with a means to analyze trends from previous years as well as changes in market conditions to forecast day by day rooms sold and ADR by segment of business. The forecast is then used to identify the types of business and periods of time where the sales effort will result in the greatest revenue gains and where changes in current strategy are not necessary.
 
In 2000, we developed a centrally-housed Area Revenue Office (“ARO”) that is tasked with providing high quality reservation service by trained reservation sales associates to maximize revenue and relieve on-site associates of reservations responsibilities, thereby allowing the on-site front office teams to maximize guest service. The ARO, based in Strongsville, OH, houses a staff of 35-50 reservation sales agents (depending on seasonal demands). The ARO handles approximately half a million calls per year. The ARO is scaleable, and has in the past handled up to a million calls per year. The ARO handles reservations for all of our InterContinental Hotels Group (IHG) branded hotels including Crowne Plaza, Holiday Inn Select, Holiday Inn, and Holiday Inn Express and Marriott branded


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hotels including Courtyard by Marriott, Fairfield Inn by Marriott, Marriott Residence Inn by Marriott and Spring Hill Suites by Marriott. Incoming calls are answered with a distinct greeting for the destination hotel and customers are under the assumption that the call is being handled by an on-property hotel associate.
 
While the IHG brand provides a similar reservation solution, the ARO has several key advantages including lower overhead costs (the ARO is located inside one of our hotels and shares hotel support staff), opportunities for cross-selling among our portfolio of hotels, the ability to promote Company strategies for revenue maximization, and an intimate knowledge of our hotel portfolio.
 
Joint Ventures
 
As of March 1, 2008, we operate one hotel in a joint venture in which we have a 50% voting equity interest and exercise control.
 
On March 20, 2007, the Company acquired its joint venture partner’s 18% interest in the Radisson New Orleans Airport Plaza, LA for $2.9 million. On July 26, 2007, the Company acquired its joint venture partner’s 50% interest in the Crowne Plaza Melbourne, FL for $13.5 million. As a result, the hotels are now wholly-owned subsidiaries.
 
Competition and Seasonality
 
The hotel business is highly competitive. Each of our hotels competes in its market area with numerous other hotel properties operating under various lodging brands. National chains, including in many instances chains from which we obtain franchises, may compete with us in various markets. Our competition is comprised of public companies, privately-held equity fund companies, and small independent owners and operators. Competitive factors in the lodging industry include, among others, room rates, quality of accommodation, service levels, convenience of locations and amenities customarily offered to the traveling public. In addition, the development of travel-related Internet websites has increased price awareness among travelers and price competition among similarly located, comparable hotels.
 
Demand for accommodations, and the resulting revenues, varies seasonally. The high season tends to be the summer months for hotels located in colder climates and the winter months for hotels located in warmer climates. Aggregate demand for accommodations in our portfolio is lowest during the winter months. Levels of demand are also dependent upon many factors that are beyond our control, including national and local economic conditions and changes in levels of leisure and business-related travel. Our hotels depend on both business and leisure travelers for revenue.
 
We also compete with other hotel owners and operators with respect to acquiring hotels and obtaining desirable franchises for upscale, upper upscale and midscale hotels in targeted markets.
 
The Lodging Industry
 
The lodging industry has shown signs of recovery since 2004. Full-year RevPAR has grown 8.4%, 7.5%, and 5.7% for years 2005, 2006, and 2007, respectively, according to Smith Travel Research as reported in January 2008.
 
The U.S. lodging industry enjoyed nine consecutive years of positive RevPAR growth from 1992 through 2000 after the economic recession of 1991. The periods of greatest RevPAR growth over this time period generally occurred when growth in room demand exceeded new room supply growth. Smith Travel Research recently predicted annual U.S. lodging industry RevPAR growth of 4.0% — 4.5% in 2008 with an annual increase in supply of 2.2%, slightly ahead of the annual net change in demand of 1.4%. As a result, industry occupancy is expected to decline 0.8% and ADR is expected to increase 5.2%. These industry forecasts may not necessarily reflect our portfolio of hotels. In addition, the recent economic slowdown and potential for a recession could result in lower than expected results.
 
Chain-Scale Segmentation
 
Smith Travel Research classifies the lodging industry into six chain scale segments by brand according to their respective national average daily rate or ADR. The six segments are defined as: luxury, upper upscale, upscale,


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midscale with food and beverage, midscale without food and beverage and economy. We operate hotel brands in the following four chain scale segments:
 
  •  Upper Upscale (Hilton and Marriott);
 
  •  Upscale (Courtyard by Marriott, Crowne Plaza, Four Points by Sheraton, Radisson, Residence Inn by Marriott, SpringHill Suites by Marriott and Wyndham);
 
  •  Midscale with Food & Beverage (Holiday Inn, Holiday Inn Select); and
 
  •  Midscale without Food & Beverage (Fairfield Inn by Marriott and Holiday Inn Express);
 
We believe that our hotels and brands will perform competitively with the U.S. lodging industry as occupancy declines slightly and ADR continues to increase. RevPAR for our held for use hotels increased 5.2% in 2007 as compared to 5.7% for the industry as a whole. Excluding the three hotels that were under major renovation during 2007, RevPar for our held for use hotels increased 6.7% in 2007.
 
Properties
 
We own and manage our hotels. Accordingly, we retain responsibility for all aspects of the day-to-day management for each of our hotels. We establish and implement standards for hiring, training and supervising staff, creating and maintaining financial controls, complying with laws and regulations related to hotel operations, and providing for the repair and maintenance of the hotels. Because we own and manage our hotels, we are able to directly control our labor costs, we can negotiate purchasing arrangements without fees to third parties, and as an owner and operator, we are motivated to focus our results on bottom-line profit performance instead of solely on top-line revenue growth. Accordingly, we are focused on maximizing returns for our shareholders.
 
Portfolio
 
Our hotel portfolio, as of March 1, 2008, by franchisor, is set forth below:
 
                                 
                          Year of
    Room Count         Last Major Renovation or
Franchisor/Hotel Name
  Held for Use     Held for Sale     Total     Location   Construction
 
InterContinental Hotels Group PLC (IHG)
                               
Crowne Plaza Albany
    384               384     Albany, NY   2001
Crowne Plaza Houston
    294               294     Houston, TX   1999
Crowne Plaza Melbourne
    270               270     Melbourne, FL   2006
Crowne Plaza Phoenix Airport
    299               299     Phoenix, AZ   2004
Crowne Plaza Pittsburgh
    193               193     Pittsburgh, PA   2001
Crowne Plaza Silver Spring
    231               231     Silver Spring, MD   2005
Crowne Plaza West Palm Beach (50% owned)
    219               219     West Palm Beach, FL   2005
Crowne Plaza Worcester
            243       243     Worcester, MA   1996
Holiday Inn BWI Airport
    260               260     Baltimore, MD   Planning and Diligence
Holiday Inn Cromwell Bridge
            139       139     Cromwell Bridge, MD   2000
Holiday Inn East Hartford
            130       130     East Hartford, CT   2000
Holiday Inn Frederick
            158       158     Frederick, MD   2000
Holiday Inn Frisco
            217       217     Frisco, CO   1997
Holiday Inn Glen Burnie North
            127       127     Glen Burnie, MD   2000
Holiday Inn Hilton Head
    202               202     Hilton Head, SC   2001
Holiday Inn Inner Harbor
    375               375     Baltimore, MD   Planning and Diligence
Holiday Inn Marietta(1)
    193               193     Marietta, GA   2003
Holiday Inn Meadowlands
    138               138     Pittsburgh, PA   2005
Holiday Inn Monroeville
    187               187     Monroeville, PA   2005


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                          Year of
    Room Count         Last Major Renovation or
Franchisor/Hotel Name
  Held for Use     Held for Sale     Total     Location   Construction
 
Holiday Inn Myrtle Beach
    133               133     Myrtle Beach, SC   2006
Holiday Inn Phoenix West
            144       144     Phoenix, AZ   2003
Holiday Inn Santa Fe
    130               130     Santa Fe, NM   2003
Holiday Inn Express Palm Desert
    129               129     Palm Desert, CA   2003
Holiday Inn Select Strongsville
    303               303     Cleveland, OH   2005
Holiday Inn Select Windsor
            214       214     Windsor, Ontario   2004
                                 
Total IHG Room Count
    3,940       1,372       5,312          
                                 
Total IHG Hotel Count
    17       8       25          
                                 
Marriott International Inc.
                               
Courtyard by Marriott Abilene
    99               99     Abilene, TX   2004
Courtyard by Marriott Bentonville
    90               90     Bentonville, AR   2004
Courtyard by Marriott Buckhead
    181               181     Atlanta, GA   2008
Courtyard by Marriott Florence
    78               78     Florence, KY   2004
Courtyard by Marriott Lafayette
    90               90     Lafayette, LA   2004
Courtyard by Marriott Paducah
    100               100     Paducah, KY   2004
Courtyard by Marriott Tulsa
    122               122     Tulsa, OK   2004
Fairfield Inn by Marriott Merrimack
    115               115     Merrimack, NH   2002
Marriott Denver Airport
    238               238     Denver, CO   Being Renovated
Residence Inn by Marriott Dedham
    81               81     Dedham, MA   Planning and Diligence
Residence Inn by Marriott Little Rock
    96               96     Little Rock, AR   Planning and Diligence
SpringHill Suites by Marriott Pinehurst
    107               107     Pinehurst, NC   2007
                                 
Total Marriott Room Count
    1,397             1,397          
                                 
Total Marriott Hotel Count
    12             12          
                                 
Hilton Hotels Corporation
                               
Hilton Columbia
    152               152     Columbia, MD   2003
Hilton Fort Wayne
    244               244     Fort Wayne, IN   Planning and Diligence
Hilton Northfield
            191       191     Troy, MI   2003
                                 
Total Hilton Room Count
    396       191       587          
                                 
Total Hilton Hotel Count
    2       1       3          
                                 
Carlson Companies
                               
Radisson New Orleans Airport Plaza
    244               244     New Orleans, LA   2005
Radisson Phoenix
    159               159     Phoenix, AZ   2005
                                 
Total Carlson Room Count
    403             403          
                                 
Total Carlson Hotel Count
    2             2          
                                 
Starwood Hotels & Resorts Worldwide, Inc.
                               
Four Points by Sheraton Philadelphia(2)
    190               190     Philadelphia, PA   2008
                                 
Total Starwood Room Count
    190             190          
                                 
Total Starwood Hotel Count
    1             1          
                                 

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                          Year of
    Room Count         Last Major Renovation or
Franchisor/Hotel Name
  Held for Use     Held for Sale     Total     Location   Construction
 
Wyndham Hotels and Resorts, LLC
                               
Wyndham DFW Airport North
    282               282     Dallas, TX   Being Renovated
                                 
Total Wyndham Room Count
    282             282          
                                 
Total Wyndham Hotel Count
    1             1          
                                 
Non-branded hotels
                               
French Quarter Suites Memphis
            105       105     Memphis, TN   1997
Arden Hills/St. Paul Hotel(1)
            156       156     St. Paul, MN   1995
                                 
Total Non-branded Room Count
          261       261          
                                 
Total Non-branded Hotel Count
          2       2          
                                 
Grand Total Room Count
    6,608       1,824       8,432          
                                 
Grand Total Hotel Count
    35       11       46          
                                 
 
 
(1) This hotel is currently closed.
 
(2) This hotel converted from a DoubleTree Club in January 2008.
 
Dispositions
 
A summary of our disposition activity is as follows:
 
                 
    Number of  
    Hotels     Land Parcels  
 
Owned at December 31, 2005
    78       1  
Surrendered to lender in 2006
    (2 )      
Deeded to the lender in 2006
    (1 )      
Sold in 2006
    (6 )     (1 )
                 
Owned at December 31, 2006
    69        
Sold in 2007
    (23 )      
                 
Owned at December 31, 2007
    46        
                 
 
No hotels were sold from January 1, 2008 to March 1, 2008.
 
Hotel data by market segment and region
 
The following four tables exclude four of our hotels as noted below:
 
Held for Use (Continuing Operations)
 
  •  the Holiday Inn hotel in Marietta, GA is excluded because it was closed since 2006 due to a fire that occurred in January 2006;
 
  •  the Crowne Plaza Melbourne, FL hotel is excluded because it was closed throughout 2005 for hurricane renovations; and
 
  •  the Crowne Plaza West Palm Beach, FL hotel is excluded because it was closed during most of 2005 for hurricane renovations.

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Held for Sale (Discontinued Operations)
 
• the Arden Hills/St. Paul, MN hotel, which closed in September 2007.
 
The two tables below present data on occupancy, ADR and RevPAR for the hotels in our portfolio for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 by chain scale segment with four hotels excluded as noted above. The chain scale segments are defined on page 5.
 
Combined Continuing and Discontinued Operations — 42 hotels (excludes the Marietta, Melbourne, West Palm Beach and St. Paul hotels)
 
                         
    2007     2006     2005  
 
Upper Upscale
                       
Number of properties
    4       4       4  
Number of rooms
    825       825       825  
Occupancy
    72.4 %     68.3 %     69.7 %
Average daily rate
  $ 118.74     $ 113.65     $ 101.39  
RevPAR
  $ 86.00     $ 77.67     $ 70.63  
Upscale
                       
Number of properties
    19       18       18  
Number of rooms
    3,370       3,088       3,088  
Occupancy
    67.2 %     69.7 %     69.1 %
Average daily rate
  $ 105.42     $ 103.56     $ 94.52  
RevPAR
  $ 70.89     $ 72.16     $ 65.28  
Midscale with Food & Beverage
                       
Number of properties
    16       17       17  
Number of rooms
    3,047       3,329       3,329  
Occupancy
    68.5 %     67.0 %     63.1 %
Average daily rate
  $ 99.20     $ 94.57     $ 88.73  
RevPAR
  $ 67.91     $ 63.38     $ 55.98  
Midscale without Food & Beverage
                       
Number of properties
    2       2       2  
Number of rooms
    245       245       245  
Occupancy
    58.0 %     58.6 %     62.7 %
Average daily rate
  $ 90.00     $ 87.58     $ 74.35  
RevPAR
  $ 52.24     $ 51.34     $ 46.63  
Independent Hotels
                       
Number of properties
    1       1       1  
Number of rooms
    105       105       105  
Occupancy
    54.7 %     58.6 %     45.3 %
Average daily rate
  $ 48.36     $ 49.77     $ 61.80  
RevPAR
  $ 26.46     $ 29.17     $ 27.98  
All Hotels
                       
Number of properties
    42       42       42  
Number of rooms
    7,592       7,592       7,592  
Occupancy
    67.8 %     67.9 %     66.0 %
Average daily rate
  $ 103.38     $ 99.68     $ 91.95  
RevPAR
  $ 70.12     $ 67.64     $ 60.67  


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Continuing Operations — 41 hotels (excludes the Marietta, Melbourne and West Palm Beach hotels, and 2 hotels held for sale as of December 31, 2007).
 
                         
    2007     2006     2005  
 
Upper Upscale
                       
Number of properties
    4       4       4  
Number of rooms
    825       825       825  
Occupancy
    72.4 %     68.3 %     69.7 %
Average daily rate
  $ 118.74     $ 113.65     $ 101.39  
RevPAR
  $ 86.00     $ 77.67     $ 70.63  
Upscale
                       
Number of properties
    19       18       18  
Number of rooms
    3,370       3,088       3,088  
Occupancy
    67.2 %     69.7 %     69.1 %
Average daily rate
  $ 105.42     $ 103.56     $ 94.52  
RevPAR
  $ 70.89     $ 72.16     $ 65.28  
Midscale with Food & Beverage
                       
Number of properties
    15       16       16  
Number of rooms
    2,889       3,171       3,171  
Occupancy
    68.8 %     67.1 %     62.9 %
Average daily rate
  $ 100.58     $ 95.51     $ 89.73  
RevPAR
  $ 69.19     $ 64.07     $ 56.46  
Midscale without Food & Beverage
                       
Number of properties
    2       2       2  
Number of rooms
    245       245       245  
Occupancy
    58.0 %     58.6 %     62.7 %
Average daily rate
  $ 90.00     $ 87.58     $ 74.35  
RevPAR
  $ 52.24     $ 51.34     $ 46.63  
Independent
                       
Number of properties
    1       1       1  
Number of rooms
    105       105       105  
Occupancy
    54.7 %     58.6 %     45.3 %
Average daily rate
  $ 48.36     $ 49.77     $ 61.80  
RevPAR
  $ 26.46     $ 29.17     $ 27.98  
All Hotels
                       
Number of properties
    41       41       41  
Number of rooms
    7,434       7,434       7,434  
Occupancy
    67.9 %     67.9 %     66.0 %
Average daily rate
  $ 104.01     $ 100.19     $ 92.43  
RevPAR
  $ 70.66     $ 68.03     $ 60.97  
 
The two tables below present data on occupancy, ADR and RevPAR for the hotels in our portfolio for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 by geographic region with four hotels excluded as previously noted.
 
The regions in the two tables below are defined as:
 
  •  Northeast:  Canada, Connecticut, Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania;
 
  •  Southeast:  Florida, Georgia, Kentucky, Louisiana, North Carolina, South Carolina, Tennessee;
 
  •  Midwest:  Arkansas, Indiana, Michigan, Oklahoma, Texas; and
 
  •  West:  Arizona, California, Colorado, New Mexico.


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Combined Continuing and Discontinued Operations — 42 hotels (excludes the Marietta, Melbourne, West Palm Beach and St. Paul hotels)
 
                         
    2007     2006     2005  
 
Northeast Region
                       
Number of properties
    18       18       18  
Number of rooms
    3,621       3,621       3,621  
Occupancy
    67.9 %     66.9 %     66.1 %
Average daily rate
  $ 104.36     $ 102.08     $ 95.69  
RevPAR
  $ 70.88     $ 68.32     $ 63.22  
Southeast Region
                       
Number of properties
    9       9       9  
Number of rooms
    1,240       1,240       1,240  
Occupancy
    66.7 %     69.5 %     63.4 %
Average daily rate
  $ 103.17     $ 104.73     $ 97.14  
RevPAR
  $ 68.79     $ 72.77     $ 61.55  
Midwest Region
                       
Number of properties
    8       8       8  
Number of rooms
    1,415       1,415       1,415  
Occupancy
    63.2 %     68.0 %     66.7 %
Average daily rate
  $ 98.27     $ 89.23     $ 83.11  
RevPAR
  $ 62.11     $ 60.70     $ 55.43  
West Region
                       
Number of properties
    7       7       7  
Number of rooms
    1,316       1,316       1,316  
Occupancy
    73.6 %     68.7 %     67.4 %
Average daily rate
  $ 105.80     $ 99.58     $ 86.69  
RevPAR
  $ 77.90     $ 68.41     $ 58.45  
All Hotels
                       
Number of properties
    42       42       42  
Number of rooms
    7,592       7,592       7,592  
Occupancy
    67.8 %     67.9 %     66.0 %
Average daily rate
  $ 103.38     $ 99.68     $ 91.95  
RevPAR
  $ 70.12     $ 67.64     $ 60.67  


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Continuing Operations — 41 hotels (excludes the Marietta, Melbourne and West Palm Beach hotels, and 2 hotels held for sale as of December 31, 2007).
 
                         
    2007     2006     2005  
 
Northeast Region
                       
Number of properties
    17       17       17  
Number of rooms
    3,463       3,463       3,463  
Occupancy
    68.2 %     67.0 %     66.0 %
Average daily rate
  $ 105.74     $ 103.28     $ 96.88  
RevPAR
  $ 72.08     $ 69.17     $ 63.99  
Southeast Region
                       
Number of properties
    9       9       9  
Number of rooms
    1,240       1,240       1,240  
Occupancy
    66.7 %     69.5 %     63.4 %
Average daily rate
  $ 103.17     $ 104.73     $ 97.14  
RevPAR
  $ 68.79     $ 72.77     $ 61.55  
Midwest Region
                       
Number of properties
    8       8       8  
Number of rooms
    1,415       1,415       1,415  
Occupancy
    63.2 %     68.0 %     66.7 %
Average daily rate
  $ 98.27     $ 89.23     $ 83.11  
RevPAR
  $ 62.11     $ 60.70     $ 55.43  
West Region
                       
Number of properties
    7       7       7  
Number of rooms
    1,316       1,316       1,316  
Occupancy
    73.6 %     68.7 %     67.4 %
Average daily rate
  $ 105.80     $ 99.58     $ 86.69  
RevPAR
  $ 77.90     $ 68.41     $ 58.45  
All Hotels
                       
Number of properties
    41       41       41  
Number of rooms
    7,434       7,434       7,434  
Occupancy
    67.9 %     67.9 %     66.0 %
Average daily rate
  $ 104.01     $ 100.19     $ 92.43  
RevPAR
  $ 70.66     $ 68.03     $ 60.97  
 
Hotel Encumbrances
 
Of the 46 hotels that we own and consolidate as of December 31, 2007, 38 hotels were pledged as collateral to secure long-term debt. Refer to the table in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, Liquidity and Capital Resources.
 
Insurance
 
We maintain the following types of insurance:
 
  •  general liability;
 
  •  property damage and business interruption (including coverage for terrorism);
 
  •  flood;
 
  •  directors’ and officers’ liability;
 
  •  liquor liability;


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  •  workers’ compensation;
 
  •  fiduciary liability;
 
  •  business automobile;
 
  •  environmental; and
 
  •  employment practices liability insurance.
 
We are self-insured up to certain amounts with respect to our insurance coverages. We establish liabilities for these self-insured obligations annually, based on actuarial valuations and our history of claims. If these claims exceed our estimates, our future financial condition and results of operations would be adversely affected. As of December 31, 2007, we had accrued $12.2 million for these costs (including employee medical and dental coverage). We believe that we have adequate reserves and sufficient insurance coverage for our business.
 
There are other types of losses for which we cannot obtain insurance at all or at a reasonable cost, including losses caused by acts of war. If an uninsured loss or a loss that exceeds our insurance limits were to occur, we could lose both the revenues generated from the affected property and the capital that we have invested. We also could be liable for any outstanding mortgage indebtedness or other obligations related to the hotel. Any such loss could materially and adversely affect our financial condition and results of operations.
 
Regulation
 
Our hotels are subject to certain federal, state and local regulations which require us to obtain and maintain various licenses and permits. These licenses and permits must be periodically renewed and may be revoked or suspended for cause at any time.
 
Occupancy licenses are obtained prior to the opening of a hotel and may require renewal if there has been a major renovation. The loss of the occupancy license for any of the larger hotels in our portfolio could have a material adverse effect on our financial condition and results of operations. Liquor licenses are required for hotels to be able to serve alcoholic beverages and are generally renewable annually. We believe that the loss of a liquor license for an individual hotel would not have a material effect on our financial condition and results of operations. We are not aware of any reason why we should not be in a position to maintain our licenses.
 
We are subject to certain federal and state labor laws and regulations such as minimum wage requirements, regulations relating to working conditions, laws restricting the employment of illegal aliens, and the Americans with Disabilities Act (“ADA”). As a provider of restaurant services, we are subject to certain federal, state and local health laws and regulations. We believe that we comply in all material respects with these laws and regulations. We are also subject in certain states to dramshop statutes, which may give an injured person the right to recover damages from us if we wrongfully serve alcoholic beverages to an intoxicated person who causes an injury. We believe that our insurance coverage relating to contingent losses in these areas is adequate.
 
Our hotels are also subject to environmental regulations under federal, state and local laws. These environmental regulations have not had a material adverse effect on our operations. However, such regulations potentially impose liability on property owners for cleanup costs for hazardous waste contamination. If material hazardous waste contamination problems exist on any of our properties, we would be exposed to liability for the costs associated with the cleanup of those sites.
 
Employees
 
At December 31, 2007, we had 2,442 full-time and 1,002 part-time employees. We had 69 full-time employees engaged in administrative, regional operations, and executive activities and the balance of our employees manage, operate and maintain our properties. At December 31, 2007, 328 of our full and part-time employees located at four hotels were covered by five collective bargaining agreements. These five agreements expire between 2008 and 2010. In addition, we have one inactive collective bargaining agreement associated with a closed hotel. We consider relations with our employees to be good.


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Legal Proceedings
 
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.
 
On January 15, 2006, the Holiday Inn Marietta, GA suffered a fire. There was one death associated with the fire, and certain guests have made claims for various injuries allegedly caused by the fire. As of March 1, 2008, sixteen lawsuits have been brought against the Company, including the one alleging wrongful death.
 
All pending litigation claims related to the fire are covered by the Company’s general liability insurance policies, subject to a self-insured retention of $250,000. However, the Company has responsibility to pay certain of its legal and other expenses associated with defending these claims.
 
Management believes that the Company has adequate insurance protection to cover all pending litigation matters, including the claims related to fire at the Marietta, GA property, and that the resolution of these claims will not have a material adverse effect on the Company’s results of operations or financial condition.
 
SEC Filings and Financial Information
 
This Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our Proxy Statement on Schedule 14A, and amendments to those reports are available free of charge on our website (www.Lodgian.com) as soon as practicable after they are submitted to the Securities and Exchange Commission (“SEC”).
 
You may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information about us.
 
Financial information about our revenues and expenses for the last three fiscal years and assets and liabilities for the last two years may be found in the Consolidated Financial Statements, beginning on page F-1.
 
Item 1A.   Risk Factors
 
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:
 
  •  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;


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  •  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; and
 
  •  The risks identified below under “Risks Related to Our Business” and “Risks Related to Our Common Stock”.
 
Any of these risks and uncertainties could cause actual results to differ materially from historical results or those anticipated. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained and caution you not to place undue reliance on such statements. We undertake no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances or their impact on our business, financial condition, results of operations and prospects.
 
The following represents risks and uncertainties which could either individually or together cause actual results to differ materially from those described in the forward-looking statements. If any of the following risks actually occur, our business, financial condition, results of operations, cash flow, liquidity and prospects could be adversely affected. In that case, the market price of our common stock could decline and you may lose all or part of your investment in our common stock.
 
Risks Related to Our Business
 
We may not be able to meet the requirements imposed by our franchisors in our franchise agreements and therefore could lose the right to operate one or more hotels under a national brand.
 
We operate substantially all of our hotels pursuant to franchise agreements for nationally recognized hotel brands. The franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. The standards are also subject to change over time. Compliance with any new and existing standards could cause us to incur significant expenses and investment in capital expenditures.
 
If we do not comply with standards or terms of any of our franchise agreements, those franchise agreements may be terminated after we have been given notice and an opportunity to cure the non-compliance or default. Refer to “Franchise Affiliations” for specific information regarding the current status of our franchise agreements.
 
Loss of a franchise agreement may result in a default under, and acceleration of, the related mortgage debt. In particular, we would be in default under the Merrill Lynch Mortgage fixed rate refinancing debt if we experience either:
 
  •  multiple franchise agreement defaults and the continuance thereof beyond all notice and grace periods for hotels whose allocated loan amounts total 10% or more of the outstanding principal amount of such Refinancing Debt;
 
  •  either the termination of franchise agreements for more than one property or the termination of franchise agreements for hotels whose allocated loan amounts represent more than 5% of the outstanding principal amount of the fixed rate loan, and such hotels continue to operate for more than five consecutive days without being subject to replacement franchise agreements; or


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  •  a franchise termination for any hotel currently subject to a franchise agreement that remains without a franchise agreement for more than six months.
 
A single franchise agreement termination could materially and adversely affect our revenues, cash flow and liquidity.
 
Also, our loan agreements generally prohibit a hotel from operating without a national franchise affiliation, and the loss of such an affiliation could trigger a default under one or more such agreements. Six of the eight hotels that are in default or non-compliance under their respective franchise agreements are part of the collateral security for an aggregate of $300.8 million of mortgage debt as of March 1, 2008.
 
Our current franchise agreements, generally for terms of 10 to 20 years, terminate at various times and have differing remaining terms. As a condition to renewal of the franchise agreements, franchisors frequently contemplate a renewal application process, which may require substantial capital improvements to be made to the hotel and increases in franchise fees. A significant increase in unexpected capital expenditures and franchise fees would adversely affect us.
 
Hotels typically require a higher level of capital expenditures, maintenance and repairs than other building types. If we are not able to meet the requirements of our hotels appropriately, our business and operating results will suffer.
 
In order to maintain our hotels in good condition and attractive appearance, it is necessary to replace furnishings, fixtures and equipment periodically, generally every five to seven years, and to maintain and repair public areas and exteriors on an ongoing basis. When we make needed capital improvements, we can be more competitive in the market and our hotel occupancy and room rate can grow accordingly. Further, the process of renovating a hotel has the potential to be disruptive to operations. It is vital that we properly plan and execute renovations during lower occupancy and/or lower rated months in order to avoid “displacement”, an industry term for a temporary loss of revenue caused by rooms being out of service during a renovation. Additionally, if capital improvements are not made, franchise agreements could be at risk.
 
Most of our hotels are pledged as collateral for mortgage loans, and we have a significant amount of debt that could limit our operational flexibility or otherwise adversely affect our financial condition. In addition, market conditions may limit our ability to refinance on favorable terms or at all.
 
As of December 31, 2007, we had $360.8 million of total long-term obligations outstanding (including the current portion), all of which is associated with our assets held for use. We are subject to the risks normally associated with significant amounts of debt, such as:
 
  •  We may not be able to repay or refinance our maturing indebtedness on favorable terms or at all. If we are unable to refinance or extend the maturity of our maturing indebtedness, we may not otherwise be able to repay such indebtedness. Debt defaults could lead us to sell one or more of our hotels on unfavorable terms or, in the case of secured debt, to convey the mortgaged hotel(s) to the lender, causing a loss of any anticipated income and cash flow from, and our invested capital in, such hotel(s);
 
  •  38 of our consolidated hotels are pledged as collateral for existing mortgage loans as of December 31, 2007. These 38 hotels represented 85.2% of the book value of our consolidated property and equipment, net, as of December 31, 2007. As a result, we have limited flexibility to sell our hotels to satisfy cash needs;
 
  •  Increased vulnerability to downturns in our business, the lodging industry and the general economy;
 
  •  Our ability to obtain other financing to fund future working capital, capital expenditures and other general corporate requirements may be limited;
 
  •  Our cash flow from operations may be insufficient to make required debt service payments, and we may be required to dedicate a substantial portion of our cash flow from operations to debt service payments, reducing the availability of our cash flow to fund working capital, capital expenditures, and other needs and placing us at a competitive disadvantage with other companies that have greater resources and/or less debt; and


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  •  Our flexibility in planning for, or reacting to, changes in our business and industry may be restricted, placing us at a competitive disadvantage to our competitors that may have greater financial strength than we have.
 
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 financial covenants, including leverage and coverage ratios. Our compliance with these covenants depends substantially upon the financial results of our hotels. The restrictive 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 our debt agreements, including these restrictive covenants, may result in additional interest being due and would 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. As of December 31, 2007, the Company was in compliance with all of its debt covenants.
 
Increases in interest rates could have an adverse effect on our cash flow and interest expense.
 
A significant portion of our capital needs are fulfilled by borrowings, of which $170.0 million was variable rate debt at December 31, 2007. In the future, we may incur additional indebtedness bearing interest at a variable rate, or we may be required to refinance our existing fixed-rate indebtedness at higher interest rates. Accordingly, increases in interest rates will increase our interest expense and adversely affect our cash flow, reducing the amounts available to make payments on our indebtedness, fund our operations and our capital expenditure program, make acquisitions or pursue other business opportunities. We have reduced the risk of rising interest rates by entering into interest rate cap agreements for all our variable interest rate debt.
 
To service our indebtedness, we require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control and a cash shortfall could adversely affect our ability to fund our operations, planned capital expenditures and other needs.
 
Our ability to make payments on and to refinance our indebtedness and to fund our operations, planned capital expenditures and other needs will depend on our ability to generate cash in the future. Various factors could adversely affect our ability to meet operating cash requirements, many of which are subject to the operating risks inherent in the lodging industry and, therefore, are beyond our control. These risks include the following:
 
  •  Dependence on business and leisure travelers, who have been and continue to be affected by threats of terrorism, or other outbreaks of hostilities, and new laws to counter terrorism which result to some degree in a reduction of foreign travelers visiting the U.S.;
 
  •  Cyclical overbuilding in the lodging industry;
 
  •  Varying levels of demand for rooms and related services;
 
  •  Competition from other hotels, motels and recreational properties, some of which may be owned or operated by companies having greater marketing and financial resources than we have;
 
  •  Effects of economic and market conditions;
 
  •  Decreases in air travel;
 
  •  Fluctuations in operating costs;
 
  •  Changes in governmental laws and regulations that influence or determine wages or required remedial expenditures;
 
  •  Natural disasters, including, but not limited to hurricanes;


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  •  Changes in interest rates and changes in the availability, cost and terms of credit; and
 
  •  The perception of the lodging industry and lodging companies in the debt and equity markets.
 
The value of our hotels and our ability to repay or refinance our debt are dependent upon the successful operation and cash flows of the hotels.
 
The value of our hotels is heavily dependent on their cash flows. If cash flow declines, the hotel values may also decline and the ability to repay or refinance our debt could also be adversely affected. Factors affecting the performance of our hotels include, but are not limited to, construction of competing hotels in the markets served by our hotels, loss of franchise affiliations, the need for renovations, the effectiveness of renovations or repositioning in attracting customers, changes in travel patterns and adverse economic conditions.
 
We may not be able to fund our future capital needs, including necessary working capital, funds for capital expenditures or acquisition financing from operating cash flow. Consequently, we may have to rely on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all, which could materially and adversely affect our operating results, cash flow and liquidity. Any additional debt would increase our leverage, which would reduce our operational flexibility and increase our risk exposure. Our access to third-party sources of capital depends, in part, on:
 
  •  general market conditions;
 
  •  the market’s perception of our growth potential;
 
  •  our current debt levels and property encumbrances;
 
  •  our current and expected future earnings;
 
  •  our cash flow and cash needs; and
 
  •  the market price per share of our common stock.
 
If we are not able to execute our strategic initiatives, we may not be able to improve our financial performance.
 
Our strategic initiatives are focused on improving the operations of our continuing operations hotels with improved product quality, improved services levels, and disciplined capital investment in our hotels, including repositionings and renovations, that will earn a sufficient return on the capital invested. The execution of these initiatives are dependent upon a number of factors, including but not limited to, our ability to dispose of the assets that do not fit into our core portfolio in a timely manner and at the desired selling prices. Additionally, we periodically evaluate our portfolio of hotels to identify underperforming hotels that should be sold. We cannot assure you that the execution of our strategic initiative will produce improved financial performance at the affected hotels. We compete for growth opportunities with national and regional hospitality companies, many of which have greater name recognition, marketing support and financial resources than we do. An inability to successfully implement our strategic initiatives could limit our ability to grow our revenue, net income and cash flow.
 
We have a history of significant losses and we may not be able to successfully improve our performance to achieve profitability.
 
We had an accumulated deficit of $93.3 million as of December 31, 2007. Our ability to improve our performance to achieve profitability is dependent upon the state of the economy in general and the lodging industry in particular, as well as the successful implementation of our business strategy. In August 2007, we announced cost-reduction initiatives to improve future operating performance, which resulted in position eliminations at the corporate, regional, and hotel levels. The reduction in staff, particularly at the hotel level, could have a negative impact on our guest satisfaction scores, which could ultimately impact our financial performance and/or result in the loss of one or more franchise agreements. In addition, our failure to improve our performance could have a material adverse effect on our business, results of operations, financial condition, cash flow, liquidity and prospects. Although Smith Travel Research recently forecasted RevPAR growth for the U.S. lodging industry in 2008 due to


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increased average daily rates, this forecast will not necessarily be reflected in our portfolio of hotels. Additionally, rising energy costs, the financial condition of the airline industry in general and continued threats to national security or air travel safety, among other things, could adversely affect the industry, resulting in our inability to meet our profit expectations.
 
Force majeure events, including natural disasters, acts and threats of terrorism, the ongoing war against terrorism, military conflicts and other factors have had and may continue to have a negative effect on the lodging industry and our results of operations.
 
Force majeure events, including natural disasters, such as Hurricane Katrina that affected the Gulf Coast in August 2005, the terrorist attacks of September 11, 2001 and the continued threat of terrorism and changing threat levels announced by the U.S. Department of Homeland Security, have had a negative impact on the lodging industry and on our hotel operations. These events can cause a significant decrease in occupancy and ADR due to disruptions in business and leisure travel patterns and concerns about travel safety. In particular, as it relates to terrorism, major metropolitan areas and airport hotels can be adversely affected by concerns about air travel safety and may see an overall decrease in the amount of air travel.
 
Our expenses may remain constant or increase even if revenues decline.
 
Certain expenses associated with owning and operating a hotel are relatively fixed and do not proportionately reduce with a decline in revenues. Consequently, during periods when revenues decline, we could continue to incur certain expenses which are fixed in nature. Moreover, we could be adversely affected by:
 
  •  Rising interest rates;
 
  •  Tightening of funding available to the lodging industry on favorable terms, or at all;
 
  •  Rising energy costs, gasoline or heating fuel supply shortages;
 
  •  Rising insurance premiums;
 
  •  Rising property tax expenses;
 
  •  Increase in labor and related costs; and
 
  •  Changes in, and as a result, increases in the cost of compliance with new governmental regulations, including those governing environmental, usage, zoning and tax matters.
 
We may make acquisitions or investments that are not successful and that adversely affect our ongoing operations.
 
We may acquire or make investments in hotel companies or groups of hotels that we believe complement our business. If we fail to properly evaluate and execute acquisitions or investments, it may have a material adverse effect on our results of operations. In making or attempting to make acquisitions or investments, we face a number of risks, including:
 
  •  Significant errors or miscalculations in identifying suitable acquisition or investment candidates, performing appropriate due diligence, identifying potential liabilities and negotiating favorable terms;
 
  •  Reducing our working capital and hindering our ability to expand or maintain our business, including making capital expenditures and funding operations;
 
  •  The potential distraction of our management, diversion of our resources and disruption of our business;
 
  •  Overpaying by competing for acquisition opportunities with resourceful competitors;
 
  •  Inaccurate forecasting of the financial impact of an acquisition or investment; and
 
  •  Failure to effectively integrate acquired companies or investments into our Company and the resultant inability to achieve expected synergies.


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Losses may exceed our insurance coverage or estimated reserves, which could impair our results of operations, financial condition and liquidity.
 
We are self-insured up to certain amounts with respect to our insurance coverages. Various types of catastrophic losses, including those related to environmental, health and safety matters may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not cover the full current market value or replacement cost of our lost investment or building code upgrades associated with such an occurrence. Inflation, changes in building codes and ordinances, environmental considerations and other factors might cause insurance proceeds to be insufficient to fully replace or renovate a hotel after it has been damaged or destroyed.
 
We cannot assure you that:
 
  •  the insurance coverages that we have obtained will fully protect us against insurable losses (i.e., losses may exceed coverage limits); or,
 
  •  we will not incur losses from risks that are not insurable or that are not economically insurable.
 
Should a material uninsured loss or a loss in excess of insured limits occur with respect to any particular property, we could lose our capital invested in the property, as well as the anticipated income and cash flow from the property. Any such loss could have an adverse effect on our results of operations, financial condition and liquidity. In addition, if we are unable to maintain insurance that meets our debt and franchise agreement requirements, and if we are unable to amend or waive those requirements, it could result in an acceleration of the related debt and impair our ability to maintain franchise affiliations.
 
Competition in the lodging industry could have a material adverse effect on our business and results of operations.
 
The lodging industry is highly competitive. No single competitor or small number of competitors dominates the industry. We generally operate in areas that contain numerous other competitors, some of which may have substantially greater resources than we have. Competitive factors in the lodging industry include, among others, oversupply in a particular market, franchise affiliation, reasonableness of room rates, quality of accommodations, service levels, convenience of locations and amenities customarily offered to the traveling public. There can be no assurance that demographic, geographic or other changes in markets will not adversely affect the future demand for our hotels, or that the competing and new hotels will not pose a greater threat to our business. Any of these adverse factors could materially and adversely affect us.
 
Adverse conditions in major metropolitan markets in which we do substantial business could negatively affect our results of operations.
 
Adverse economic conditions in markets in which the Company has multiple hotels, such as Pittsburgh, Baltimore/Washington, D.C. and Phoenix, could significantly and negatively affect the Company’s revenue and results of operations. The 12 continuing operations hotels in these markets combined provided 33%, 32%, and 33% of the Company’s continuing operations revenue in 2007, 2006, and 2005, respectively. As a result of the geographic concentration of these hotels, the Company is particularly exposed to the risks of downturns in these markets, which could have a major adverse effect on the Company’s profitability.
 
The lodging business is seasonal.
 
Demand for accommodations varies seasonally. The high season tends to be the summer months for hotels located in colder climates and the winter months for hotels located in warmer climates. Aggregate demand for accommodations at the hotels in our portfolio is lowest during the winter months. We generate substantial cash flow in the summer months compared to the slower winter months. If adverse factors affect our ability to generate cash in the summer months, the impact on our profitability is much greater than if similar factors were to occur during the winter months.


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We are exposed to potential risks of brand concentration.
 
As of March 1, 2008, we operate approximately 80% of our hotels under the InterContinental Hotels Group and Marriott flags, and therefore, are subject to potential risks associated with the concentration of our hotels under limited brand names. If either of these brands suffered a major decline in popularity with the traveling public, it could adversely affect our revenue and profitability.
 
We have experienced significant changes in our senior management team and Board of Directors.
 
There have been a number of changes in our senior management team. Our former chief executive officer, who was hired in July 2005, resigned in January 2008. The chief executive officer role is currently being filled by a member of the Board of Directors on an interim basis. Additionally, our senior vice president of capital investment left the Company in August 2007 as a result of the restructuring of our corporate office staff. Our current vice president of hotel operations, who has worked for the Company for approximately two years in a different role, assumed the position in August 2007. If our management team is unable to develop and successfully execute our business strategies, achieve our business objectives or maintain effective relationships with employees, suppliers, creditors and customers, our ability to grow our business and successfully meet operational challenges could be impaired.
 
The composition of our Board of Directors has changed significantly. From January 1, 2007 through March 1, 2008, five Board members resigned their positions (including the resignation of the former chief executive officer, who was also a director), while five new members joined the Board of Directors.
 
Our success is dependent on recruiting and retaining high caliber key personnel.
 
Our future success and our ability to manage future growth will depend in large part on our ability to attract and retain other highly qualified personnel. Competition for personnel is intense, and we may not be successful in attracting and retaining our personnel. The inability to attract and retain highly qualified personnel could hinder our business.
 
The increasing use of third-party travel websites by consumers may adversely affect our profitability.
 
Some of our hotel rooms are booked through third-party travel websites such as Travelocity.com, Expedia.com, Priceline.com and Hotels.com. If these Internet bookings increase, these intermediaries may be in a position to demand higher commissions, reduced room rates or induce other significant contract concessions from us. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. Although we expect to continue to derive most of our business through the traditional channels, if the revenue generated through Internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be adversely affected.
 
We will be unable to utilize all of our net operating loss carryforwards.
 
As of December 31, 2007, we had approximately $217.6 million of net operating loss carryforwards available for federal income tax purposes. To the extent that we do not have sufficient future taxable income to be offset by these net operating loss carryforwards, any unused losses will expire between 2018 and 2027. Our ability to use these net operating loss carryforwards to offset future income is also subject to annual limitations. An audit or review by the Internal Revenue Service could result in a reduction in the net operating loss carryforwards available to us.
 
Many aspects of our operations are subject to government regulations, and changes in these regulations may adversely affect our results of operations and financial condition.
 
A number of states and local governments regulate the licensing of hotels and restaurants, including occupancy and liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. Operators of hotels are also subject to the Americans with Disabilities Act, and various employment laws,


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which regulate minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could increase our operating costs and reduce profitability.
 
Costs of compliance with environmental laws and regulations could adversely affect operating results.
 
Under various federal, state, local and foreign environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for non-compliance with applicable environmental and health and safety requirements and for the costs of investigation, monitoring, removal or remediation of hazardous or toxic substances. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances.
 
The presence of these hazardous or toxic substances on a property could also result in personal injury, property damage or similar claims by private parties. In addition, the presence of contamination, or the failure to report, investigate or properly remediate contaminated property, could adversely affect the operation of the property or the owner’s ability to sell or rent the property or to borrow funds using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of those substances at the disposal or treatment facility, whether or not that facility is or ever was owned or operated by that person.
 
The operation and removal of underground storage tanks is also regulated by federal, state and local laws. In connection with the ownership and operation of our hotels, we could be held liable for the costs of remedial action for regulated substances and storage tanks and related claims.
 
Some of our hotels contain asbestos-containing building materials (“ACBMs”). Environmental laws require that ACBMs be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. Third parties may be permitted by law to seek recovery from owners or operators for personal injury associated with exposure to contaminants, including, but not limited to, ACBMs. Operation and maintenance programs have been developed for those hotels which are known to contain ACBMs.
 
Many, but not all, of our hotels have undergone Phase I environmental site assessments within the past several years, which generally provide a nonintrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental consultant. The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotel owner or others may be responsible. None of the Phase I environmental site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on us. Nevertheless, it is possible that these assessments did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware.
 
Some of our hotels may contain microbial matter such as mold, mildew and viruses, whose presence could adversely affect our results of operations. In addition, if any hotel in our portfolio is not properly connected to a water or sewer system, or if the integrity of such systems are breached, microbial matter or other contamination might develop. If this were to occur, we could incur significant remedial costs and we might also be subject to private damage claims and awards.
 
Any liability resulting from noncompliance or other claims relating to environmental matters could have a material adverse effect on us and our insurability for such matters in the future and on our results of operations, financial condition, liquidity and prospects.
 
A downturn in the economy due to high energy costs and gasoline prices could negatively impact our financial performance, our customer guest satisfaction scores and customer service levels.
 
We use significant amounts of electricity, gasoline, natural gas and other forms of energy to operate our hotels. A shortage in supply or a period of sustained high energy costs could negatively affect our results of operations. Additionally, a shortage of supply could impact our ability to operate our hotels and could adversely impact our guests’ experience at our hotels, and ultimately, our guest satisfaction scores and potentially our franchisor affiliations.


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Risks Related to Our Common Stock
 
Our stock price may be volatile.
 
The market price of our common stock could decline or fluctuate significantly in response to various factors, including:
 
  •  Actual or anticipated variations in our results of operations;
 
  •  Announcements of new services or products or significant price reductions by us or our competitors;
 
  •  Market performance by our competitors;
 
  •  Future issuances of our common stock, or securities convertible into or exchangeable or exercisable for our common stock, by us directly, or the perception that such issuances are likely to occur;
 
  •  Sales of our common stock by stockholders or the perception that such sales may occur in the future;
 
  •  The size of our market capitalization;
 
  •  Loss of our franchises;
 
  •  Default on our indebtedness and/or foreclosure of our properties;
 
  •  Changes in financial estimates by securities analysts; and
 
  •  Domestic and international economic, legal and regulatory factors unrelated to our performance.
 
We may never pay dividends on our common stock, in which event our stockholders’ only return on their investment, if any, will occur on the sale of our common stock.
 
We have not yet paid any dividends on our common stock, and we do not intend to do so in the foreseeable future. As a result, a stockholders’ only return on their investment, if any, will occur on the sale of our common stock.
 
Our charter documents, employment contracts and Delaware law may impede attempts to replace or remove our management or inhibit a takeover, which could adversely affect the value of our common stock.
 
Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent changes in our management or a change of control that you might consider favorable and may prevent you from receiving a takeover premium for your shares. These provisions include, for example:
 
  •  Authorizing the issuance of preferred stock, the terms of which may be determined at the sole discretion of the board of directors;
 
  •  Establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at meetings; and
 
  •  Requiring all stockholder action to be taken at a duly called meeting, not by written consent.
 
In addition, we have entered into, and could enter into in the future, employment contracts with certain of our employees that contain change of control provisions.
 
Item 1B.   Unresolved Staff Comments
 
We have no unresolved staff comments.
 
Item 2.   Properties
 
The information required to be presented in this section is presented in “Item 1. Business.”


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Item 3.   Legal Proceedings
 
The information required to be presented in this section is presented in “Item 1. Business.”
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of security holders during the fourth quarter of 2007.
 
PART II
 
Item 5.   Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Historical Data
 
The following table sets forth the high and low closing prices of our common stock on a quarterly basis for the past two years:
 
                 
    2006  
    High     Low  
 
First Quarter
  $ 13.93     $ 10.69  
Second Quarter
  $ 14.25     $ 10.92  
Third Quarter
  $ 14.21     $ 11.61  
Fourth Quarter
  $ 15.66     $ 12.79  
 
                 
    2007  
    High     Low  
 
First Quarter
  $ 14.40     $ 11.98  
Second Quarter
  $ 15.41     $ 13.05  
Third Quarter
  $ 15.50     $ 10.14  
Fourth Quarter
  $ 12.63     $ 11.05  
 
                 
    2008  
    High     Low  
 
First Quarter (up to March 1, 2008)
  $ 11.11     $ 8.45  
 
At March 1, 2008, we had approximately 1,703 holders of record of our common stock.
 
We have not declared or paid any dividends on our common stock, and our board of directors does not anticipate declaring or paying any cash dividends in the foreseeable future. We anticipate that all of our earnings, if any, and other cash resources will be retained to fund our business and build cash reserves and will be available for other strategic opportunities that may develop. Future dividend policy will be subject to the discretion of our board of directors, and will be contingent upon our results of operations, financial position, cash flow, liquidity, capital expenditure plan and requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal and regulatory restrictions on the payment of dividends and other factors that our board of directors deems relevant.
 
Stock Repurchase Programs
 
In May 2006, the Board of Directors of the Company approved a $15 million share repurchase program which expired in May 2007. Under this program, the Company repurchased 225,267 shares at an aggregate cost of $2.8 million during 2006. During 2007, the Company repurchased 146,625 shares at an aggregate cost of $1.9 million.
 
In August 2007, the Board of Directors of the Company approved a $30 million share repurchase program which expires on August 22, 2009. Under this program, the Company repurchased 1,304,645 shares at an aggregate


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cost of $15.2 million as of December 31, 2007. From January 1, through March 1, 2008, the Company repurchased 952,770 shares of common stock at an aggregate cost of $8.9 million, bringing the total number of shares repurchased under this program to 2,257,415.
 
Stock Awards
 
On January 26, 2007 the Compensation Committee of the Board of Directors authorized the issuance of 63,000 shares of nonvested stock awards to certain employees. The shares vest in three equal annual installments commencing on January 26, 2008. The shares were valued at $12.84, the closing price of the Company’s common stock on the date of the grant.
 
On February 12, 2007, the Board of Directors authorized the issuance of a total of 46,000 shares of nonvested stock awards to all non-employee members of the Board of Directors. The shares vest in three equal annual installments commencing on January 30, 2008. The shares were valued at $12.95, the closing price of the Company’s common stock on the date of the grant.
 
On March 30, 2007, the Company granted 18,800 shares of nonvested stock awards to certain employees. The shares vest in three equal annual installments commencing on March 30, 2008. The shares were valued at $13.36, the closing price of the Company’s common stock on the date of the grant.
 
On January 22, 2008, the Company granted 76,500 shares of nonvested stock awards to certain employees. The shares vest in two equal annual installments commencing on January 22, 2009. The shares were valued at $8.90, the closing price of the Company’s common stock on the date of the grant.
 
On February 12, 2008, the Company granted 24,000 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, 2009. The shares were valued at $8.68, the closing price of the Company’s common stock on the date of the grant.
 
The aggregate value of these stock grants is being recorded as compensation expense over the vesting period.
 
Equity Compensation Plan Information
 
The tables below summarize certain information with respect to our equity compensation plan as of December 31, 2007:
 
                         
                Number of
 
    Number of
          Securities Remaining
 
    Securities to be
    Weighted-Average
    Available for Future
 
    Issued Upon
    Exercise Price of
    Issuance Under
 
    Exercise
    Outstanding
    Equity Compensation
 
    of Outstanding
    Options,
    Plans (Excluding
 
    Options, Warrants
    Warrants and
    Securities Reflected
 
    and Rights (1)
    Rights
    in Column (a))
 
    (a)     (b)     (c)  
 
Equity compensation plans approved by security holders
    212,408 (1)(2)     10.60       2,536,666(2 )
Equity compensations plans not approved by security holders
                 
 
 
(1) Column (a) excludes Class B warrants which are not a component of the Equity Compensation Plan.
 
(2) All of the awards have been granted under the Stock Incentive Plan.
 
(3) After taking into account the outstanding options, the exercised options and the shares of nonvested common stock, we have 2,536,666 shares of common stock available for grant under the Stock Incentive Plan.
 
On November 25, 2002, the Company adopted a stock incentive plan (“Stock Incentive Plan”) which replaced the stock option plan previously in place. The Stock Incentive Plan, prior to the completion of the secondary stock offering on June 25, 2004, authorized the Company to award its directors, officers, or other key employees or consultants as determined by a committee appointed by the Board of Directors, options to acquire and other equity incentives up to 353,333 shares of common stock. With the completion of the secondary stock offering on June 25,


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2004, the total number of shares available for issuance under our stock incentive plan increased to 3,301,058 shares. As of December 31, 2007, we have issued options to acquire 981,332 shares (502,338 of which were forfeited), 12,413 shares of restricted stock (of which 4,719 shares were withheld to satisfy tax obligations), 66,666 shares of restricted stock units (of which 21,633 were withheld to satisfy tax obligations) and 250,066 shares of nonvested stock (of which 10,406 shares were forfeited and 6,989 of which were withheld to satisfy tax obligations).
 
Awards made during 2007 pursuant to the Stock Incentive Plan are summarized below:
 
         
Available under the plan, less previously issued as of December 31, 2006
    2,568,029  
Nonvested stock issued January 26, 2007
    (63,000 )
Nonvested stock issued February 12, 2007
    (46,000 )
Nonvested stock issued March 30, 2007
    (18,800 )
Shares of nonvested stock withheld from awards to satisfy tax withholding obligations
    6,989  
Nonvested shares forfeited in 2007
    9,629  
Stock options forfeited in 2007
    79,819  
         
Available for issuance, December 31, 2007
    2,536,666  
         
 
Treasury Stock Repurchases
 
The following table presents information with respect to the Company’s purchases of common stock made during the three months ended December 31, 2007:
 
                                 
                Total Number of
    Maximum Dollar Amount of
 
                Shares Purchased as
    Shares That May Yet Be
 
    Total Number of
    Average Price
    Part of Publicly
    Purchased Under the
 
    Shares
    Paid per Share
    Announced Plans or
    Publicly Announced Plans or
 
Period
  Purchased(1)     (2)     Programs     Programs  
 
October 2007
    228,715     $ 12.17       228,715     $ 22,162,687.02  
November 2007
    315,242     $ 11.49       315,242     $ 18,541,281.12  
December 2007
    319,808     $ 11.73       319,808     $ 14,800,275.17  
                                 
      863,765     $ 11.81       863,765          
                                 
 
 
(1) The total number of shares purchased includes:
 
(a) shares purchased pursuant to the August 2007 share repurchase program, which granted a maximum of $30 million of repurchase authority expiring in August 2009, and
 
(b) shares surrendered to the Company to satisfy tax withholding obligations in connection with the Stock Incentive Plan, of which there were none in October, November and December 2007.
 
(2) The average price paid per share excludes commissions.


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Performance Graph
 
We emerged from reorganization proceedings under Chapter 11 bankruptcy on November 25, 2002. Pursuant to the Joint Plan of Reorganization approved by the Bankruptcy Court, the previous common stock was cancelled and new common stock became available for issuance. The new common stock began trading on AMEX on January 28, 2003, under the symbol “LGN”. There is no meaningful market information relating to the price of the common stock from November 25, 2002 until the new common stock was listed on AMEX on January 28, 2003. Accordingly, performance information with respect to the Company’s common stock before January 28, 2003 is not presented below.
 
The following stock performance graph compares the cumulative total stockholder return of our common stock between January 28, 2003 and December 31, 2007, against the cumulative stockholder return during such period achieved by the Dow Jones Lodging Index and the Wilshire 5000 Total Market Index. The graph assumes that $100 was invested on January 28, 2003 in each of the comparison indices and in our common stock. The chart is adjusted to reflect a 1 for 3 reverse stock split which was effective on April 30, 2004.
 
 
                                                             
      1/28/03     12/03     12/04     12/05     12/06     12/07
Lodgian, Inc. 
      100.00         99.06         77.36         67.48         85.53         70.82  
Dow Jones Wilshire 5000
      100.00         134.81         151.82         161.42         187.05         197.78  
Dow Jones US Hotels
      100.00         151.78         221.79         242.09         309.16         262.09  
                                                             


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Item 6.   Selected Financial Data
 
Selected Consolidated Financial Data
 
We present, in the table below, selected financial data derived from our historical financial statements for the five years ended December 31, 2007.
 
In addition, in accordance with generally accepted accounting principles, our results of operations distinguish between the results of operations of those properties which we plan to retain in our portfolio for the foreseeable future, referred to as continuing operations, and the results of operations of those properties which have been sold or have been identified for sale, referred to as discontinued operations. The historical income statements have been reclassified based on the assets sold or held for sale as of December 31, 2007.
 
You should read the financial data below in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” included in this Form 10-K.
 
The income statement financial data for the years ended December 31, 2007, December 31, 2006, and December 31, 2005, and selected balance sheet data for the years ended December 31, 2007 and December 31, 2006, were extracted from the audited financial statements included in this Form 10-K, which commence on page F-1.
 
                                         
    (In thousands, except per-share data)  
    2007     2006     2005     2004     2003  
 
Income statement data:
                                       
Revenues — continuing operations
  $ 278,079     $ 261,785     $ 222,762     $ 217,189     $ 210,089  
Revenues — discontinued operations
    40,071       89,986       117,465       143,119       162,462  
Revenues — continuing and discontinued operations
    318,150       351,771       340,227       360,308       372,551  
(Loss) income — continuing operations
    (9,926 )     (10,267 )     10,836       (27,383 )     (16,140 )
Income (loss) — discontinued operations
    1,480       (4,909 )     1,465       (4,451 )     (15,537 )
Net (loss) income
    (8,446 )     (15,176 )     12,301       (31,834 )     (31,677 )
Net (loss) income attributable to common stock
    (8,446 )     (15,176 )     12,301       (31,834 )     (39,271 )
(Loss) income from continuing operations attributable to common stock before discontinued operations
    (9,926 )     (10,267 )     10,836       (27,383 )     (23,734 )
Basic (loss) earnings per common share:
                                       
(Loss) income — continuing operations
    (0.41 )     (0.42 )     0.44       (1.98 )     (6.92 )
Income (loss) — discontinued operations
    0.06       (0.20 )     0.06       (0.32 )     (6.66 )
Net (loss) income
    (0.35 )     (0.62 )     0.50       (2.30 )     (13.58 )
Net (loss) income attributable to common stock
    (0.35 )     (0.62 )     0.50       (2.30 )     (16.83 )
(Loss) income from continuing operations attributable to common stock before discontinued operations
    (0.41 )     (0.42 )     0.44       (1.98 )     (10.17 )
Diluted (loss) earnings per common share:
                                       
(Loss) income — continuing operations
    (0.41 )     (0.42 )     0.44       (1.98 )     (6.92 )
Income (loss) — discontinued operations
    0.06       (0.20 )     0.06       (0.32 )     (6.66 )
Net (loss) income
    (0.35 )     (0.62 )     0.50       (2.30 )     (13.58 )
Net (loss) income attributable to common stock
    (0.35 )     (0.62 )     0.50       (2.30 )     (16.83 )
(Loss) income from continuing operations attributable to common stock before discontinued operations
    (0.41 )     (0.42 )     0.44       (1.98 )     (10.17 )
Basic weighted average shares
    24,292       24,617       24,576       13,817       2,333  
Diluted weighted average shares
    24,292       24,617       24,630       13,817       2,333  


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    (In thousands, except per-share data)  
    2007     2006     2005     2004     2003  
 
Balance sheet data (at period end):
                                       
Total assets
  $ 624,730     $ 699,158     $ 726,685     $ 723,648     $ 709,460  
Assets held for sale
    8,009       89,437       14,866       30,559       68,617  
Long-term liabilities
    355,728       292,301       394,432       393,143       551,292  
Liabilities related to assets held for sale
    961       68,351       4,610       30,572       57,998  
Total liabilities
    404,142       446,122       466,424       495,385       666,534  
Total stockholders’ equity
    220,588       242,114       249,044       226,634       40,606  
                                         
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
You should read the discussion below in conjunction with the consolidated financial statements and accompanying notes. Also, the discussion which follows contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed above under the caption “Risk Factors.”
 
Executive Summary
 
We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms, as reported by Hotel Business in the 2008 Green Book published in December 2007. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as “Crowne Plaza,”, “Four Points by Sheraton”, “Hilton,” “Holiday Inn,” “Marriott,” and “Wyndham”. As of March 1, 2008, we operated 46 hotels with an aggregate of 8,432 rooms, located in 24 states and Canada. Of the 46 hotels, 35 hotels, with an aggregate of 6,608 rooms, are held for use and the results of operations are classified in continuing operations, while 11 hotels, with an aggregate of 1,824 rooms, are held for sale and the results of operations are classified in discontinued operations.
 
                         
    Held for Use     Held for Sale     Total  
 
Hotel count in portfolio as of December 31, 2007(a)
    44       2       46  
Reclassified to held for sale from January 1, 2008 to March 1, 2008
    (9 )     9        
                         
Hotel count in portfolio as of March 1, 2008
    35       11       46  
                         
 
 
(a) Includes 2 hotels which are closed.
 
Overview of Continuing Operations
 
Below is a summary of our results of continuing operations, presented in more detail in “Results of Operations-Continuing Operations”:
 
  •  Revenues increased $16.3 million, or 6.2%. Rooms revenues increased $10.5 million, or 5.3%, as ADR rose 3.8% and occupancy grew 1.5%. Food and beverage revenues increased $5.1 million, or 9.2%, boosted by the successful implementation of our food and beverage and profitability initiatives.
 
  •  Operating income declined $4.2 million. Impairment charges increased $6.1 million. Of this amount, $5.2 million was related to the write-down of three of the nine hotels that we identified for sale in December 2007 to their estimated fair values. Since the assets did not meet the held for sale criteria of SFAS No. 144 until January 2008, the assets remained in our held for use portfolio as of December 31, 2007. Accordingly, the impairment charge was recorded in continuing operations in 2007. Casualty gains decreased $1.0 million due to the wind-down of our insurance claim activity related to our hurricane-damaged hotels. Additionally, the Company incurred a $1.2 million restructuring charge in 2007 in conjunction with a cost-saving initiative to improve future profitability. These factors more than offset our improved operating performance driven by

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  sales and profitability initiatives. We also benefited from a $1.2 million reduction in the provision for our self-insured workers compensation, general liability and automobile programs. The reduction, which was allocated to several line items in our statement of operations based on the underlying cost, resulted primarily from lower expenditures than previously estimated.
 
Overview of Discontinued Operations
 
In November 2006, we announced a strategic initiative to reconfigure our hotel portfolio. We redefined our held for use portfolio, which contains 44 hotels with 8,116 rooms (including the Holiday inn Marietta, GA hotel, which is currently closed following a fire). In accordance with this strategy, we sold 23 hotels during 2007.
 
The consolidated statements of operations for discontinued operations for the years ended 2007, 2006 and 2005 include the results of operations for the 2 hotels that were held for sale at December 31, 2007, as well as all properties that have been sold in accordance with SFAS No. 144.
 
The assets held for sale at December 31, 2007 and December 31, 2006 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 December 31, 2007 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 year ended December 31, 2007, we recorded impairment charges of $4.7 million on assets held for sale.
 
Our continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria of 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.
 
For the 23 hotels sold in 2007, the total revenues for the year ended December 31, 2007 were $34.8 million, the direct operating expenses were $14.8 million, and the other hotel operating expenses were $23.6 million.
 
Critical Accounting Policies and Estimates
 
Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). As we prepare our financial statements, we make estimates and assumptions which affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. A summary of our significant accounting policies is included in Note 1 of the notes to our consolidated financial statements. We consider the following to be our critical accounting policies and estimates:
 
Consolidation policy — All of our hotels are owned by operating subsidiaries. We consolidate the assets, liabilities and results of operations of those hotels where we own at least 50% of the voting equity interest and we exercise significant control. All of the subsidiaries are wholly-owned except for one joint venture, which meets the criteria for consolidation.
 
When we consolidate a hotel in which we own less than 100% of the voting equity interest, we include the assets and liabilities of the hotel in our consolidated balance sheet. The third party interest in the net assets of the hotel is reported as minority interest on our consolidated balance sheet. In addition, our consolidated statement of operations reflects the full revenues and expenses of the hotel and the third party portion of the net income or loss is reported as minority interest in our consolidated statements of operations. If the loss applicable to the minority interest exceeds the minority’s equity, we report the entire loss in our consolidated statement of operations.


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Deferral policy — We defer franchise application fees on the acquisition or renewal of a franchise as well as loan origination costs related to new or renewed loan financing arrangements. Deferrals relating to the acquisition or renewal of a franchise are amortized on a straight-line basis over the period of the franchise agreement. We amortize deferred financing costs over the term of the loan using the effective interest method. The effective interest method incorporates the present values of future cash outflows and the effective yield on the debt in determining the amortization of loan fees. At December 31, 2007, these deferrals totaled $4.1 million for our held for use hotels. If we were to write-off these expenses in the year of payment, our operating expenses in those years would be significantly higher and lower in other years covered in the related agreement.
 
Asset impairment — We invest significantly in real estate assets. Property and equipment for our held for use assets represent 80.0% of the total assets on our consolidated balance sheet at December 31, 2007. Accordingly, our policy on asset impairment is considered a critical accounting estimate. Management periodically evaluates the Company’s property and equipment to determine whether events or changes in circumstances indicate that a possible impairment in the carrying values of the assets has occurred. As part of this evaluation, and in accordance with SFAS No. 144, we classify our properties into two categories: “assets held for sale” and “assets held for use”.
 
We consider an asset held for sale when the following criteria per SFAS No. 144 are met:
 
1. Management commits to a plan to sell the asset;
 
2. The asset is available for immediate sale in its present condition;
 
3. An active marketing plan to sell the asset has been initiated at a reasonable price;
 
4. The sale of the asset is probable within one year; and
 
5. It is unlikely that significant changes to the plan to sell the asset will be made.
 
Upon designation of an asset as held for sale, we record the carrying value of the asset at the lower of its carrying value or its estimated fair value (which is determined after consultation with independent real estate brokers) less estimated selling costs, and we cease depreciation of the asset. The fair values of the assets held for sale are based on the estimated selling prices. We determine the estimated selling prices with the assistance of independent real estate brokers. The estimated selling costs are generally based on our experience with similar asset sales. We record impairment charges and write down respective hotel assets if their carrying values exceed the estimated selling prices less costs to sell. During 2007, we recorded $4.7 million of impairment losses on 5 hotels held for sale. During 2006, we recorded $23.1 million of impairment losses on 16 hotels held for sale.
 
With respect to assets held for use, we estimate the undiscounted cash flows to be generated by these assets. We then compare the estimated undiscounted cash flows for each hotel with their respective carrying values to determine if there are indicators of impairment. The carrying value of a long-lived asset is considered for impairment when the estimated undiscounted cash flows to be generated by the asset over its estimated useful life are less than the asset’s carrying value. For those assets where there are indicators of impairment, we determine the estimated fair values of these assets using broker valuations or appraisals. The broker valuations of fair value normally use the “cap rate” approach of estimated cash flows, a “per key” approach or a “room revenue multiplier” approach for determining fair value. If the estimated fair value exceeds the asset’s carrying value, no adjustment is generally recorded. Additionally, if an asset is replaced prior to the end of its useful life, the remaining net book value is recorded as an impairment loss. During 2007, we recorded $6.8 million of impairment losses. Of this amount, $1.6 million related to the write-off of assets that were replaced and had remaining book value. The remaining $5.2 million represented the write-down of three of our held for use hotels to their estimated fair values. These three hotels were part of the nine hotels that management identified for sale in December 2007. Since the assets did not meet the held for sale criteria of SFAS No. 144 until January 2008, the assets were classified as held for use as of December 31, 2007 and the related impairment charges were classified in continuing operations. During 2006, we recorded $0.8 million of impairment losses to write-off assets that were replaced in 2006 and had remaining book value.
 
Accrual of self-insured obligations — We are self-insured up to certain amounts for employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers’ compensation, automobile liability and other coverages. We establish reserves for our estimates of the loss that we will ultimately


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incur on reported claims as well as estimates for claims that have been incurred but not yet reported. Our reserves, which are reflected in other accrued liabilities on our consolidated balance sheet, are based on actuarial valuations and our history of claims. Our actuaries incorporate historical loss experience and judgments about the present and expected levels of costs per claim. Trends in actual experience are an important factor in the determination of these estimates. We believe that our estimated reserves for such claims are adequate; however, actual experience in claim frequency and amount could materially differ from our estimates and adversely affect our results of operations, cash flow, liquidity and financial condition. As of December 31, 2007, our reserve balance related to these self-insured obligations was $12.2 million.
 
Income Statement Overview
 
The discussion below focuses primarily on our continuing operations. In the continuing operations discussions, we compare the results of operations for the last three years for the 44 consolidated hotels that, as of December 31, 2007, are classified as assets held for use.
 
Revenues
 
We categorize our revenues into the following three categories:
 
  •  Room revenues — derived from guest room rentals;
 
  •  Food and beverage revenues — derived from hotel restaurants, room service, hotel catering and meeting room rentals; and
 
  •  Other revenues — derived from guests’ long-distance telephone usage, laundry services, parking services, in-room movie services, vending machine commissions, leasing of hotel space and other miscellaneous revenues.
 
Transient revenues, which accounted for approximately 71% of our 2007 room revenues, are revenues derived from individual guests who stay only for brief periods of time without a long-term contract. Demand from groups made up approximately 23% of our 2007 room revenues while our contract revenues (such as contracts with airlines for crew rooms) accounted for the remaining 6%.
 
We believe revenues in the hotel industry are best explained by the following four key performance indicators:
 
  •  Occupancy — computed by dividing total room nights sold by the total available room nights;
 
  •  Average Daily Rate (ADR) — computed by dividing total room revenues by total room nights sold; and
 
  •  Revenue per available room (RevPAR) — computed by dividing total room revenues by total available room nights. RevPAR can also be obtained by multiplying the occupancy by the ADR.
 
  •  RevPAR Index — computed by dividing Lodgian’s RevPAR performance by the industry (or market) RevPAR performance which is a measure of market share.
 
To obtain available room nights for a year, we multiply the number of rooms in our portfolio by the number of days the hotel was open during the year. We have adjusted available rooms accordingly, for the Holiday Inn Arden Hills, St. Paul, MN hotel which was closed in 2007, the Holiday Inn Marietta, GA hotel, which closed following a fire in January 2006, the Crowne Plaza Melbourne, FL hotel, which was closed throughout 2005 due to hurricane renovations, and the Crowne Plaza West Palm Beach, FL hotel which reopened on December 29, 2005 after the completion of hurricane repairs.
 
These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of our hotels experience lower occupancy levels in the fall and winter months, November through February, which generally results in lower revenues, lower net income and less cash flow during these months.


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Operating expenses
 
Operating expenses fall into the following categories:
 
  •  Direct operating expenses — these expenses tend to vary with available rooms and occupancy. However, hotel level expenses contain significant elements of fixed costs and, therefore, do not decline proportionately with revenues. Direct expenses are further categorized as follows:
 
  •  Room expenses — expenses incurred in generating room revenues;
 
  •  Food and beverage expenses — expenses incurred in generating food and beverage revenues; and
 
  •  Other direct expenses — expenses incurred in generating the revenue activities classified in “other revenue”;
 
We use certain “non-GAAP financial measures,” which are measures of our historical financial performance that are not calculated and presented in accordance with GAAP, within the meaning of applicable SEC rules. For instance, we use the term direct operating contribution to mean revenues less direct operating expenses as presented in the consolidated statement of operations. We assess profitability by measuring changes in our direct operating contribution and direct operating contribution percentage, which is direct operating contribution as a percentage of the applicable revenue source. These measures assist 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, provide useful information to management.
 
  •  Other hotel operating expenses — these expenses include salaries for hotel management, advertising and promotion, franchise fees, repairs and maintenance and utilities;
 
  •  Property and other taxes, insurance and leases — these expenses include equipment, ground and building rentals, insurance, and property, franchise and other taxes;
 
  •  Corporate and other — these expenses include corporate salaries and benefits, legal, accounting and other professional fees, directors’ fees, costs for office space and information technology costs. Also included are costs related to compliance with Sarbanes-Oxley legislation;
 
  •  Casualty (gains) losses, net — these expenses include hurricane and other repair costs and charges related to the assets written off that were damaged, netted against any gains realized on the final settlement of property damage claims;
 
  •  Depreciation and amortization — depreciation of fixed assets (primarily hotel assets) and amortization of deferred franchise fees; and
 
  •  Impairment of long-lived assets — charges which were required to write down the carrying values of long-lived assets to their fair values on assets where the estimated undiscounted cash flows over the life of the asset were less than the carrying value of the asset.
 
Non-operating items
 
Non-operating items include:
 
  •  Business interruption insurance proceeds represent insurance proceeds for lost profits as a result of a business shutdown. Our 2007 business interruption proceeds relate primarily to the recovery of lost profits and reimbursement for additional expenses incurred at the Holiday Inn Hotel & Suites Marietta, which was closed as a result of a fire in January 2006.
 
  •  Interest expense and other financing costs represent interest expense, which includes amortization of deferred loan costs;


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  •  Interest income;
 
  •  Minority interests — our equity partner’s share of the income or loss of the hotel owned by joint venture that we consolidate.
 
Results of Operations — Continuing Operations
 
Results of operations for the twelve months ended December 31, 2007 and December 31, 2006
 
Revenues — Continuing Operations
 
                                 
                Increase
 
    2007     2006     (decrease)  
    ($ in thousands)  
 
Revenues:
                               
Rooms
  $ 208,222     $ 197,719     $ 10,503       5.3 %
Food and beverage
    60,898       55,792       5,106       9.2 %
Other
    8,959       8,274       685       8.3 %
                                 
Total revenues
    278,079       261,785     $ 16,294       6.2 %
                                 
Occupancy
    68.4 %     67.5 %             1.5 %
ADR
  $ 105.29     $ 101.47     $ 3.81       3.8 %
RevPAR
  $ 72.00     $ 68.45     $ 3.55       5.2 %
 
Rooms revenues increased $10.5 million, or 5.3%, driven by a 3.8% increase in ADR and a 1.5% increase in occupancy. Our RevPAR index grew 0.9% from 98.4% in 2006 to 99.3% to 2007, excluding the hotel that closed in January 2006 following a fire. Our RevPAR index increased 2.7% to 102.3%, excluding the hotels under renovation during 2006 and 2007 and the closed hotel.
 
Food and beverage revenues increased $5.1 million, or 9.2%, driven by the successful execution of initiatives to improve our food and beverage operations. Other revenues grew $0.7 million, or 8.3%, largely as a result of new programs offered at our beachfront and resort hotels.
 
Revenue growth was negatively impacted by displacement. Displacement refers to lost revenues and profits due to rooms being out of service as a result of renovation. Revenue is considered “displaced” only when a hotel has sold all available rooms and denies additional reservations due to rooms out of service. 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 twelve months ended December 31, 2007 for the six hotels under renovation was $1.9 million. The largest amount of this displacement occurred at our former Holiday Inn Select DFW Airport hotel, which was recently converted to a Wyndham hotel and is undergoing an extensive renovation. Total revenue displacement for the twelve months ended December 31, 2006 was $0.3 million.


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The table below shows our occupancy, ADR, RevPAR and RevPAR Index (market share) for our continuing operations hotels for the twelve months ended December 31, 2007 and 2006. We have presented this information in subsets to illustrate the impact of the hotel closed in January 2006 due to fire, renovations underway and completed, and branding.
 
                                                 
Hotel
    Room
                    Increase
 
Count
    Count         2007     2006     (decrease)  
 
  43       7,923     All Continuing Operations less one hotel closed in 2006 due to fire                                
                Occupancy     68.4 %     67.4 %             1.5 %
                ADR   $ 105.29     $ 101.54     $ 3.75       3.7 %
                RevPAR   $ 72.00     $ 68.48     $ 3.52       5.1 %
                RevPAR Index     99.3 %     98.4 %             0.9 %
  36       6,419     Continuing Operations less one hotel closed in 2006 due to fire and hotels under renovation in 2006 and 2007                                
                Occupancy     69.7 %     66.9 %             4.2 %
                ADR   $ 103.56     $ 101.06     $ 2.50       2.5 %
                RevPAR   $ 72.22     $ 67.64     $ 4.58       6.8 %
                RevPAR Index     102.3 %     99.6 %             2.7 %
  10       2,259     Hotels completing major renovations in 2005 and 2006                                
                Occupancy     71.6 %     65.6 %             9.1 %
                ADR   $ 109.86     $ 109.71     $ 0.15       0.1 %
                RevPAR   $ 78.63     $ 71.98     $ 6.65       9.2 %
                RevPAR Index     97.5 %     93.4 %             4.4 %
  12       1,398     Marriott Hotels                                
                Occupancy     71.1 %     72.5 %             (1.9 )%
                ADR   $ 113.72     $ 106.59     $ 7.13       6.7 %
                RevPAR   $ 80.81     $ 77.31     $ 3.50       4.5 %
                RevPAR Index     112.9 %     114.2 %             (1.1 )%
  4       777     Hilton Hotels                                
                Occupancy     67.2 %     64.7 %             3.9 %
                ADR   $ 107.15     $ 104.47     $ 2.68       2.6 %
                RevPAR   $ 72.04     $ 67.57     $ 4.47       6.6 %
                RevPAR Index     95.1 %     91.3 %             4.2 %
  23       4,958     IHG Hotels less one hotel closed in 2006 due to fire                                
                Occupancy     69.0 %     66.1 %             4.4 %
                ADR   $ 104.95     $ 101.49     $ 3.46       3.4 %
                RevPAR   $ 72.45     $ 67.11     $ 5.34       8.0 %
                RevPAR Index     100.4 %     97.4 %             3.1 %
  3       685     Other Brands(1)                                
                Occupancy     61.6 %     71.0 %             (13.2 )%
                ADR   $ 93.62     $ 94.88     $ (1.26 )     (1.3 )%
                RevPAR   $ 57.70     $ 67.41     $ (9.71 )     (14.4 )%
                RevPAR Index     73.2 %     85.9 %             (14.8 )%
 
 
(1) Other Brands include the Wyndham DFW Airport North, which was under renovation and brand conversion during 2007 and experienced a significant amount of displacement, as well as the Radisson New Orleans Airport Hotel in Kenner, LA which, experienced a dramatic increase in 2006 (and decrease in 2007) in occupancy and ADR as a result of Hurricane Katrina.


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Direct operating expenses — Continuing Operations
 
                                                 
                Increase
    % of Total Revenues  
    2007     2006     (decrease)     2007     2006  
    ($ in thousands)  
 
Direct operating expenses:
                                               
Rooms
  $ 53,161     $ 51,272     $ 1,889       3.7 %     19.1 %     19.6 %
Food and beverage
    41,796       39,623       2,173       5.5 %     15.0 %     15.1 %
Other
    6,286       6,161       125       2.0 %     2.3 %     2.4 %
                                                 
Total direct operating expenses
  $ 101,243     $ 97,056     $ 4,187       4.3 %     36.4 %     37.1 %
                                                 
Direct operating contribution (by revenue source):
                                               
Rooms
  $ 155,061     $ 146,447     $ 8,614       5.9 %                
Food and beverage
    19,102       16,169       2,933       18.1 %                
Other
    2,673       2,113       560       26.5 %                
                                                 
Total direct operating contribution
  $ 176,836     $ 164,729     $ 12,107       7.3 %                
                                                 
Direct operating contribution% (by revenue source):
                                               
Rooms
    74.5 %     74.1 %                                
Food and beverage
    31.4 %     29.0 %                                
Other
    29.8 %     25.5 %                                
                                                 
Total direct operating contribution
    63.6 %     62.9 %                                
                                                 
 
Rooms expenses increased $1.9 million, or 3.7%. Room expenses on a cost per occupied room (“POR”) basis increased from $26.17 in 2006 to $26.76 in 2007, an increase of 2.3%, primarily as a result of higher fee-based expenses including credit card and other commissions driven by revenue growth. Additionally, payroll costs on a POR basis increased 1.0%, because of performance incentives. Direct operating contribution for rooms increased $8.6 million, a growth rate of 5.9%. The increase in direct operating contribution is attributable to the realization of our labor management initiatives.
 
Food and beverage expenses increased $2.2 million, or 5.5%, driven primarily by higher food and beverage revenues. Food and beverage direct operating contribution grew $2.9 million, or 18.1%, largely as a result of the successful deployment of our revenue growth and labor management initiatives.
 
Other expenses grew $0.1 million, or 2.0%, while the related direct operating contribution rose $0.6 million, an increase of 26.5%. In total, direct operating contribution increased $12.1 million, or 7.3%. As a percentage of total revenue, direct operating contribution expanded 70 basis points, from 62.9% to 63.6%.


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Other operating expenses — Continuing Operations
 
                                                 
                            % of Total Revenues  
    2007     2006     Increase (decrease)     2007     2006  
    ($ in thousands)  
 
Other operating expenses:
                                               
Other hotel operating costs
                                               
General and administrative
  $ 17,459     $ 15,650     $ 1,809       11.6 %     6.3 %     6.0 %
Advertising and promotion
    14,828       12,819       2,009       15.7 %     5.3 %     4.9 %
Franchise fees
    19,761       18,547       1,214       6.5 %     7.1 %     7.1 %
Repairs and maintenance
    13,017       13,059       (42 )     (0.3 )%     4.7 %     5.0 %
Utilities
    14,965       14,436       529       3.7 %     5.4 %     5.5 %
Other expenses
    607       188       419       222.9 %     0.2 %     0.1 %
                                                 
Total other hotel operating expenses
    80,637       74,699       5,938       7.9 %     29.0 %     28.5 %
Property and other taxes, insurance and leases
    20,684       20,793       (109 )     (0.5 )%     7.4 %     7.9 %
Corporate and other
    21,454       20,760       694       3.3 %     7.7 %     7.9 %
Casualty (gains), net
    (1,867 )     (2,888 )     1,021       35.4 %     (0.7 )%     (1.1 )%
Restructuring
    1,232             1,232       n/m       0.4 %     0.0 %
Depreciation and amortization
    32,145       30,718       1,427       4.6 %     11.6 %     11.7 %
Impairment of long-lived assets
    6,819       758       6,061       799.6 %     2.5 %     0.3 %
                                                 
Total other operating expenses
  $ 161,104     $ 144,840     $ 16,264       11.2 %     57.9 %     55.3 %
                                                 
Total operating expenses
  $ 262,347     $ 241,896     $ 20,451       8.5 %     94.3 %     92.4 %
                                                 
Operating income
  $ 15,732     $ 19,889     $ (4,157 )     (20.9 )%     5.7 %     7.6 %
                                                 
 
Other hotel operating costs increased $5.9 million, or 7.9%. The increase is a result of the following:
 
  •  General and administrative costs increased $1.8 million. As a percent of revenues, general and administrative expenses increased 30 basis points in 2007 to 6.3%. The increase was due in large part to higher payroll costs (fewer vacant positions and higher caliber employees), legal and other professional fees, relocation, and travel and training costs.
 
  •  Advertising and promotion costs increased $2.0 million, or 15.7%. As a percentage of revenue, advertising and promotional costs increased 40 basis points from 4.9% in 2006 to 5.3% in 2007. The increase is largely attributable to staffing related to sales and marketing programs designed to drive higher revenues.
 
  •  Franchise fees increased $1.2 million, or 6.5%, primarily as a result of revenue growth. As a percentage of revenues, franchise fees remained flat year over year at 7.1%.
 
  •  Repairs and maintenance expenses were essentially flat to the prior year, resulting from improved preventive maintenance programs and the execution of our capital expenditures plan. As a percentage of total revenues, repairs and maintenance costs decreased 30 basis points from 5.0% in 2006 to 4.7% in 2007.
 
  •  Utilities costs increased $0.5 million, or 3.7%. This increase is driven largely by higher occupancy. As a percentage of total revenues, utilities costs decreased 10 basis points to 5.4% in 2007.
 
Property and other taxes, insurance and leases decreased $0.1 million in 2007 and decreased 50 basis points as a percentage of revenues, to 7.4%. The decrease was due largely to lower property insurance premiums and lower claims associated with our self-insurance programs.
 
Corporate and other expenses increased $0.6 million, or 3.3%, due largely to the following:
 
  •  In January 2007, we announced a review of strategic alternatives to enhance shareholder value. During 2007, we incurred $1.5 million in related costs. Similar costs were not incurred in 2006.


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  •  $0.4 million related to the amortization of non-vested stock awards granted to our Board of Directors in February 2007. Two members of the Board did not stand for reelection at the April 2007 annual meeting of stockholders. In addition, one Board member resigned in August 2007 and another Board member resigned in December 2007. The Board of Directors elected to accelerate the vesting of the awards for all four of these members and the related expense was recorded. The stock awarded to the remaining members of our Board of Directors is being amortized over a three-year vesting period at an annualized rate of $0.1 million.
 
  •  These increases in costs were largely offset by lower payroll and related expenses primarily as a result of the August 2007 restructuring plan.
 
Casualty (gains) losses, net represent costs related to hurricane and other property damage, offset by gains related to the final settlement of the related property damage claims. In 2007, we recognized total net gains of $1.9 million related to the settlement of a property damage claim at our Radisson New Orleans Airport hotel, which was damaged in 2005 by Hurricane Katrina.
 
In August 2007, we announced cost-reduction initiatives to improve future operating performance. These initiatives resulted in position eliminations in the Company’s corporate and regional staff as well as reductions in hotel staff at certain locations. As a result, we incurred restructuring costs totaling $1.2 million, which included severance and related costs. All of the terminations were completed and the related costs were paid as of December 31, 2007.
 
Depreciation and amortization expenses increased $1.4 million, or 4.6%, driven by the completion of several renovation projects in 2006 and 2007. In accordance with generally accepted accounting principles, we begin recognizing depreciation expense when the asset is placed in service.
 
During 2007, we recorded $6.8 million of impairment losses. Of this amount, $1.6 million related to the write-off of assets that were replaced but had remaining book value. The remaining $5.2 million represented the write-down of three of our held for use hotels to their estimated fair values. These three hotels were part of the nine hotels that management identified for sale in December 2007. Since the assets did not meet the held for sale criteria of SFAS No. 144 until January 2008, the assets were classified as held for use as of December 31, 2007 and the related impairment charges were classified in continuing operations. During 2006, we recorded $0.8 million of impairment losses to write-off assets that were replaced in 2006 and had remaining book value.
 
Non-operating income (expenses) — Continuing Operations
 
                                 
    2007     2006     Increase (decrease)  
    ($ in thousands)  
 
Non-operating income (expenses):
                               
Business interruption proceeds
  $ 571     $ 3,931     $ (3,360 )     (85.5 )%
Interest income and other
    4,014       2,607       1,407       54.0 %
Interest expense
    (26,030 )     (25,348 )     682       2.7 %
Loss on debt extinguishment
    (3,411 )           3,411       n/m  
Minority interests
    (421 )     295       (716 )     (242.7 )%
 
Business interruption proceeds represent funds received or amounts for which proofs of loss have been signed. Business interruption proceeds in 2007 were recorded for the Holiday Inn Marietta, GA which closed in January 2006 as the result of a fire. The hotel remains closed.
 
Interest income and other increased $1.4 million, or 54%, due to higher balances in our interest-bearing and escrow accounts throughout the year as well as higher interest rates.
 
Interest expense increased $0.7 million following the refinancing that occurred in April 2007. We entered into a $130 million loan agreement with Goldman Sachs Commercial Mortgage Capital, L.P., defeased the entire $67.7 million balance of the Merrill Lynch Fixed Rate #2 Loan, and paid off the $55.8 million Merrill Lynch Floating Rate Loan. The refinancing decreased our overall interest expense, but resulted in higher interest expense for continuing operations and lower interest expense for discontinued operations based on the respective hotels that were encumbered by the debt facilities.


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The $3.4 million loss on debt extinguishment was a result of the April 2007 refinancing.
 
Minority interests represent the third party owners’ share of the net income (losses) of the joint ventures in which we have (or had) a controlling interest during the period. We recorded $0.4 million in minority interest expense in 2007, which represented our joint venture partners’ interests in the Radisson New Orleans Airport Plaza, LA and the Crowne Plaza Melbourne, FL through the dates on which we acquired our joint venture partners’ interests in 2007. In 2006, we recorded $0.3 million in minority interest income as these hotels experienced losses in 2006. We currently have an ownership interest in one of our hotels through a joint venture. The cumulative losses exceed the joint venture partner’s interest. Thus, no minority interest expense or income was recorded in 2007.
 
Results of operations for the twelve months ended December 31, 2006 and December 31, 2005
 
Revenues — Continuing Operations
 
                                 
    2006     2005     Increase (decrease)  
    ($ in thousands)  
 
Revenues:
                               
Rooms
  $ 197,719     $ 168,028     $ 29,691       17.7 %
Food and beverage
    55,792       46,869       8,923       19.0 %
Other
    8,274       7,865       409       5.2 %
                                 
Total revenues
    261,785       222,762     $ 39,023       17.5 %
                                 
Occupancy
    67.5 %     65.9 %             2.4 %
ADR
  $ 101.47     $ 91.51     $ 9.96       10.9 %
RevPAR
  $ 68.45     $ 60.35     $ 8.10       13.4 %
 
Room revenues increased $29.7 million, or 17.7% due to higher rooms sold (up 6.1%) and ADR (up 10.9%). The increase in rooms sold was driven by a 2.4% increase in occupancy (rooms sold as a percentage of available rooms) and a 3.7% increase in available rooms. The increase in available rooms was due to the reopening of two hotels. Our Crowne Plaza Hotels in West Palm Beach and Melbourne, FL, which were closed due to hurricane damage, reopened in late December 2005 and January 2006, respectively. The increase in occupancy was attributable in part to lowered occupancy in 2005 caused by displacement. In addition to the two hotels in Florida, eight other continuing operations hotels underwent major renovations in 2005. For the year ended December 31, 2005, room revenue displacement for the 10 hotels was $15.9 million and total revenue displacement was $21.1 million. Excluding the impact of 2005 displacement, room revenues increased $13.8 million, or 7.5%. The growth in ADR and occupancy were partially offset by the closure of one hotel in January 2006 due to a fire.
 
Revenue is considered “displaced” only when a hotel has sold all available rooms and denies additional reservations due to rooms being out of order. We feel this method is conservative, as it does not include estimated other or “soft” displacement associated with a renovation; for example, guests who depart earlier than planned due to the disruption caused by the renovation work, local customers or frequent guests who may choose an alternative hotel during the renovation, or local groups that may not choose to use the hotel to house their groups during renovations.
 
Food and beverage revenues increased $8.9 million, or 19.0% due largely to the reopening of the Crowne Plaza hotels in West Palm Beach and Melbourne, FL. Excluding these two hotels, food and beverage revenues increased $4.2 million, or 8.9%, driven by initiatives to improve our food and beverage operations.
 
Other revenues increased $0.4 million due to the reopening of our two Crowne Plaza hotels in Florida. Excluding these two hotels, other revenues remained constant year over year.


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Direct operating expenses — Continuing Operations
 
                                                 
                            % of Total Revenues  
    2006     2005     Increase (decrease)     2006     2005  
    ($ in thousands)  
 
Direct operating expenses:
                                               
Rooms
  $ 51,272     $ 45,028     $ 6,244       13.9 %     19.6 %     20.2 %
Food and beverage
    39,623       33,114       6,509       19.7 %     15.1 %     14.9 %
Other
    6,161       6,019       142       2.4 %     2.4 %     2.7 %
                                                 
Total direct operating expenses
  $ 97,056     $ 84,161     $ 12,895       15.3 %     37.1 %     37.8 %
                                                 
Direct operating contribution (by revenue source):
                                               
Rooms
  $ 146,447     $ 123,000     $ 23,447       19.1 %                
Food and beverage
    16,169       13,755       2,414       17.5 %                
Other
    2,113       1,846       267       14.5 %                
                                                 
Total direct operating contribution
  $ 164,729     $ 138,601     $ 26,128       18.9 %                
                                                 
Direct operating contribution% (by revenue source):
                                               
Rooms
    74.1 %     73.2 %                                
Food and beverage
    29.0 %     29.3 %                                
Other
    25.5 %     23.5 %                                
                                                 
Total direct operating contribution
    62.9 %     62.2 %                                
                                                 
 
Room expenses increased $6.2 million, or 13.9%. Room expenses on a cost per occupied room basis increased from $24.52 in 2005 to $26.31 in 2006, an increase of 7.3%, primarily as a result of higher travel agent and credit card commissions driven by the increase in room revenue. Additionally, payroll costs on a per occupied room basis increased 4.9%, driven largely by higher rooms sold. Direct operating contribution for rooms increased $23.4 million, a growth rate of 19.1%. Direct operating rooms margin as a percentage of revenue increased from 73.2% to 74.1%, an increase of 90 basis points.
 
Food and beverage expenses increased $6.5 million, or 19.7%, driven primarily by higher food and beverage revenues. The food and beverage direct operating contribution declined 30 basis points from 29.3% in 2005 to 29.0% in 2006 as a result of ramp-up expenses at our Crowne Plaza hotels in West Palm Beach and Melbourne, FL and the closure of one hotel due to a fire. Excluding these three hotels, food and beverage direct operating contribution as a percentage of food and beverage revenue remained unchanged at 30.1%.
 
Total direct operating expenses increased $12.9 million, while total revenues increased $39.0 million. Direct operating contribution increased $26.1 million, or 18.9%. Total direct operating contribution as a percentage of total revenues improved from 62.2% in 2005 to 62.9% in 2006.


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Other operating expenses — Continuing Operations
 
                                                 
                            % of Total Revenues  
    2006     2005     Increase (decrease)     2006     2005  
    ($ in thousands)  
 
Other operating expenses:
                                               
Other hotel operating costs
                                               
General and administrative
  $ 15,650     $ 15,110     $ 540       3.6 %     6.0 %     6.8 %
Advertising and promotion
    12,819       11,171       1,648       14.8 %     4.9 %     5.0 %
Franchise fees
    18,547       15,578       2,969       19.1 %     7.1 %     7.0 %
Repairs and maintenance
    13,059       11,753       1,306       11.1 %     5.0 %     5.3 %
Utilities
    14,436       13,215       1,221       9.2 %     5.5 %     5.9 %
Other expenses
    188       405       (217 )     (53.6 )%     0.1 %     0.2 %
                                                 
Total other hotel operating expenses
    74,699       67,232       7,467       11.1 %     28.5 %     30.2 %
Property and other taxes, insurance and leases
    20,793       16,751       4,042       24.1 %     7.9 %     7.5 %
Corporate and other
    20,760       20,016       744       3.7 %     7.9 %     9.0 %
Casualty (gains) losses, net
    (2,888 )     (28,464 )     25,576       89.9 %     (1.1 )%     (12.8 )%
Depreciation and amortization
    30,718       22,040       8,678       39.4 %     11.7 %     9.9 %
Impairment of long-lived assets
    758       1,244       (486 )     (39.1 )%     0.3 %     0.6 %
                                                 
Total other operating expenses
  $ 144,840     $ 98,819     $ 46,021       46.6 %     55.3 %     44.4 %
                                                 
Total operating expenses
  $ 241,896     $ 182,980     $ 58,916       32.2 %     92.4 %     82.1 %
                                                 
Operating income
  $ 19,889     $ 39,782     $ (19,893 )     (50.0 )%     7.6 %     17.9 %
                                                 
 
Other hotel operating costs increased $7.5 million, or 11.1%, but declined as a percentage of revenue. The increase is a result of the following:
 
  •  Franchise fees increased $3.0 million, or 19.1%, primarily as a result of revenue growth. As a percentage of revenues, franchise fees increased slightly from 7.0% in 2005 to 7.1% in 2006.
 
  •  Advertising and promotion costs increased $1.6 million, or 14.8%. As a percentage of revenue, advertising and promotional costs declined 10 basis points to 4.9%. Payroll costs were up $1.0 million due to the reopening of the West Palm Beach and Melbourne, Florida Crowne Plaza hotels as well as increased staffing related to marketing and sales programs designed to drive higher revenues;
 
  •  Repairs and maintenance expenses were increased $1.3 million, or 11.1%, primarily because of several large repair projects, as well as higher automobile fuel costs associated with our fleet of vans. As a percentage of total revenues, repairs and maintenance costs decreased 30 basis points from 5.3% in 2005 to 5.0% in 2006.
 
  •  Utilities costs increased $1.2 million, or 9.2%. $0.9 million of the increase was associated with the reopening of the Crowne Plaza Hotels in West Palm Beach and Melbourne, FL. The remaining increase is driven largely by higher occupancy.
 
  •  General and administrative costs increased $0.5 million, due to the reopening of the West Palm Beach and Melbourne FL, Crowne Plaza Hotels. Excluding these two hotels, general and administrative costs declined $0.1 million. As a percent of revenues, general and administrative expenses declined 80 basis points in 2006 to 6.0%.
 
Property and other taxes, insurance and leases increased $4.0 million, or 24.1%. Higher property insurance premiums accounted for $3.5 million of this increase. If our insurance costs had remained constant, property and other taxes, insurance and leases would have increased $0.6 million, or 3.4%.
 
Corporate and other expenses increased $0.7 million, or 3.7%, due mainly to the adoption of SFAS No. 123(R), “Share Based Payment”, on January 1, 2006. SFAS No. 123(R) requires grants of employee stock options to be recognized as expense in the statement of operations. Prior to January 1, 2006, stock option expense was accounted for using the intrinsic method under APB Opinion No. 25 “Accounting for Stock Issued to Employees” and thus was


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excluded from our statement of operations. Stock option expense of $0.8 million was recorded in Corporate and other expenses in 2006. In addition, we incurred costs during 2006 associated with the restructuring of several departments in the corporate office, including severance, relocation, signing bonuses, nonvested stock grants, and recruiting fees. However, similar costs were incurred in 2005 due to the resignations of several executives and the hiring costs for our new president and chief executive officer.
 
Casualty (gains) losses, net represent costs related to hurricane and other property damage, offset by gains related to the final settlement of the related property damage claims. In 2006, we recognized a net casualty gain of $2.9 million associated with the final settlement of property damage claims at the Crowne Plaza hotels in West Palm Beach and Melbourne, FL. In 2005, we recognized a net casualty gain of $28.5 million on the settlement of property damage claims for the Crowne Plaza hotels in West Palm Beach and Melbourne, FL which was offset by related repair expenses.
 
Depreciation and amortization expenses increased $8.7 million, or 39.4% due to the completion of several renovation projects. In accordance with generally accepted accounting principles, we begin recognizing depreciation expense when the asset is placed in service.
 
The impairment of long-lived assets of $0.8 million recorded during 2006 represents the write-off of the net book value of disposed assets.
 
Non-operating income (expenses) — Continuing Operations
 
                                 
    2006     2005     Increase (decrease)  
    ($ in thousands)  
 
Non-operating income (expenses):
                               
Business interruption proceeds
  $ 3,931     $ 9,595     $ (5,664 )     (59.0 )%
Interest income and other
    2,607       833       1,774       213.0 %
Interest expense
    (25,348 )     (21,353 )     3,995       18.7 %
Minority interests
    295       (9,492 )     (9,787 )     (103.1 )%
 
Business interruption proceeds represent funds received or amounts for which proofs of loss have been signed. Business interruption proceeds in 2006 were recorded for the Crowne Plaza hotels in West Palm Beach and Melbourne, FL that were closed as a result of damage sustained in the 2004 hurricanes, and the Holiday Inn Marietta, GA which was closed in January 2006 as the result of a fire. In 2005, business interruption proceeds were recorded for Crowne Plaza hotels in West Palm Beach and Melbourne, FL.
 
Interest income and other increased $1.8 million due to higher balances in our interest-bearing and escrow accounts as well as higher interest rates.
 
Interest expense increased $4.0 million, or 18.7% as a result of prepayment penalties and higher amortization of deferred loans costs associated with debt refinancings which occurred in the first quarter of 2006, lower capitalized interest due to fewer construction projects, and higher interest rates on our variable rate debt. We have interest rate caps for all our variable rate debt to manage our exposure to increases in interest rates.
 
Minority interests represent the third party owners’ share of the net income (losses) of the joint ventures in which we have a controlling interest. The $9.8 million decrease in minority interest is primarily due to the large casualty gains and business interruption proceeds realized in 2005.
 
Results of Operations — Discontinued Operations
 
During 2007, we sold 23 hotels, or 4,109 rooms, for an aggregate sales price of $82.2 million, $2.0 million of which was used to pay down debt. The remaining proceeds, after paying settlement costs, were used for capital expenditures and general corporate purposes. We realized gains of approximately $4.0 million in 2007 from the sale of these assets. A list of the properties sold in 2007 is summarized below:
 
  •  On January 15, 2007, we sold the University Plaza, a 186 room hotel located in Bloomington, IN.
 
  •  On March 9, 2007, we sold the Holiday Inn, a 130 room hotel located in Hamburg, NY.


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  •  On June 13, 2007, we sold the following 16 hotels:
 
  •  Holiday Inn, a 202 room hotel located in Sheffield, AL
 
  •  Clarion Hotel, a 393 room hotel located in Louisville, KY
 
  •  Crowne Plaza Hotel, a 275 room hotel located in Cedar Rapids, IA
 
  •  Augusta West Inn Hotel, a 117 room hotel located in Augusta, GA
 
  •  Holiday Inn Hotel, a 201 room hotel located in Greentree, PA
 
  •  Holiday Inn Hotel, a 189 room hotel located in Lancaster East, PA
 
  •  Holiday Inn Hotel, a 244 room hotel located in Lansing, MI
 
  •  Holiday Inn Hotel, a 152 room hotel located in Pensacola, FL
 
  •  Holiday Inn Hotel, a 228 room hotel located in Winter Haven, FL
 
  •  Holiday Inn Hotel, a 100 room hotel located in York, PA
 
  •  Holiday Inn Express Hotel, a 112 room hotel located in Dothan, AL
 
  •  Holiday Inn Express Hotel, a 122 room hotel located in Pensacola, FL
 
  •  Park Inn Hotel, a 126 room hotel located in Brunswick, GA
 
  •  Quality Inn Hotel, a 102 room hotel located in Dothan, AL
 
  •  Ramada Plaza Hotel, a 297 room hotel located in Macon, GA
 
  •  Ramada Inn Hotel, a 197 room hotel located in North Charleston, SC
 
  •  On July 12, 2007, we sold the Holiday Inn Hotel, a 159 room hotel located in Clarksburg, WV.
 
  •  On July 20, 2007, we sold the Holiday Inn Hotel, a 208 room hotel located in Fort Wayne, IN.
 
  •  On August 14, 2007, we sold the Holiday Inn Hotel, a 106 room hotel located in Fairmont, WV.
 
  •  On December 18, 2007, we sold the Holiday Inn Hotel, a 146 room hotel located in Jamestown, NY.
 
  •  On December 27, 2007, we sold the Vermont Maple Inn, a 117 room hotel located in Burlington, VT.
 
During 2006, we sold one land parcel and six hotels with an aggregate 929 rooms for an aggregate sales price of $27.1 million, $5.0 million of which was used to pay down debt. The remaining proceeds were used for capital expenditures and general corporate purposes. We realized gains of approximately $3.0 million in 2006 from the sale of these assets. Also in 2006, we surrendered two Holiday Inn hotels, located in Lawrence and Manhattan, KS, to a bond trustee pursuant to the settlement agreement entered into in August 2005. Further, a venture in which we own a minority interest and which owned the Holiday Inn City Center Columbus, OH transferred the hotel to the lender.
 
During 2005, we sold eight hotels, comprising an aggregate 2,073 rooms. The aggregate net proceeds from the sales were approximately $36 million of which $29.2 million was used to pay down debt and the balance was used for capital expenditures and general corporate purposes. The aggregate gain realized from the sale of these assets was $6.9 million.


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Summary statement of operations information for discontinued operations for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 is as follows:
 
                         
    December 31,
    December 31,
    December 31,
 
    2007     2006     2005  
    ($ in thousands)  
 
Total revenues
  $ 40,071     $ 89,986     $ 117,465  
Total operating expenses (excluding impairment)
    (33,826 )     (82,982 )     (104,891 )
Impairment of long-lived assets
    (4,714 )     (23,122 )     (11,062 )
Interest income and other
    1       11       308  
Interest expense
    (1,669 )     (5,856 )     (7,444 )
Business interruption proceeds
          754        
Gain on asset disposition
    3,956       2,961       6,872  
(Loss) gain on extinguishment of debt, net
    (1,747 )     10,231        
(Provision) benefit for income taxes
    (592 )     3,108       313  
Minority interest in (income)
                (96 )
                         
Income (loss) from discontinued operations
  $ 1,480     $ (4,909 )   $ 1,465  
                         
 
We recorded impairment on assets held for sale in 2007, 2006, and 2005. The fair values of the assets held for sale are based on the estimated selling prices less estimated costs to sell. We determine the estimated selling prices in conjunction with independent real estate brokers. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down respective hotel asset carrying values if the carrying values exceed the estimated selling prices less costs to sell. As a result of these evaluations, during 2007, we recorded impairment charges totaling $4.7 million on 5 hotels as follows (amounts below are rounded individually):
 
  •  $1.8 million on the Holiday Inn Frederick, MD to reflect the estimated selling price less costs to sell;
 
  •  $1.3 million on the Holiday Inn Clarksburg, WV to reflect the estimated selling price less costs to sell and to record the final disposition of the hotel;
 
  •  $0.8 million on the Vermont Maple Inn Colchester, VT to reflect the estimated selling price less costs to sell and to record the final disposition of the hotel;
 
  •  $0.6 million on the Holiday Inn Jamestown, NY to reflect the estimated selling price less costs to sell and to record the final disposition of the hotel; and
 
  •  $0.1 million on the University Plaza Bloomington, IN to record the final disposition of the hotel.
 
In 2006, we recorded impairment charges totaling $23.1 million on 16 hotels as follows (amounts below are rounded individually)
 
  •  $3.9 million on the Holiday Inn Manhattan, KS to record the loss on disposal of fixed assets;
 
  •  $2.2 million on the Holiday Inn Lawrence, KS to record the loss on disposal of fixed assets;
 
  •  $1.4 million on the Holiday Inn Sheffield, AL which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
 
  •  $0.3 million on the Holiday Inn McKnight, PA to reflect the lowered estimated selling price less, the write-off of capital improvements spent on this hotel for franchisor compliance that did not add incremental value or revenue generating capacity to the property, and the final disposition of the hotel;
 
  •  $0.1 million on the Holiday Inn Valdosta, GA to reflect the estimated selling costs of the sale as this hotel was identified for sale during 2006, and to reflect the final disposition of the hotel;
 
  •  $0.1 million on the Azalea Inn Valdosta, GA to reflect the estimated selling costs of the sale as this hotel was identified for sale during 2006, and to reflect the final disposition of the hotel;


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  •  $0.7 million on the University Plaza Bloomington, IN, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
 
  •  $1.3 million on the Ramada Plaza Macon, GA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less cost to sell;
 
  •  $2.1 million on the Holiday Inn University Mall, FL, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
 
  •  $1.8 million on the Holiday Inn Express Pensacola, FL, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
 
  •  $0.8 million on the Holiday Inn Greentree, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
 
  •  $0.2 million on the Holiday Inn York, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
 
  •  $0.9 million on the Holiday Inn Lancaster, PA, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
 
  •  $6.4 million on the Holiday Inn Lansing, MI, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell;
 
  •  $0.6 million on the Holiday Inn Clarksburg, WV, which was classified as held for sale during 2006, to reduce the carrying value to estimated selling price less costs to sell; and
 
  •  $0.1 million on the Holiday Inn Jekyll Island, GA to record the disposal costs of furniture, fixtures and equipment incurred during the closing of the hotel.
 
In 2005, the Company recorded impairment charges of $11.1 million on 10 hotels and one land parcel as follows (amounts below are rounded individually):
 
  •  $1.8 million on the Azalea Inn Valdosta, GA to reduce the carrying value to estimated selling price;
 
  •  $1.7 million on the Holiday Inn Rolling Meadows, IL to reflect the lowered selling price and to record the final disposition of the hotel;
 
  •  $1.7 million on the Holiday Inn Sheffield, AL to reduce the carrying value to estimated selling price;
 
  •  $1.6 million on the Holiday Inn Lawrence, KS to reflect the reduced fair value appraisal;
 
  •  $1.3 million on the Holiday Inn St. Louis, MO to reflect the reduced selling price of the hotel;
 
  •  $1.1 million on the Park Inn Brunswick, GA, to write-off the capital improvements made on this property related to the franchise conversion that did not result in an increase in the fair value of this hotel;
 
  •  $0.9 million on the Holiday Inn Hamburg, NY, as the undiscounted future cash flows were less than the asset’s carrying value and the resulting broker opinion required a write-down of the carrying value of the asset to its fair value;
 
  •  $0.4 million on the land parcel in Mt. Laurel, NJ to reflect the lowered estimated selling price of the land;
 
  •  $0.3 million on the Holiday Inn Express Gadsden, AL to reflect the estimated selling costs as this hotel was identified for sale in January 2005, to reflect the write-off of capital improvements spent on this hotel for franchisor compliance that did not add incremental value or revenue generating capacity to the property, and to record the final disposition of the hotel;
 
  •  $0.3 million on the Holiday Inn Morgantown, WV to reflect the reduced selling price of the hotel and the additional charges to dispose of the hotel in February 2005; and
 
  •  $0.1 million on the Holiday Inn McKnight, PA as the hotel was identified for sale in 2005 and its carrying value was adjusted to the estimated selling price less selling costs.


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Historical operating results and gains are reflected as discontinued operations in our consolidated statement of operations. See Note 1 and Note 3 to the accompanying consolidated financial statements for further discussion.
 
Income Taxes
 
We expect to have a taxable loss of $47.5 million for the year ended December 31, 2007. We reported a net taxable income of $3.3 million for federal income tax purposes for the year ended December 31, 2006. Because we have net operating losses (“NOLs”) available we paid no federal income taxes. At December 31, 2007, we had available net operating loss carryforwards of $217.6 million for federal income tax purposes, which will expire in years 2018 through 2027 if not utilized against taxable income. In addition, the Company has excess tax benefits related to current year stock option exercises subsequent to the adoption of FAS 123(R) of $0.8 million that are not recorded as a deferred tax asset as the amounts have not yet resulted in a reduction in current taxes payable. The benefit of these deductions will be recorded to additional paid-in capital at the time the tax deduction results in a reduction of current taxes payable. Our 2002 reorganization under Chapter 11 and our 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 use these net operating loss carryforwards 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 and 2007 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, 2007, $90.7 million of the NUBIL has been recognized. The amount of losses subject to Section 382 limitations is $166.4 million; losses not subject to 382 limitations are $51.3 million.
 
At December 31, 2007, a valuation allowance of $59.2 million fully offset the Company’s net deferred tax asset. As a result of our history of losses, we believed it was more likely than not that our net deferred tax asset would not be realized and, therefore, provided a valuation allowance to fully reserve against these amounts. Of this $59.2 million, the 2007 deferred tax asset was decreased by $62.2 million with $63.3 million of the decrease relating to NOLs that have or will expire unused due to Section 382 limitations, $1.9 million related to prior year true-ups, partially offset by $3.0 million of additional deferred tax assets generated during the period. The balance of $59.2 million is primarily attributable to pre-emergence deferred tax assets and may be credited to additional paid-in capital in future periods.
 
In addition, we recognized an income tax provision of $1.0 million for 2007, $8.5 million for 2006, and $8.2 million for 2005. $7.9 million and $7.7 million of the income tax provision in 2006 and 2005, respectively, were non-cash charges related to the utilization of pre-emergence net operating losses in accordance with SOP 90-7 “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”.
 
In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 applies to all tax positions accounted for in accordance with SFAS No. 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, derecognition, and measurement is based on management’s best judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006.
 
We adopted the provisions of FIN 48 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 that remains subject to examination 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, and 2006 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 next twelve months. Interest and penalties on unrecognized tax benefits will be classified as income tax expense if recorded in a future period.


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Quarterly Results of Operations
 
The following table presents certain quarterly data for the eight quarters ended December 31, 2007. The data have been derived from our unaudited consolidated financial statements for the periods indicated. Our unaudited consolidated financial statements have been prepared on substantially the same basis as our audited consolidated financial statements included elsewhere in this report and include all adjustments, consisting primarily of normal recurring adjustments, that we consider to be necessary to present this information fairly, when read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. 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 the timing of our classification of assets held for sale. 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 44 hotels classified in continuing operations at December 31, 2007.
 
                                                                 
    2007     2006  
    Fourth
    Third
    Second
    First
    Fourth
    Third
    Second
    First
 
    Quarter     Quarter     Quarter     Quarter     Quarter     Quarter     Quarter     Quarter  
    (Unaudited in thousands)  
 
Revenues:
                                                               
Rooms
  $ 47,576     $ 54,187     $ 56,216     $ 50,243     $ 45,617     $ 50,445     $ 53,788     $ 47,869  
Food and beverage
    15,894       14,381       16,779       13,844       15,134       12,912       15,636       12,110  
Other
    2,028       2,417       2,453       2,061       2,066       2,105       2,154       1,949  
                                                                 
      65,498       70,985       75,448       66,148       62,817       65,462       71,578       61,928  
                                                                 
Direct operating expenses:
                                                               
Rooms
    12,569       14,157       13,756       12,679       12,462       13,297       13,310       12,203  
Food and beverage
    10,140       10,651       11,021       9,984       10,363       9,772       10,469       9,019  
Other
    1,449       1,683       1,642       1,512       1,456       1,523       1,657       1,525  
                                                                 
      24,158       26,491       26,419       24,175       24,281       24,592       25,436       22,747  
                                                                 
      41,340       44,494       49,029       41,973       38,536       40,870       46,142       39,181  
Other operating expenses:
                                                               
Other hotel operating costs
    19,222       20,924       20,478       20,013       18,304       19,078       18,755       18,562  
Property and other taxes, insurance and leases
    5,127       4,734       5,212       5,611       5,813       5,862       4,717       4,401  
Corporate and other
    4,257       5,585       5,930       5,682       4,959       5,592       5,292       4,917  
Casualty (gain) losses, net
                      (1,867 )           (3,085 )     31       166  
Restructuring
    (26 )     1,258                                                  
Depreciation and amortization
    8,297       8,086       7,960       7,802       7,770       7,886       7,704       7,358  
Impairment of long-lived assets
    5,797       535       222       265       225       323       16       194  
                                                                 
Other operating expenses
    42,674       41,122       39,802       37,506       37,071       35,656       36,515       35,598  
                                                                 
      (1,334 )     3,372       9,227       4,467       1,465       5,214       9,627       3,583  
Other income (expenses):
                                                               
Business interruption insurance proceeds
          299       272             530       2,706       695        
Interest income and other
    937       1,330       822       925       664       786       848       309  
Other interest expense
    (6,423 )     (6,642 )     (6,767 )     (6,198 )     (6,297 )     (6,482 )     (6,227 )     (6,342 )
Loss on debt extinguishment
                (3,411 )                              
                                                                 
(Loss) income before income taxes and minority interests
    (6,820 )     (1,641 )     143       (806 )     (3,638 )     2,224       4,943       (2,450 )
Minority interests (net of taxes, nil)
                (56 )     (365 )     335       100       (136 )     (4 )
                                                                 
(Loss) income before income taxes — continuing operations
    (6,820 )     (1,641 )     87       (1,171 )     (3,303 )     2,324       4,807       (2,454 )
(Provision) benefit for income taxes — continuing operations
    (1,792 )     744       (19 )     686       (9,082 )     (1,039 )     (2,245 )     725  
                                                                 
(Loss) income from continuing operations
    (8,612 )     (897 )     68       (485 )     (12,385 )     1,285       2,562       (1,729 )
                                                                 


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    2007     2006  
    Fourth
    Third
    Second
    First
    Fourth
    Third
    Second
    First
 
    Quarter     Quarter     Quarter     Quarter     Quarter     Quarter     Quarter     Quarter  
    (Unaudited in thousands)  
 
Discontinued operations:
                                                               
(Loss) income from discontinued operations before income taxes
    (845 )     1,300       (565 )     2,182       (12,765 )     (1,917 )     1,853       4,812  
Benefit (provision) for income taxes
    1,384       (356 )     234       (1,854 )     4,437       794       (414 )     (1,709 )
                                                                 
Income (loss) from discontinued operations
    539       944       (331 )     328       (8,328 )     (1,123 )     1,439       3,103  
                                                                 
Net (loss) income attributable to common stock
  $ (8,073 )   $ 47     $ (263 )   $ (157 )   $ (20,713 )   $ 162     $ 4,001     $ 1,374  
                                                                 
Net (loss) income from continuing operations attributable to common stock
                                                               
Basic
  $ (0.36 )   $ (0.04 )   $ 0.00     $ (0.02 )   $ (0.50 )   $ 0.05     $ 0.10     $ (0.07 )
                                                                 
Diluted
  $ (0.36 )   $ (0.04 )   $ 0.00     $ (0.02 )   $ (0.50 )   $ 0.05     $ 0.10     $ (0.07 )
                                                                 
 
Historically, our operations and related revenues and operating results have varied substantially from quarter to quarter. We expect these variations to continue for a variety of reasons, primarily seasonality. Due to the fixed nature of certain expenses, such as marketing and rent, our operating expenses do not vary as significantly from quarter to quarter.
 
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 a reduction in demand for lodging or 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 December 31, 2007, our consolidated airline receivables represented approximately 23% 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. 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. As of March 1, 2008, we had 11 hotels held for sale.
 
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 and, to a certain extent, the general condition of the lodging industry and the general economic, political, financial, competitive, legislative and regulatory environment. In addition, our ability to refinance our indebtedness depends to a certain extent on these factors as well. Many factors affecting our future performance and financial results, including the severity and duration of macro-economic downturns, are beyond our control. See Item 1A, “Risk Factors.”
 
We intend to continue to use our cash flow to fund operations, scheduled debt service payments, fund operations, capital expenditures, and share repurchases. 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, if applicable.

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At December 31, 2007, we had working capital (current assets less current liabilities) of $54.7 million compared to $32.7 million at December 31, 2006. The increase in working capital was primarily the result of the April 2007 refinancing, which resulted in a reclassification of debt from current to long-term. The refinancing reallocated our debt portfolio, resulting in a lower portion of our debt being secured by held for sale assets. The debt balances secured by our held for sale assets are included in current liabilities (Liabilities related to assets held for sale) in the consolidated balance sheet, while the debt balances secured by our held for use assets are included in long-term liabilities, excluding the current portion.
 
For the year ended December 31, 2007, we spent $41.5 million in capital expenditures. During 2008, we expect to spend $40 to $46 million in capital expenditures, depending on the determined courses of action following our ongoing diligence and analysis.
 
We believe that the combination of our current cash, cash flows from operations, capital expenditure escrows and asset sales will be sufficient to meet our working capital needs for the next 24 months.
 
Our ability to meet our long-term cash needs is dependent on the market condition of the lodging industry, the successful execution of various initiatives to improve operating results, the timely sale of the assets currently held for sale and at the anticipated sales prices, and our ability to obtain third party sources of capital on favorable terms when and as needed. In the short term, we continue to diligently monitor our costs. Our future financial needs and sources of working capital are, however, subject to uncertainty, and we can provide no assurance that we will have sufficient liquidity to be able to meet our operating expenses, debt service requirements, including scheduled maturities, and planned capital expenditures. We could lose the right to operate certain hotels under nationally recognized brand names, and furthermore, the termination of one or more franchise agreements could trigger defaults and acceleration under one or more loan agreements as well as obligations to pay liquidated damages under the franchise agreements if we are unable to find a suitable replacement franchisor. See “Item 1A — Risk Factor” 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 $36.9 million in 2007 and $35.6 million in 2006. The increase in cash generated by operations is attributable to the improved operating performance of our hotel portfolio. Operating activities generated cash of $28.7 million in 2005.
 
Investing activities
 
Investing activities generated $30.5 million of cash in 2007 compared to $0.8 million in 2006. We expended $41.5 million in capital improvements in 2007 compared to $35.8 million in 2006. Net proceeds from the sale of assets were $78.0 million in 2007 and $22.9 million in 2006. In 2007, we paid $16.4 million to acquire the minority partners’ interests in two of our hotels. Withdrawals from capital expenditure reserves with our lenders totaled $4.9 million in 2007 and $9.4 million in 2006. In 2007, we received $0.1 million in advances (net of related expenditures) for property damage claims primarily related to one hotel damaged by fire. In 2006, we received $3.2 million in similar advances (net of related expenditures) primarily related to one hotel damaged by fire and three of our hurricane-damaged hotels. Restricted cash decreased $5.4 million in 2007 compared to $1.2 million in 2006.
 
Investing activities used $13.8 million of cash in 2005. We expended $86.5 million for capital improvements and withdrew $15.4 million from capital expenditure reserves with our lenders. We received $36.4 million in net proceeds from the sale of assets and were advanced $26.2 million (net of related expenditures) for property damage claims related to seven of our hotels that were damaged by hurricanes in 2004 and 2005. Restricted cash increased $5.2 million.


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Financing activities
 
Financing activities used cash of $61.5 million in 2007 compared with $7.2 million in 2006. In 2007, we received $130.0 million in gross proceeds associated with the April 2007 refinancing and used the net proceeds to pay off existing debt. We made principal payments of $169.4 million, including the payoff of five loans which had reached their scheduled maturity dates and the payoff of existing debt in conjunction with the refinancing and/or the sale of encumbered assets. In addition, we purchased $16.8 million of treasury stock and paid defeasance costs of $4.2 million.
 
In 2006, we refinanced mortgages on the Holiday Inn Express Palm Desert, Crowne Plaza Worcester, Radisson Phoenix, Crowne Plaza Pittsburgh and the Crowne Plaza Phoenix Airport, resulting in gross proceeds of $45.0 million. Additionally, we made $49.8 million in principal payments and purchased $2.7 million of treasury stock. In 2005, we refinanced mortgages on the Holiday Inn West Phoenix, AZ and the Holiday Inn Hilton Head, SC and encumbered the SpringHill Suites Pinehurst, NC purchased in 2004, resulting in gross proceeds of $32.2 million. Additionally, we made $63.6 million in principal payments and $0.9 million in deferred loan costs.
 
Debt and contractual obligations
 
The following table provides information about our debt and certain other long-term contractual obligations:
 
                                                         
    Debt Obligations
    Maturities  
    December 31, 2007     2008     2009     2010     2011     2012     Thereafter  
    (In thousands)  
 
DEBT OBLIGATIONS
                                                       
Mortgage Debt(1) :
                                                       
Merrill Lynch Mortgage Lending, Inc. — Fixed
  $ 153,940     $ 3,099     $ 150,841     $     $     $     $  
Goldman Sachs
    130,000             130,000                          
Wachovia
    35,425       691       740       3,633       30,361              
IXIS
    40,041       534       39,507                          
                                                         
Total — Mortgage Debt
    359,406       4,324       321,088       3,633       30,361              
Other Long-term Liabilities(2) :
                                                       
Tax Notes Issued Pursuant to our Joint Plan of Reorganization
    633       601       32                          
Other Long-term Liabilities
    781       167       166       124       91       42       191  
                                                         
      1,414       768       198       124       91       42       191  
                                                         
Total Debt Obligations
    360,820       5,092       321,286       3,757       30,452       42       191  
Less: Debt Obligations — Discontinued Operations
                                         
                                                         
Total Debt Obligations — Continuing Operations
  $ 360,820     $ 5,092     $ 321,286     $ 3,757     $ 30,452     $ 42     $ 191  
                                                         
OTHER OBLIGATIONS
                                                       
Interest Expense(3)
    49,138     $ 24,500     $ 18,717     $ 5,653     $ 268     $     $  
Ground, Parking and Other Lease Obligations
    85,483       3,446       3,468       3,495       3,120       2,994       68,960  
                                                         
Total Other Obligations
    134,621       27,946       22,185       9,148       3,388       2,994       68,960  
Less: Other Obligations — Discontinued Operations
                                         
                                                         
Total Other Obligations — Continuing Operations
  $ 134,621     $ 27,946     $ 22,185     $ 9,148     $ 3,388     $ 2,994     $ 68,960  
                                                         
TOTAL OBLIGATIONS
                                                       
Total Other Obligations
    495,441       33,038       343,471       12,905       33,840       3,036       69,151  
Less: Other Obligations — Discontinued Operations
                                         
                                                         
Total Other Obligations — Continuing Operations
  $ 495,441     $ 33,038     $ 343,471     $ 12,905     $ 33,840     $ 3,036     $ 69,151  
                                                         
 
 
(1) Discussed in “Note 9, Long-Term Liabilities” in the notes to our consolidated financial statements.
 
(2) Comprised of unsecured notes payable of $0.6 million for pre-petition bankruptcy related tax obligations and $0.8 million of other obligations.
 
(3) The computation of interest expense related to our variable rate debt assumes a LIBOR of 4.60% for all future periods.


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We did not include franchise fees in the table above because substantially all of our franchise fees vary with revenues. Franchise fees for 2007 related to continuing operations are shown under the caption “Franchise Agreements and Capital Expenditures” Below.
 
Debt and Contractual Obligations
 
On June 25, 2004, the Company entered into four fixed rate loans with Merrill Lynch Mortgage Lending, Inc (“Merrill Lynch”). The four loans, each of which has a five-year term and bears a fixed interest rate of 6.58%, totaled $260 million at inception. Except for certain defeasance provisions, the Company may not prepay the loans except during the 60 days prior to maturity. One of the loans was defeased in 2007, as discussed below. The remaining three loans are currently secured by 20 hotels. The loans are not cross-collateralized. Each loan is non-recourse; however, the Company has agreed to indemnify Merrill Lynch in certain situations, such as fraud, waste, misappropriation of funds, certain environmental matters, asset transfers in violation of the loan agreements, or violation of certain single-purpose entity covenants. In addition, each loan will become full recourse in certain limited cases such as bankruptcy of a borrower or Lodgian.
 
On November 10, 2005, the Company entered into a $19.0 million loan agreement with IXIS Real Estate Capital Inc. (“IXIS”), which is secured by the Holiday Inn Hilton Head, SC. The loan agreement has a two-year initial term with three one-year extension options which are exercisable provided the loan is not in default. The loan bears a floating interest rate of 290 basis points above LIBOR. In December 2007, the Company exercised the first of three one-year extension options. The Company contemporaneously entered into a 12-month interest rate cap agreement, which effectively caps the interest rate at 8.4%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement.
 
On February 1, 2006, the Company entered into a $17.4 million loan agreement with Wachovia Bank, National Association (“Wachovia”), which is secured by the Crowne Plaza Worcester, MA. The loan agreement has a five year term and bears a fixed rate of interest of 6.04%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement.
 
On February 1, 2006, the Company entered into a $6.1 million loan agreement with Wachovia, which is secured by the Holiday Inn Palm Desert, CA. The loan agreement has a five year term and bears a fixed rate of interest of 6.04%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement.
 
On March 1, 2006, the Company entered into a $21.5 million loan agreement with IXIS, which is secured by the Radisson Phoenix and Crowne Plaza Phoenix Airport hotels located in Phoenix, AZ along with the Crowne Plaza Pittsburgh Airport hotel located in Coraopolis, PA. The loan agreement has a two-year initial term with three one-year extension options which are exercisable provided the loan is not in default. The loan bears a floating rate of interest which is 295 basis points above LIBOR. Contemporaneously with the closing of the loan, the Company purchased an interest rate cap agreement that effectively caps the interest rate for the first two years of the loan agreement at 8.45%. The loan agreement is non-recourse to Lodgian, Inc., except in certain limited circumstances as set forth in the loan agreement. The Company exercised the first one-year extension option and extended the term of the related interest rate cap agreement.
 
The loan proceeds from the two new Wachovia loans and a portion of the proceeds from the new IXIS financing were used to pay off the Column Financial loan agreement. Also, in February 2006, the Company surrendered the Holiday Inn Manhattan, KS and the Holiday Inn Lawrence, KS hotels to the bond trustee, J P Morgan Chase, to satisfy certain debt obligations under industrial revenue bonds secured by these hotels.
 
In April 2007, the Company entered into a $130 million loan agreement (the “Goldman Loan”) with Goldman Sachs Commercial Mortgage Capital, L.P. The Goldman Loan is secured by ten hotels and has an initial term of two years, with the option to extend the loan for three additional one-year periods. The loan bears interest at LIBOR plus 150 basis points. The loan can be repaid at any time, subject to a prepayment penalty of 0.5% of the outstanding balance prior to April 12, 2008. There is no prepayment penalty after the first anniversary of the loan. The Company purchased an interest rate protection agreement which caps the maximum interest rate at 8.5%.


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After paying closing costs and establishing required reserve balances totaling $8.6 million, the loan proceeds were used as follows:
 
  •  $46.1 million of the loan proceeds, along with $9.7 million in funds held in reserve by Merrill Lynch, were used to pay off the $55.8 million Merrill Lynch Floating Rate Loan, which was secured by 14 hotels (2 hotels were classified as held for use, while 12 hotels were classified as held for sale). The unamortized deferred loan costs of $0.3 million were recorded as a Loss on Debt Extinguishment in the statement of operations. Of this amount, approximately $0.1 million was recorded in continuing operations and approximately $0.3 million was recorded in discontinued operations.
 
  •  $59.6 million of the loan proceeds, along with $11.7 million of the Company’s cash, were used to defease the Merrill Lynch Fixed Rate #2 Loan, as discussed below.
 
  •  $15.7 million was held in a restricted cash account, pending resolution or settlement of the terms of a ground lease relating to one of the ten hotels securing the loan. In June 2007, the terms of the ground lease were settled and $15.4 million of the restricted cash balance was transferred into an unrestricted cash account.
 
In April 2007, the Company defeased the entire $67.7 million balance of one of the Merrill Lynch fixed rate loans, which was secured by 9 hotels (6 hotels were classified as held for use, while 3 hotels were classified as held for sale). The Company purchased $71.1 million of US Government treasury securities (“Treasury Securities”) to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the nine hotels that had served as collateral for the loan. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations of the defeased debt. The Company has no further obligation with regard to the defeased loan. Accordingly, the defeased loan is no longer reflected on the Company’s balance sheet. As a result of the defeasance, the Company recorded $3.8 million as a Loss on Debt Extinguishment in the statement of operations. Of this amount, $3.3 million was recorded in continuing operations, and $0.5 million was recorded in discontinued operations.
 
In May 2007, the Company repaid two loans totaling $8.6 million, each of which was secured by one hotel. Both loans had reached their scheduled maturity dates.
 
Also, in May 2007, the Company defeased $5.7 million of the $60.9 million balance of one of the Company’s mortgage loans, which was secured by seven hotels. The Company purchased $6.0 million of Treasury Securities to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the two hotels that originally served as collateral for the defeased portion of the loan. Both hotels were classified as held for sale and have since been sold. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because the Company continues to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Company’s Consolidated Balance Sheet. As a result of the defeasance, the Company recorded a $0.4 million Loss on Debt Extinguishment in the statement of operations. The entire amount was recorded in discontinued operations.
 
In July 2007, the Company repaid two loans totaling $6.4 million, each of which was secured by one hotel. Both loans had reached their scheduled maturity dates.
 
Also, in July 2007, the Company defeased $3.1 million of the $65.3 million balance of one of the Company’s mortgage loans, which was secured by nine hotels. The Company purchased $3.2 million of Treasury Securities to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the hotel that originally served as collateral for the defeased portion of the loan. The hotel was classified as held for sale and has since been sold. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because the Company continues to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Company’s Consolidated Balance Sheet. As a result of the defeasance, the Company recorded a $0.2 million Loss on Debt Extinguishment in the statement of operations. The entire amount was recorded in discontinued operations.


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In November 2007, the Company repaid one loan totaling $8.6 million, which was secured by one hotel. The loan had reached the scheduled Optional Prepayment Date.
 
In December 2007, the Company defeased $5.4 million of the $51.7 million balance of one of the Company’s mortgage loans, which was secured by eight hotels. The Company purchased $5.7 million of Treasury Securities to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the hotel that originally served as collateral for the defeased portion of the loan. The hotel was classified as held for sale prior to defeasance and has yet to be sold. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because the Company continues to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Company’s Consolidated Balance Sheet. As a result of the defeasance, the Company recorded a $0.4 million Loss on Debt Extinguishment in the statement of operations. The entire amount was recorded in discontinued operations.
 
Summary of Long-term Debt
 
Set forth below, by debt pool, is a summary of our long-term debt (including current portion) with the applicable interest rates and the carrying values of the property and equipment which collateralize the long-term debt:
 
                                     
    December 31, 2007     December 31, 2006      
    Number
    Property and
    Long-Term
    Long-Term
     
    of Hotels     Equipment, Net     Liabilities     Liabilities     Interest Rates at December 31, 2007
    ($ in thousands)
 
Mortgage Debt
                                   
Merrill Lynch Mortgage Lending, Inc. — Floating
        $     $     $ 58,118      
Merrill Lynch Mortgage Lending, Inc. — Fixed
    20       239,371       153,940       239,383     6.58%
Goldman Sachs
    10       120,103       130,000           LIBOR plus 1.50%; capped at 8.50%
Computer Share Trust Company of Canada
                      7,551      
Lehman Brothers Holdings, Inc. 
                      15,194      
Wachovia
    4       36,493       35,425       36,081     $9,666 at 6.03%; $3,053 at 5.78%; 22,706 at 6.04%
                                    $18,765 at LIBOR plus 2.90%, capped at 8.4%;
IXIS
    4       36,645       40,041       40,501     $21,276 at LIBOR plus 2.95%, capped at 8.45%
                                     
Total
    38       432,612       359,406       396,828     6.74%(1)
Long-term liabilities — other
                                   
Tax notes issued pursuant to our Joint Plan of Reorganization
                633       1,263      
Other
                781       1,038      
                                     
                  1,414       2,301