##### Table of Contents



FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

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



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|                                           |  |                            
|------------------------------------------ |  | ---------------------------
|For the Second Quarter Ended July 14, 2002 |  | Commission File No. 0-19840



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SHOLODGE, INC.
(Exact name of registrant as specified in its charter)



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|                                                                                          |  |                                                   
|----------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Tennessee
(State or other jurisdiction
of incorporation or organization)                  |  | 62-1015641
(I.R.S. Employer
Identification Number)
|                                                                                          |  |                                                   
|130 Maple Drive North, Hendersonville, Tennessee
(address of principal executive offices) |  | 37075
(Zip Code)                                  

|                                                   |  |               
|-------------------------------------------------- |  | --------------
|Registrants telephone number, including area code |  | (615) 264-8000



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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 as the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.   
Yes   x   
No   o

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

As of August 27, 2002, there were 5,118,278 shares of ShoLodge, Inc. common stock outstanding.





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TABLE OF CONTENTS



|                                           |  |  |  |  |  |  |  | 
|------------------------------------------ |  |  |  |  |  |  |  | 
|PART II  OTHER INFORMATION               
|SIGNATURES                                
|SECTION 906 CERTIFICATION OF THE CFO & CEO



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets

|                                               |                           |                                                                              |             |             |           |              |             |           |           | 
|---------------------------------------------- | ------------------------- | ---------------------------------------------------------------------------- | ----------- | ----------- | --------- | ------------ | ----------- | --------- | --------- | 
|                                               |                           |                                                                              |             | July 14,    |           | December 30,
|                                               |                           |                                                                              |             | 2002        |           | 2001(1)     
|                                               |                           |                                                                              |             | (unaudited) |           |             
|                                               |                           |                                                                              |             |             |           |             
|Assets                                         |                           |                                                                              |             |             |           |              |             |          
|Current assets:                                |                           |                                                                              |             |             |           |              |             |          
|                                               | Cash and cash equivalents |                                                                              | $           | 753,530     |           |              | $           | 2,704,161 |          
|                                               | Restricted cash           |                                                                              |             | 200,000     |           |              |             | 200,000   |          
|                                               | Accounts receivable:      |                                                                              |             |             |           |              |             |           |          
|                                               |                           | Accounts receivable-trade, net                                               |             |             | 4,576,969 |              |             |           | 3,557,591 | 
|                                               |                           | Construction contracts                                                       |             |             | 3,065,744 |              |             |           | 4,016,502 | 
|                                               |                           | Costs and estimated earnings in excess of
billings on construction contracts |             |             | 401,564   |              |             |           | 3,063,747 | 
|                                               |                           | Arbitration award                                                            |             |             | 8,909,188 |              |             |           |          | 
|                                               | Prepaid expenses          |                                                                              |             | 493,292     |           |              |             | 365,849   |          
|                                               | Notes receivable, net     |                                                                              |             | 6,278,192   |           |              |             | 1,728,340 |          
|                                               | Other current assets      |                                                                              |             | 169,106     |           |              |             | 153,766   |          
|                                               |                           |                                                                              |             |             |           |              |             |          
|Total current assets                           |                           |                                                                              | 24,847,585  |             |           |              | 15,789,956  |          
|Notes receivable, net                          |                           |                                                                              | 67,365,060  |             |           |              | 68,227,306  |          
|Restricted cash                                |                           |                                                                              | 24,179      |             |           |              | 1,781,747   |          
|Property and equipment                         |                           |                                                                              | 115,090,337 |             |           |              | 123,112,190 |          
|Less accumulated depreciation and amortization |                           |                                                                              | (21,781,606 | )           |           |              | (21,944,927 | )        
|                                               |                           |                                                                              |             |             |           |              |             |          
|                                               |                           |                                                                              | 93,308,731  |             |           |              | 101,167,263 |          
|Land under development or held for sale        |                           |                                                                              | 11,061,421  |             |           |              | 9,254,986   |          
|Deferred charges, net                          |                           |                                                                              | 2,559,094   |             |           |              | 6,111,825   |          
|Intangible assets, net                         |                           |                                                                              | 894,065     |             |           |              | 2,795,659   |          
|Other assets                                   |                           |                                                                              | 1,675,179   |             |           |              | 1,457,907   |          
|                                               |                           |                                                                              |             |             |           |              |             |          
|                                               |                           | $                                                                            | 201,735,314 |             |           | $            | 206,586,649 |          
|                                               |                           |                                                                              |             |             |           |              |             |          



|(1) |  | Derived from fiscal year ended December 30, 2001 audited financial statements.See accompanying notes.
|--- |  | -----------------------------------------------------------------------------------------------------





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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)

|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |            |            | 
|-------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ----------- | ---------- | ------------ | ----------- | ---------- | ---------- | 
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             | July 14,    |            | December 30,
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             | 2002        |            | 2001(1)     
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             | (unaudited) |            |             
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             |             |            |             
|Liabilities and Shareholders equity                                       |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |           
|Current liabilities:                                                       |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |           
|                                                                           |                                                                                                                                  | Accounts payable and accrued expenses                                                                                                                                    |             | $           | 8,633,713  |              |             | $          | 14,171,631 | 
|                                                                           |                                                                                                                                  | Taxes payable other than on income                                                                                                                                       |             |             | 612,841    |              |             |            | 476,809    | 
|                                                                           |                                                                                                                                  | Income taxes payable                                                                                                                                                     |             |             | 1,389,432  |              |             |            | 3,859,873  | 
|                                                                           |                                                                                                                                  | Current portion of long-term debt                                                                                                                                        |             |             | 672,071    |              |             |            | 650,700    | 
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |           
|Total current liabilities                                                  |                                                                                                                                  |                                                                                                                                                                          | 11,308,057  |             |            |              | 19,159,013  |           
|Long-term debt, less current portion                                       |                                                                                                                                  |                                                                                                                                                                          | 96,429,797  |             |            |              | 89,701,381  |           
|Deferred income taxes                                                      |                                                                                                                                  |                                                                                                                                                                          | 992,275     |             |            |              | 992,275     |           
|Deferred gain on sale/leaseback                                            |                                                                                                                                  |                                                                                                                                                                          |            |             |            |              | 4,129,962   |           
|Deferred credits                                                           |                                                                                                                                  |                                                                                                                                                                          | 2,419,378   |             |            |              | 2,545,004   |           
|Minority interests in equity of consolidated subsidiaries and
partnerships |                                                                                                                                  |                                                                                                                                                                          | 812,742     |             |            |              | 786,477     |           
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |           
|Total liabilities                                                          |                                                                                                                                  |                                                                                                                                                                          | 111,962,249 |             |            |              | 117,314,112 |           
|Shareholders equity:                                                      |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |           
|                                                                           |                                                                                                                                  | Preferred stock (no par value; 1,000,000 shares authorized;
no shares issued)                                                                                            |             |             |           |              |             |            |           | 
|                                                                           |                                                                                                                                  | Series A redeemable nonparticipating stock
(no par value; 1,000 shares authorized, no
shares issued)                                                                     |             |             |           |              |             |            |           | 
|                                                                           |                                                                                                                                  | Common stock (no par value; 20,000,000 shares
authorized, 5,118,778 and 5,088,278 shares
issued and outstanding as of July 14, 2002
and December 30, 2001, respectively) |             |             | 1,000      |              |             |            | 1,000      | 
|                                                                           | Additional paid-in capital                                                                                                       |                                                                                                                                                                          |             | 23,579,621  |            |              |             | 23,519,506 |           
|                                                                           | Retained earnings                                                                                                                |                                                                                                                                                                          |             | 67,360,380  |            |              |             | 67,001,529 |           
|                                                                           | Unrealized gain on securities available-for-sale, net of income
taxes                                                            |                                                                                                                                                                          |             | 207,535     |            |              |             | 100,307    |           
|                                                                           | Notes receivable from officer, net of discount of $155,778 and
$181,444, as of July 14, 2002 and December 30, 2001,
respectively |                                                                                                                                                                          |             | (1,375,471  | )          |              |             | (1,349,805 | )         
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |           
|                                                                           |                                                                                                                                  | Total shareholders equity                                                                                                                                               |             |             | 89,773,065 |              |             |            | 89,272,537 | 
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |           
|                                                                           |                                                                                                                                  | $                                                                                                                                                                        | 201,735,314 |             |            | $            | 206,586,649 |           
|                                                                           |                                                                                                                                  |                                                                                                                                                                          |             |             |            |              |             |           



|(1) |  | Derived from fiscal year ended December 30, 2001 audited financial statements.See accompanying notes.
|--- |  | -----------------------------------------------------------------------------------------------------





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##### Table of Contents



|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |            |        |            |           | 
|---------------------------------------------------------------------------- | ------------------------------------------------ | --------------------------------------------------------------------- | ----------------------- | --------------------------------- | ------- | -------------- | --------- | -------------- | ------ | ---------- | ---------- | ---------- | ------- | ---------- | ---------- | ---------- | ------ | ---------- | --------- | 
|                                                                             |                                                  |                                                                       |                         |                                   |         | 12 weeks ended |           | 28 weeks ended
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |               
|                                                                             |                                                  |                                                                       |                         |                                   |         | July 14,       |           | July 15,       |        | July 14,   |            | July 15,  
|                                                                             |                                                  |                                                                       |                         |                                   |         | 2002           |           | 2001           |        | 2002       |            | 2001      
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |           
|Revenues:                                                                    |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             | Hotel                                            |                                                                       | $                       | 3,888,671                         |         |                | $         | 3,185,087      |        |            | $          | 8,030,016  |         |            | $          | 7,209,403  |       
|                                                                             | Franchising, management and reservation services |                                                                       |                         | 1,536,835                         |         |                |           | 1,107,043      |        |            |            | 3,222,767  |         |            |            | 1,879,957  |       
|                                                                             | Construction and development                     |                                                                       |                         | 648,830                           |         |                |           | 5,330,206      |        |            |            | 4,180,061  |         |            |            | 10,157,385 |       
|                                                                             | Rent income                                      |                                                                       |                         | 822,099                           |         |                |           | 796,276        |        |            |            | 1,869,664  |         |            |            | 1,899,980  |       
|                                                                             | Other income                                     |                                                                       |                         | 26,424                            |         |                |           | 114,763        |        |            |            | 66,275     |         |            |            | 125,841    |       
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  |                                                                       | Total revenues          |                                   |         | 6,922,859      |           |                |        | 10,533,375 |            |            |         | 17,368,783 |            |            |        | 21,272,566 |          
|Cost and expenses:                                                           |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             | Hotel                                            |                                                                       |                         | 2,896,475                         |         |                |           | 2,343,363      |        |            |            | 6,206,064  |         |            |            | 5,478,929  |       
|                                                                             | Franchising, management and reservation services |                                                                       |                         | 887,219                           |         |                |           | 444,091        |        |            |            | 1,923,549  |         |            |            | 931,656    |       
|                                                                             | Construction and development                     |                                                                       |                         | 1,695,902                         |         |                |           | 5,101,737      |        |            |            | 5,218,138  |         |            |            | 9,421,466  |       
|                                                                             | Rent expense, net                                |                                                                       |                         | 155,515                           |         |                |           | 151,306        |        |            |            | 309,483    |         |            |            | 309,849    |       
|                                                                             | General and administrative                       |                                                                       |                         | 1,764,956                         |         |                |           | 1,351,351      |        |            |            | 3,735,945  |         |            |            | 3,092,782  |       
|                                                                             | Depreciation and amortization                    |                                                                       |                         | 1,134,771                         |         |                |           | 1,000,369      |        |            |            | 2,366,647  |         |            |            | 2,460,048  |       
|                                                                             | Write-off of intangible assets                   |                                                                       |                         | 6,808,635                         |         |                |           |               |        |            |            | 6,808,635  |         |            |            |           |       
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  |                                                                       | Total cost and expenses |                                   |         | 15,343,473     |           |                |        | 10,392,217 |            |            |         | 26,568,461 |            |            |        | 21,694,730 |          
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|Operating (loss) earnings                                                    |                                                  |                                                                       | (8,420,614              | )                                 |         |                | 141,158   |                |        |            | (9,199,678 | )          |         |            | (422,164   | )         
|                                                                             | Gain on sale of property and leasehold interests |                                                                       |                         | 48,323                            |         |                |           | 72,674         |        |            |            | 147,265    |         |            |            | 3,679,391  |       
|                                                                             | Gain on early extinguishments of debt            |                                                                       |                         | 2,251,917                         |         |                |           | 169,400        |        |            |            | 2,503,758  |         |            |            | 256,165    |       
|                                                                             | Interest expense                                 |                                                                       |                         | (2,182,369                        | )       |                |           | (1,844,656     | )      |            |            | (4,717,523 | )       |            |            | (4,308,537 | )     
|                                                                             | Interest income                                  |                                                                       |                         | 1,280,086                         |         |                |           | 1,641,820      |        |            |            | 3,019,257  |         |            |            | 3,732,350  |       
|                                                                             | Arbitration award                                |                                                                       |                         | 8,900,000                         |         |                |           |               |        |            |            | 8,900,000  |         |            |            |           |       
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|Earnings before income taxes and
minority interests                          |                                                  |                                                                       | 1,877,343               |                                   |         |                | 180,396   |                |        |            | 653,079    |            |         |            | 2,937,205  |           
|Income tax expense                                                           |                                                  |                                                                       | (803,000                | )                                 |         |                | (157,000  | )              |        |            | (458,000   | )          |         |            | (1,323,000 | )         
|Minority interests in earnings of consolidated
subsidiaries and partnerships |                                                  |                                                                       | (13,208                 | )                                 |         |                | (14,417   | )              |        |            | (26,262    | )          |         |            | (32,027    | )         
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|Earnings from continuing operations                                          |                                                  |                                                                       | 1,061,135               |                                   |         |                | 8,979     |                |        |            | 168,817    |            |         |            | 1,582,178  |           
|Discontinued operations:                                                     |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  | Income from operations of hotel
disposed of, net of income tax effect |                         |                                   | (9,792  | )              |           |                | 44,312 |            |            |            | (20,441 | )          |            |            | 56,778 |           
|                                                                             |                                                  | Gain on disposal of hotel, net of income
tax effect                   |                         |                                   | 210,475 |                |           |                |       |            |            |            | 210,475 |            |            |            |       |           
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|Net earnings                                                                 |                                                  | $                                                                     | 1,261,818               |                                   |         | $              | 53,291    |                |        | $          | 358,851    |            |         | $          | 1,638,956  |           
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|Net earnings per common share:                                               |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  |                                                                       |                         | Basic:                            |         |                |           |                |        |            |            |            |         |            |            |            |        |            |           | 
|                                                                             |                                                  |                                                                       |                         | Continuing operations             |         | $              | 0.21      |                |        | $          |           |            |         | $          | 0.03       |            |        | $          | 0.29      | 
|                                                                             |                                                  |                                                                       |                         | Discontinued operations:          |         |                |           |                |        |            |            |            |         |            |            |            |        |            |           | 
|                                                                             |                                                  |                                                                       |                         | Operations of hotel disposed of   |         |                |          |                |        |            | 0.01       |            |         |            |           |            |        |            | 0.01      | 
|                                                                             |                                                  |                                                                       |                         | Gain on sale of hotel disposed of |         |                | 0.04      |                |        |            |           |            |         |            | 0.04       |            |        |            |          | 
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  |                                                                       |                         | Net earnings                      |         | $              | 0.25      |                |        | $          | 0.01       |            |         | $          | 0.07       |            |        | $          | 0.30      | 
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  |                                                                       |                         | Diluted:                          |         |                |           |                |        |            |            |            |         |            |            |            |        |            |           | 
|                                                                             |                                                  |                                                                       |                         | Continuing operations             |         | $              | 0.20      |                |        | $          |           |            |         | $          | 0.03       |            |        | $          | 0.28      | 
|                                                                             |                                                  |                                                                       |                         | Discontinued operations:          |         |                |           |                |        |            |            |            |         |            |            |            |        |            |           | 
|                                                                             |                                                  |                                                                       |                         | Operations of hotel disposed of   |         |                |          |                |        |            | 0.01       |            |         |            |           |            |        |            | 0.01      | 
|                                                                             |                                                  |                                                                       |                         | Gain on sale of hotel disposed of |         |                | 0.04      |                |        |            |           |            |         |            | 0.04       |            |        |            |          | 
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  |                                                                       |                         | Net earnings                      |         | $              | 0.24      |                |        | $          | 0.01       |            |         | $          | 0.07       |            |        | $          | 0.29      | 
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|Weighted average common shares outstanding:                                  |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  |                                                                       |                         | Basic                             |         |                | 5,118,778 |                |        |            | 5,534,278  |            |         |            | 5,109,818  |            |        |            | 5,538,900 | 
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           
|                                                                             |                                                  |                                                                       |                         | Diluted                           |         |                | 5,182,989 |                |        |            | 5,610,791  |            |         |            | 5,185,317  |            |        |            | 5,606,156 | 
|                                                                             |                                                  |                                                                       |                         |                                   |         |                |           |                |        |            |            |            |         |            |            |           

See accompanying notes.





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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

|                                                                                              |                                                                                       |                                       |                                                                              |            |                |            |            |            |           |            |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------- | ---------------------------------------------------------------------------- | ---------- | -------------- | ---------- | ---------- | ---------- | --------- | ---------- | -
|                                                                                              |                                                                                       |                                       |                                                                              |            | 28 weeks ended
|                                                                                              |                                                                                       |                                       |                                                                              |            |               
|                                                                                              |                                                                                       |                                       |                                                                              |            | July 14,       |            | July 15,  
|                                                                                              |                                                                                       |                                       |                                                                              |            | 2002           |            | 2001      
|                                                                                              |                                                                                       |                                       |                                                                              |            |                |            |           
|Cash flows from operating activities                                                          |                                                                                       |                                       |                                                                              |            |                |            |            |           
|Earnings from continuing operations                                                           |                                                                                       | $                                     | 168,817                                                                      |            |                | $          | 1,582,178  |           
|Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities: |                                                                                       |                                       |                                                                              |            |                |            |            |           
|                                                                                              | (Loss)
gain from discontinued operations                                              |                                       |                                                                              | (20,441    | )              |            |            | 56,778     |          
|                                                                                              | Depreciation and amortization                                                         |                                       |                                                                              | 2,366,647  |                |            |            | 2,460,048  |          
|                                                                                              | Write-off of intangible assets                                                        |                                       |                                                                              | 6,808,635  |                |            |            |           |          
|                                                                                              | Amortization of deferred charges recorded as interest expense                         |                                       |                                                                              | 351,641    |                |            |            | 348,364    |          
|                                                                                              | Accretion of debt recorded as interest expense                                        |                                       |                                                                              | 50,463     |                |            |            |           |          
|                                                                                              | Recognition of previously deferred gains                                              |                                       |                                                                              | (125,626   | )              |            |            | (205,904   | )        
|                                                                                              | Gain on sale of property and other assets                                             |                                       |                                                                              | (147,265   | )              |            |            | (3,679,391 | )        
|                                                                                              | Gain on early extinguishments of debt                                                 |                                       |                                                                              | (2,503,758 | )              |            |            | (256,165   | )        
|                                                                                              | Increase in minority interest in equity of consolidated subsidiaries
and partnerships |                                       |                                                                              | 26,262     |                |            |            | 32,027     |          
|                                                                                              | Changes in assets and liabilities:                                                    |                                       |                                                                              |            |                |            |            |            |          
|                                                                                              |                                                                                       |                                       | Trade receivables                                                            |            |                | (1,019,378 | )          |            |           | (57,925    | )
|                                                                                              |                                                                                       |                                       | Construction contract receivables                                            |            |                | 950,758    |            |            |           | 570,073    |  
|                                                                                              |                                                                                       |                                       | Costs and estimated earnings in excess of billings on
construction contracts |            |                | 2,662,183  |            |            |           | (2,178,002 | )
|                                                                                              |                                                                                       |                                       | Arbitration award receivable                                                 |            |                | (8,909,188 | )          |            |           |           |  
|                                                                                              |                                                                                       |                                       | Income and other taxes receivable and payable                                |            |                | (2,426,933 | )          |            |           | 742,716    |  
|                                                                                              |                                                                                       |                                       | Prepaid expenses                                                             |            |                | (127,443   | )          |            |           | (72,973    | )
|                                                                                              |                                                                                       |                                       | Other assets                                                                 |            |                | (31,208    | )          |            |           | 228,217    |  
|                                                                                              |                                                                                       | Accounts payable and accrued expenses |                                                                              |            | (5,537,918     | )          |            |            | 1,904,198 |           
|                                                                                              |                                                                                       |                                       |                                                                              |            |                |            |            |           
|Net cash (used in) provided by operating activities                                           |                                                                                       |                                       | (7,463,752                                                                   | )          |                |            | 1,474,239  |           
|Cash flow from investing activities                                                           |                                                                                       |                                       |                                                                              |            |                |            |            |           
|                                                                                              | Restricted cash                                                                       |                                       |                                                                              | 1,758,364  |                |            |            | 5,338,458  |          
|                                                                                              | (Advances to) payments received on notes receivable                                   |                                       |                                                                              | (302,628   | )              |            |            | 221,673    |          
|                                                                                              | Capital expenditures                                                                  |                                       |                                                                              | (6,166,514 | )              |            |            | (8,589,245 | )        
|                                                                                              | Proceeds from sale of property and leasehold interests                                |                                       |                                                                              | 1,855,660  |                |            |            | 2,788,407  |          
|                                                                                              |                                                                                       |                                       |                                                                              |            |                |            |            |           
|Net cash used in investing activities                                                         |                                                                                       |                                       | (2,855,118                                                                   | )          |                |            | (240,707   | )         
|Cash flow from financing activities                                                           |                                                                                       |                                       |                                                                              |            |                |            |            |           
|                                                                                              | Deferred loan costs                                                                   |                                       |                                                                              | (841,080   | )              |            |            | (98,453    | )        
|                                                                                              | Proceeds from long-term debt                                                          |                                       |                                                                              | 19,100,000 |                |            |            | 1,500,000  |          
|                                                                                              | Payments on long-term debt                                                            |                                       |                                                                              | (9,950,796 | )              |            |            | (2,659,239 | )        
|                                                                                              | Exercise of stock options                                                             |                                       |                                                                              | 208,125    |                |            |            | 4,001      |          
|                                                                                              | Purchase of treasury stock                                                            |                                       |                                                                              | (148,010   | )              |            |            | (54,175    | )        
|                                                                                              |                                                                                       |                                       |                                                                              |            |                |            |            |           
|Net cash provided by (used in) financing activities                                           |                                                                                       |                                       | 8,368,239                                                                    |            |                |            | (1,307,866 | )         
|Net decrease in cash and cash equivalents                                                     |                                                                                       |                                       | (1,950,631                                                                   | )          |                |            | (74,334    | )         
|Cash and cash equivalents  beginning of period                                               |                                                                                       |                                       | 2,704,161                                                                    |            |                |            | 5,339,689  |           
|                                                                                              |                                                                                       |                                       |                                                                              |            |                |            |            |           
|Cash and cash equivalents  end of period                                                     |                                                                                       | $                                     | 753,530                                                                      |            |                | $          | 5,265,355  |           
|                                                                                              |                                                                                       |                                       |                                                                              |            |                |            |            |           

See accompanying notes.





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##### Table of Contents



SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | In Managements opinion, the information and amounts furnished in this report
reflect all adjustments which are necessary for the fair presentation of the
financial position and results of operations for the periods presented. All
adjustments are of a normal and recurring nature. These financial statements
should be read in conjunction with the Companys Annual Report on Form 10-K for
the fiscal year ended December 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | The fiscal year consists of a 52/53 week year ending the last Sunday of the
year. The Companys fiscal quarters have 16, 12, 12, and 12 weeks in the
first, second, third and fourth quarters, respectively, in each fiscal year.
When the 53rd week occurs in a fiscal year, it is added to the fourth fiscal
quarter, making it 13 weeks in length.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | The Company has historically reported lower earnings in the first and fourth
quarters of the year due to the seasonality of the Companys business. The
results of operations for the quarters ended July 14, 2002 and July 15, 2001
are not necessarily indicative of the operating results for the entire year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|B. |  | EXCHANGE AND SALE OF PROPERTIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | The Company opened a new AmeriSuites hotel in October 2001 and another in
February 2002. In accordance with the July 2000 agreement in which the Company
sold its operating interests in 27 AmeriSuites hotels, the Company was
obligated to exchange either one or both of the AmeriSuites hotels with the
purchaser, at its option, for one or two specific existing hotels of the same
brand and number of rooms previously operated by the Company prior to July
2000. The purchaser elected in the first quarter of 2002 to exercise its
exchange option on both hotels, and the exchanges were completed in the first
quarter of 2002. The two hotels received in the exchanges were recorded at the
historical cost basis of each of the two new AmeriSuites hotels less the
previously deferred gain on sale/leaseback.                                                                                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | The Company sold one hotel in Sugar Land, Texas, and a parcel of undeveloped
land in the second quarter ended July 14, 2002. The sale of land resulted in
the recognition of $306,657 in gains on sales of properties. Cumulative sales prices for the hotel and land were $5,315,043, of which
$1,863,082 was cash proceeds. Operating earnings or losses and the gain on the sale of
$339,475 have been eliminated from continuing operations for all periods
presented and reflected as discontinued operations, net of income tax effect.
Balance sheet reclassifications as of December 30, 2001 were not made because
of the insignificance of such amounts to the consolidated amounts: At December
30, 2001, this hotel had $63,812 in current assets, $4,442,462 in property and
equipment (net of accumulated depreciation), $22,921 in other assets, $137,135
in current liabilities, $7,182,419 due to related parties, and $2,790,359 in
stockholders deficit.





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##### Table of Contents



|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | The Company sold two hotels and three restaurants in the first quarter ended
April 22, 2001, resulting in the recognition of $3,606,717 in gain on sale of
properties, and the deferral of an additional $717,941 to be recognized in
future periods under the installment method of accounting. The restaurant
properties were leased to third parties prior to the sales. Cumulative sales
prices for the five properties were $9,590,606, of which $2,258,102 was cash
proceeds.
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|C. |  | EARNINGS PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |  | Earnings per share was computed by dividing net income by the weighted average
number of common shares outstanding. The following table reconciles earnings
and weighted average shares used in the earnings per share calculations for the
fiscal quarters and fiscal year-to-date periods ended July 14, 2002, and July
15, 2001:                                                                                                                                                

|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |           | 
|--------------------------- | ---------------------------------------------------------------- |  | -------------- | --------- | -------------- |  | -------- | --------- | -------- |  | - | --------- |  |  | - | --------- | 
|                            |                                                                  |  | 12 WEEKS ENDED |           | 28 WEEKS ENDED
|                            |                                                                  |  |                |           |               
|                            |                                                                  |  | July 14,       |           | July 15,       |  | July 14, |           | July 15,
|                            |                                                                  |  | 2002           |           | 2001           |  | 2002     |           | 2001    
|                            |                                                                  |  |                |           |                |  |          |           |         
|Basic:                      |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Earnings from continuing operations                              |  | $              | 1,061,135 |                |  | $        | 8,979     |          |  | $ | 168,817   |  |  | $ | 1,582,178 | 
|                            | Earnings from discontinued operations                            |  |                | 200,683   |                |  |          | 44,312    |          |  |   | 190,034   |  |  |   | 56,778    | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Net earnings applicable to common stock                          |  | $              | 1,261,818 |                |  | $        | 53,291    |          |  | $ | 358,851   |  |  | $ | 1,638,956 | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|Shares:                     |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Weighted average common shares outstanding                       |  |                | 5,118,778 |                |  |          | 5,534,278 |          |  |   | 5,109,818 |  |  |   | 5,538,900 | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|Basic earnings per share:   |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Continuing operations                                            |  | $              | 0.21      |                |  | $        |          |          |  | $ | 0.03      |  |  | $ | 0.29      | 
|                            | Discontinued operations                                          |  |                | 0.04      |                |  |          | 0.01      |          |  |   | 0.04      |  |  |   | 0.01      | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Net earnings                                                     |  | $              | 0.25      |                |  | $        | 0.01      |          |  | $ | 0.07      |  |  | $ | 0.30      | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|Diluted:                    |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Earnings from continuing operations                              |  | $              | 1,061,135 |                |  | $        | 8,979     |          |  | $ | 168,817   |  |  | $ | 1,582,178 | 
|                            | Earnings from discontinued operations                            |  |                | 200,683   |                |  |          | 44,312    |          |  |   | 190,034   |  |  |   | 56,778    | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Net earnings applicable to common stock                          |  |                | 1,261,818 |                |  |          | 53,291    |          |  |   | 358,851   |  |  |   | 1,638,956 | 
|                            | Dilutive effect of 7.5% convertible debentures                   |  |                |          |                |  |          |          |          |  |   |          |  |  |   |          | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Numerator for diluted earnings per share                         |  | $              | 1,261,818 |                |  | $        | 53,291    |          |  | $ | 358,851   |  |  | $ | 1,638,956 | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|Shares:                     |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Weighted average common shares outstanding                       |  |                | 5,118,778 |                |  |          | 5,534,278 |          |  |   | 5,109,818 |  |  |   | 5,538,900 | 
|                            | Effect of dilutive securities (options)                          |  |                | 64,211    |                |  |          | 76,513    |          |  |   | 75,499    |  |  |   | 67,257    | 
|                            | Effect of dilutive securities (7.5% convertible debentures)      |  |                |          |                |  |          |          |          |  |   |          |  |  |   |          | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Weighted average common and common equivalent
shares outstanding |  |                | 5,182,989 |                |  |          | 5,610,791 |          |  |   | 5,185,317 |  |  |   | 5,606,156 | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|Diluted earnings per share: |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Continuing operations                                            |  | $              | 0.20      |                |  | $        |          |          |  | $ | 0.03      |  |  | $ | 0.28      | 
|                            | Discontinued operations                                          |  |                | 0.04      |                |  |          | 0.01      |          |  |   | 0.04      |  |  |   | 0.01      | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          
|                            | Net earnings                                                     |  | $              | 0.24      |                |  | $        | 0.01      |          |  | $ | 0.07      |  |  | $ | 0.29      | 
|                            |                                                                  |  |                |           |                |  |          |           |          |  |   |           |  |  |   |          





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##### Table of Contents



|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D. |  | OPERATING SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |  | The Companys significant operating segments are hotel operations,
franchising, management and reservation services, and construction
and development. None of the Companys segments conduct foreign
operations. Operating profit includes the operating revenues and
expenses directly identifiable with the operating segment.
Identifiable assets are those used directly in the operations of
each segment. A summary of the Companys operations by segment
follows (in thousands of dollars):

|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |        |   |        |       |  
|------------------------------ | ------------------------------------------------ |  | -------------- | ----------------------------------- | - | -------------- | ------ | -------------- | - | -------- | ----- | -------- | - | ------ | ------ | ------ | - | ------ | ----- | -
|                               |                                                  |  |                |                                     |   | 12 WEEKS ENDED |        | 28 WEEKS ENDED
|                               |                                                  |  |                |                                     |   |                |        |               
|                               |                                                  |  |                |                                     |   | July 14,       |        | July 15,       |   | July 14, |       | July 15,
|                               |                                                  |  |                |                                     |   | 2002           |        | 2001           |   | 2002     |       | 2001    
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |         
|Revenues:                      |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|                               | Hotel revenues                                   |  | $              | 4,897                               |   |                | $      | 4,257          |   |          | $     | 10,386   |   |        | $      | 9,572  |  
|                               | Franchising, management and reservation services |  |                | 1,877                               |   |                |        | 1,457          |   |          |       | 3,942    |   |        |        | 2,665  |  
|                               | Construction and development                     |  |                | 1,037                               |   |                |        | 8,739          |   |          |       | 6,575    |   |        |        | 16,679 |  
|                               | Elimination of intersegment revenue              |  |                | (888                                | ) |                |        | (3,920         | ) |          |       | (3,534   | ) |        |        | (7,643 | )
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|                               |                                                  |  | Total revenues |                                     | $ | 6,923          |        |                | $ | 10,533   |       |          | $ | 17,369 |        |        | $ | 21,273 |      
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|Operating profit (loss):       |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|                               | Hotel                                            |  | $              | 861                                 |   |                | $      | 1,028          |   |          | $     | 1,841    |   |        | $      | 1,828  |  
|                               | Franchising, management and reservation services |  |                | (8,224                              | ) |                |        | (1,164         | ) |          |       | (9,986   | ) |        |        | (3,082 | )
|                               | Construction and development                     |  |                | (1,058                              | ) |                |        | 277            |   |          |       | (1,055   | ) |        |        | 832    |  
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|                               |                                                  |  |                | Total operating profit (loss)       |   | $              | (8,421 | )              |   | $        | 141   |          |   | $      | (9,200 | )      |   | $      | (422  | )
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|Capital expenditures:          |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|                               | Hotel                                            |  | $              | 951                                 |   |                | $      | 3,782          |   |          | $     | 3,708    |   |        | $      | 7,062  |  
|                               | Franchising, management and reservation services |  |                | 268                                 |   |                |        | 181            |   |          |       | 618      |   |        |        | 1,527  |  
|                               | Construction and development                     |  |                | 62                                  |   |                |        |               |   |          |       | 1,841    |   |        |        |       |  
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|                               |                                                  |  |                | Total capital expenditures          |   | $              | 1,281  |                |   | $        | 3,963 |          |   | $      | 6,167  |        |   | $      | 8,589 |  
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|Depreciation and amortization: |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|                               | Hotel                                            |  | $              | 904                                 |   |                | $      | 736            |   |          | $     | 1,890    |   |        | $      | 1,847  |  
|                               | Franchising, management and reservation services |  |                | 217                                 |   |                |        | 248            |   |          |       | 445      |   |        |        | 583    |  
|                               | Construction and development                     |  |                | 14                                  |   |                |        | 16             |   |          |       | 32       |   |        |        | 30     |  
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       
|                               |                                                  |  |                | Total depreciation and amortization |   | $              | 1,135  |                |   | $        | 1,000 |          |   | $      | 2,367  |        |   | $      | 2,460 |  
|                               |                                                  |  |                |                                     |   |                |        |                |   |          |       |          |   |        |        |       

|              |                                                  |              |  |  |  |  |  |  |  |  |   |          |         |              |   |         |         | 
|------------- | ------------------------------------------------ | ------------ |  |  |  |  |  |  |  |  | - | -------- | ------- | ------------ | - | ------- | ------- | 
|              |                                                  |              |  |  |  |  |  |  |  |  |   | As of    |         | As of       
|              |                                                  |              |  |  |  |  |  |  |  |  |   | July 14, |         | December 30,
|              |                                                  |              |  |  |  |  |  |  |  |  |   | 2002     |         | 2001        
|              |                                                  |              |  |  |  |  |  |  |  |  |   |          |         |             
|Total assets: |                                                  |              |  |  |  |  |  |  |  |  |   |          |         |              |   |        
|              | Hotel                                            |              |  |  |  |  |  |  |  |  | $ | 147,865  |         |              | $ | 152,142 |        
|              | Franchising, management and reservation services |              |  |  |  |  |  |  |  |  |   | 47,573   |         |              |   | 44,500  |        
|              | Construction and development                     |              |  |  |  |  |  |  |  |  |   | 6,297    |         |              |   | 9,945   |        
|              |                                                  |              |  |  |  |  |  |  |  |  |   |          |         |              |   |        
|              |                                                  | Total assets |  |  |  |  |  |  |  |  |   | $        | 201,735 |              |   | $       | 206,587 | 
|              |                                                  |              |  |  |  |  |  |  |  |  |   |          |         |              |   |        





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##### Table of Contents



|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E. |  | CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |  | The Company is a party to legal proceedings incidental to its
business. In the opinion of management, any ultimate liability with
respect to these actions will not materially affect the consolidated
financial position or results of operations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |  | The construction of a hotel was completed for a third party during
2001 and a balance of approximately $2,000,000 remains uncollected.
The Company has a lien against the property and has filed an
arbitration claim against the owner. The arbitration hearing was
originally scheduled for July 22, 2002, but was rescheduled for
August 12, 2002, and began on that date. Final arguments were
deferred to September 23, 2002. While the outcome of the proceeding
cannot presently be determined, management does not believe it is
probable that the carrying value of the receivable has been
impaired. Accordingly, an allowance for doubtful collectibility was
not deemed necessary at July 14, 2002. Should the Company be
unsuccessful in the arbitration hearing, the required write-off of
the receivable would be charged to operations at that time.                                                                                 
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |  | On June 28, 2001, the Company filed an arbitration proceeding
against Prime Hospitality Corp., seeking $20,000,000 in monetary
damages related to the non-use of the Companys reservation center
as agreed. The arbitration hearing was held during the week of
April 15, 2002. The results of the arbitration proceeding were
released on June 28, 2002. The Arbitrator ruled that Primes
material breach of contract caused the Company to lose $8.9 million
in anticipated profit under the terms of the Agreement. The
Arbitrator accordingly awarded the Company its full damages of $8.9
million, to be paid within 30 days of the award. Prime paid the
award by wire transfer to an escrow account on August 1, 2002. The
escrow agent wired the funds to the Company, and the Company
received the $8.9 million on August 2, 2002. The Company has
recorded the $8.9 million receivable and earnings in its second
fiscal quarter of 2002.
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|F. |  | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |  | In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, (SFAS No. 141) and SFAS No.
142, Goodwill and Other Intangible Assets(SFAS No. 142). SFAS
No. 141 was effective July 1, 2001, and SFAS No. 142 was effective
January 1, 2002. Under the new rules in SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized effective
January 1, 2002, but are subject to annual impairment tests. Other
intangible assets will continue to be amortized over their useful
lives.                                                                                                                                                                                                                                                                                                                                                                                       
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |  | The Company has applied the new rules on accounting for goodwill and
intangible assets beginning in the first quarter of 2002. The
Company has completed the required transitional impairment tests,
and the results of the tests had no effect on operations or
financial position of the Company. As                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               





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| |  |                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | discussed in Note H, events
that occurred in the second quarter of 2002 caused certain
intangible assets to become worthless and be written off.                                                                  
|
| |  | A reconciliation of previously reported net income to the pro forma
amounts adjusted for the exclusion of goodwill and indefinite lived
intangible assets amortization, net of related income tax effect,
follows:

|                                                                   |  |                |           |                |  |          |         |          |  |   |         |  |  |   |           | 
|------------------------------------------------------------------ |  | -------------- | --------- | -------------- |  | -------- | ------- | -------- |  | - | ------- |  |  | - | --------- | 
|                                                                   |  | 12 WEEKS ENDED |           | 28 WEEKS ENDED
|                                                                   |  |                |           |               
|                                                                   |  | July 14,       |           | July 15,       |  | July 14, |         | July 15,
|                                                                   |  | 2002           |           | 2001           |  | 2002     |         | 2001    
|                                                                   |  |                |           |                |  |          |         |         
|Reported net earnings                                              |  | $              | 1,261,818 |                |  | $        | 53,291  |          |  | $ | 358,851 |  |  | $ | 1,638,956 | 
|Add: Goodwill and indefinite lived
assets amortization, net of tax |  |                |          |                |  |          | 60,194  |          |  |   |        |  |  |   | 140,456   | 
|                                                                   |  |                |           |                |  |          |         |          |  |   |         |  |  |   |           | 
|Pro forma adjusted net earnings                                    |  | $              | 1,261,818 |                |  | $        | 113,485 |          |  | $ | 358,851 |  |  | $ | 1,779,412 | 
|                                                                   |  |                |           |                |  |          |         |          |  |   |         |  |  |   |           | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In August 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets(SFAS No. 144),
which supercedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
(SFAS No. 121), and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 removes goodwill from its
scope and clarifies other implementation issues related to SFAS No.
121. SFAS No. 144 also provides a single framework for evaluating
long-lived assets to be disposed of by sale. The provisions of this
statement were adopted at the beginning of fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections.SFAS No. 145 rescinds Statement 4, which
required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. Since the issuance of Statement
4, the use of debt extinguishment has become part of the risk
management strategy of many companies, including the Company. These
debt extinguishments do not meet the criteria for classification as
extraordinary items in APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, and therefore, should not be classified as
extraordinary after the adoption of SFAS No. 145. Adoption of SFAS
No. 145 is required for fiscal years beginning after May 15, 2002,
but earlier application is encouraged. The Company elected to adopt
the provisions of SFAS No. 145 at the beginning of fiscal 2002. The
extraordinary gain on extinguishment of debt of $169,400 for the 12
weeks ended July 15, 2001, and $256,165 for the 28 weeks ended July
15, 2001, previously classified as an extraordinary item in prior
periods has been reclassified to conform with the provisions of
Statement 145.





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|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|G. |  | GUESTHOUSE FRANCHISE ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | On May 3, 2002, the Company acquired all of the common stock of
GuestHouse International Franchise Systems, Inc. (GuestHouse) for
$1.6 million of cash. The results of operations of GuestHouse are
included in the consolidated statement of earnings from the
acquisition date forward. GuestHouse is the exclusive franchisor of
the GuestHouse Inns & Suites hotel brand, consisting of 71
properties open and operating, has an additional 12 properties
currently under development of which 5 are scheduled to open in
2002, and has an additional 27 license agreements in various stages
of completion. As a result of the acquisition, the Company will now
be in charge of the operation and growth of the GuestHouse brand,
and expects the transaction to be accretive to earnings beginning
with the fiscal year ending December 29, 2002. On May 21, 2002, the
Company announced its plan to convert the name of the Shoneys Inns
and Shoneys Inns & Suites hotel chain to GuestHouse International
Inns & Suites as soon as practical. Four of the Company-owned
Shoneys Inns have thus far been converted to the GuestHouse brand,
three of which were converted in the second quarter and one
subsequent July 14, 2002.
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|H. |  | WRITE-OFF OF INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | The Company sold its interests in 27 Sumner Suites hotels in 2000 to
Prime Hospitality Corp., who subsequently converted all of them to
their AmeriSuites hotel brand. The Company continued to hold the
Sumner Suites trademark with the possibility of using it to brand
future hotels it might develop or acquire. In the second quarter of
2002, management made the decision to abandon the trademark since
the use of the name by the Company in the future is highly unlikely.
Consequently, the remaining balance of $376,256 for the Sumner
Suites trademark was written off in the second quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |  | The Company carried intangible assets (deferred charges and
goodwill) related to the acquisition and modifications of the
franchising rights for Shoneys Inns and Shoneys Inns & Suites at
$6,432,379. The Company has been unsuccessful in its efforts to
sell new franchises for at least a year, and existing franchises
have exited the Shoneys Inn system for several years. In the
second quarter of 2002, the Company acquired the exclusive
franchising rights for the GuestHouse International Inns & Suites
brand. The Company has decided to convert all existing Shoneys
Inns to the GuestHouse brand and to franchise only the GuestHouse
brand in the future. No more attempts will be made to franchise the
Shoneys Inn brand. As a result, the value of the Shoneys Inn
franchising rights has been determined to be worthless.
Consequently, the balance of $6,432,379 was written off in the
second quarter.                                                                                                                                                                                                                                                                                                        





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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations

Overview

The following discussion should be read in conjunction with the Companys
condensed consolidated financial statements and notes thereto appearing
elsewhere in this quarterly report.

The Company is an operator and the exclusive franchisor of Shoneys Inns.
As of July 14, 2002, the Shoneys Inn lodging system consists of 67 Shoneys
Inns containing 6,334 rooms of which 8 containing 916 rooms are owned and
operated by the Company. Shoneys Inns are currently located in 15 states with
a concentration in the Southeast. Shoneys Inns operate in the upper economy
limited-service segment and are designed to appeal to both business and leisure
travelers, with rooms usually priced between $40 and $65 per night. The
typical Shoneys Inn includes 60 to 120 rooms and, in most cases, meeting
rooms.

On May 2, 2002, the Company became the exclusive franchisor of GuestHouse
Inns & Suites, which as of July 14, 2002, consisted of 74 properties containing
5,099 rooms open and operating in 20 states, including nine states in which
Shoneys Inns operate. GuestHouse Inns & Suites operate in the mid-market
limited service segment, with rooms typically priced between $50 and $70 per
night. The properties range in size from 21 to 180 rooms, and in most cases,
contain meeting rooms. They are designed to appeal to both business and
leisure travelers.

The Company plans to convert the name of the Shoneys Inn chain to the
GuestHouse brand as soon as practical. Four of the GuestHouse Inns & Suites
containing 462 rooms included above as of July 14, 2002, were Company-owned
Shoneys Inns & Suites prior to their conversion to the GuestHouse brand in the
second quarter of this year.

The Companys operations have been supplemented by contract revenues from
construction and development of hotels for third parties. Revenues from these
activities have varied widely from period to period, depending upon whether the
Companys construction and development activities were primarily focused on its
own facilities or on outside projects. Construction revenues are recognized on
the percentage of completion basis.

The Company has historically reported lower earnings in the first and
fourth quarters of the year due to the seasonality of the Companys business.
The results of operations for the quarters ended July 14, 2002 and July 15,
2001 are not necessarily indicative of the operating results for the entire
year.





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Results of Operations

For the Fiscal Quarters and Fiscal Year-to-date Periods Ended July 14, 2002 and
July 15, 2001

Total operating revenues for the quarter ended July 14, 2002, were $6.9
million, or 34.3% less than the total operating revenues of $10.5 million
reported for the second quarter of 2001. For the fiscal year-to-date period
ended July 14, 2002, total operating revenues were $17.4 million, or 18.4% less
than the total operating revenues of $21.3 million for the comparable period of
2001.

Revenues from hotel operations in the second fiscal quarter increased by
$704,000, or 22.1%, from the $3.2 million reported for the same period last
year. For the 11 same hotels opened for all of both quarterly periods, an
increase of 0.3% in average daily room rates, from $50.37 in the second quarter
of 2001 to $50.54 in the second quarter of 2002, and a decrease in average
occupancy rates on these hotels from 58.4% to 49.1% this year, were the primary
causes of a decrease in same hotel revenues of 16.5% from $3.2 million in the
second quarter of 2001 to $2.7 million in the second quarter of 2002. The
Company sold two Shoneys Inns in April of 2001 and one Shoneys Inn in June of
2002, acquired a Baymont Inn & Suites in November of 2001, and opened two
AmeriSuites hotels  one in October of 2001 and one in February of 2002. The
revenue effects of the Shoneys Inn sold in June of 2002 is reflected in
discontinued operations. The three hotels added since the second quarter of
2001 contributed $1.2 million to hotel revenues in the second quarter of 2002.

Revenues from hotel operations in the first two quarters increased by
$821,000, or 11.4%, from the $7.2 million reported for the same period last
year. For the 11 same hotels opened for all of both year-to-date periods, a
decrease of 0.5% in average daily room rates, from $50.31 in 2001 to $50.06 in
2002, and a decrease in average occupancy rates on these hotels from 51.6% to
46.0% this year, were the primary causes of a decrease in same hotel revenues
of 12.4% from $6.6 million in the first two fiscal quarters of 2001 to $5.8
million in the first two fiscal quarters of 2002. The two Shoneys Inns sold
in the second quarter of 2001 contributed $638,000 to 2001 year-to-date hotel
revenues. The three hotels added since the second quarter of 2001 contributed
$2.3 million to hotel revenues in the first two quarters of 2002.

The Company owns and operates primarily Shoneys Inns (soon to be
converted to GuestHouse Inns & Suites). RevPAR (revenue per available room)
for all Company-owned Shoneys Inns (including the four already converted to
GuestHouse Inns & Suites during the second quarter of this year) decreased from
$29.42 in the second quarter of 2001 to $24.79 in the second quarter of 2002.
These RevPARs also represent the 11 Shoneys Inns / GuestHouse same-hotels
RevPAR. For the first two quarters of this year, RevPAR for all Company-owned
Shoneys Inns (including the four converted to





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GuestHouse Inn & Suites)
decreased from $25.99 in the first two quarters of 2001 to $23.02 in the first
two quarters of 2002. The 11 Shoneys Inns / GuestHouse same-hotels RevPAR
decreased from $25.98 in the first two quarters of 2001 to $23.02 in the first
two quarters of 2002.

Franchising, management and reservation service revenues increased by
$430,000, or 38.8%, in the second quarter of 2002 from the second quarter of
2001. Initial and termination franchise fees decreased by $29,000, royalty
fees increased by $152,000, management fees decreased by $446,000 and reservation fees increased by
$758,000 from the second quarter of last year. Initial franchise and
termination fee revenue varies from quarter to quarter depending on the level
of franchise sales activities and terminations. Franchising, management and
reservation service revenues increased by $1.3 million, or 71.4%, in the first
two quarters of 2002 from the first two quarters of 2001. Initial and
termination franchise fees increased by $3,000, royalty fees increased by
$120,000, management fees decreased by $449,000 and reservation fees increased
by $1.7 million from the first two quarters of last year. Management fee
revenues on 16 hotel management contracts which became effective April 20,
2001, have not been accrued nor collected in 2002, but were accrued and
collected in the second quarter of 2001 in the amount of $444,000. The
management fee revenue on these 16 management contracts will be recorded in the
future only as payments are received.

Revenues from construction and development activities were $649,000 in the
second quarter of 2002 and $4.2 million in the first two quarters of 2002 on
two third party construction contracts in progress, versus $5.3 million and
$10.2 million in the second quarter and first two quarters of 2001,
respectively, on six third party construction contracts in progress. Revenues
from construction and development can vary widely from period to period
depending upon the volume of outside contract work and the timing of those
projects. The events of September 11, 2001, have had a significantly negative
impact on the Companys construction and development opportunities.

Rent income in the second quarter of 2002 increased by $26,000, to
$822,000, from $796,000, in the second quarter of 2001. Rent income in the
first two quarters of 2002 decreased by $30,000, to $1.87 million, from $1.90
million, in the first two quarters of 2001. The primary source of rent income
is from the lease of three AmeriSuites hotels which are being operated by
Prime Hospitality Corp. The decrease in year-to-date rent income was due to
the sale of some restaurants to the lessees.

Operating expenses from hotel operations for the second quarter of 2002
increased by $553,000, or 23.6%, from $2.3 million in the second quarter of
2001. Hotel operating expenses on the 11 same-hotels were $2.1 million in the
second quarter of 2002 compared to $2.3 million in the second quarter of 2001.
The operating expenses as a percentage of operating revenues for this activity
increased from 73.6% in the second quarter of 2001 to 74.5% in the second
quarter of 2002; operating expenses as a percentage of operating revenues on
the 11 same-hotels increased from 73.6% in the second quarter of 2001 to 80.7%
in the second quarter of 2002. Hotel operating expenses on same-hotels were not
reduced as much as the decline in hotel revenues, thus reducing gross operating
profit margin on these hotels.





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Operating expenses from hotel operations for the first two quarters of
2002 increased by $727,000, or 13.3%, from $5.5 million in the first two
quarters of 2001. Hotel operating expenses on the 11 same-hotels were $4.7
million in the first two quarters of 2002 compared to $5.0 million in the first
two quarters of 2001. The operating expenses as a percentage of operating
revenues for this activity increased from 76.0% in the first two quarters of
2001 to 77.3% in the first two quarters of 2002; operating expenses as a
percentage of operating revenues on the 11 same-hotels increased from 76.0% in
the first two quarters of 2001 to 82.5% in the first two quarters of 2002.
Hotel operating expenses on same-hotels were not reduced as much as the decline
in hotel revenues, thus reducing gross operating profit margin on these hotels.

Franchising, management and reservation service operating expenses
increased by $443,000, or 99.8%, from the second quarter of 2001 to the second
quarter of 2002, and by $992,000, or 106.5%, from the first two quarters of
2001 to the first two quarters of 2002. The increases were primarily in
reservation center expenses incurred in order to support the additional
revenues earned from services provided to additional chains and independent
hotel properties since the second quarter of 2001.

Construction and development costs in the second quarter of 2002 were $1.7
million on the two third party construction contracts in progress versus $5.1
million in the second quarter of 2001 on the six third party construction
contracts in progress at that time. Construction and development costs in the
first two quarters of 2002 were $5.2 million on the two third party
construction contracts in progress versus $9.4 million in the first two
quarters of 2001 on the six third party construction contracts in progress at
that time.

Rent expense increased by $4,000 in the second quarter of this year from
last years second quarter, and decreased by $1,000 in the first two quarters
of this year from last years first two quarters. The Company leased only one
hotel property in both years.

General and administrative expenses increased by $414,000, or 30.6%, from
the second quarter of 2001, and increased by $643,000, or 20.8%, from the first
two quarters of 2001. The increases were due primarily to increased
professional fees and insurance costs. The increase in professional fees was
due primarily to legal fees incurred in the arbitration proceeding against
Prime Hospitality Corp. (see discussion of arbitration award below).

Depreciation and amortization expense increased by $134,000, or 13.4%,
from the second quarter of 2001. A reduction of $97,000 was due to the adoption
of Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assetseffective with the 2002 fiscal year. Increases in
depreciation of $159,000 was due to the three hotels added since the second
quarter of 2001. Depreciation of the 11 hotels owned and operated for all of
both quarterly periods increased by $11,000, and depreciation increased by
$61,000 due to other net additions to depreciable assets other than hotels.





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Depreciation and amortization expense decreased by $93,000, or 3.8%, from
the first two quarters of 2001. A reduction of $227,000 was due to the
adoption of Statement of Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assetseffective with the 2002 fiscal year. Further
reductions of $118,000 were due to the sale of the two hotels in the first
quarter of 2001, offset with increases in depreciation of $338,000 due to the
three hotels added since the second quarter of 2001. Depreciation of the 11
hotels owned and operated for all of both quarterly periods decreased by
$174,000, and depreciation increased by $88,000 due to other net additions to
depreciable assets other than hotels.

The Company sold its interests in 27 Sumner Suites hotels in 2000 to
Prime Hospitality Corp., who subsequently converted all of them to their
AmeriSuites hotel brand. The Company continued to hold the Sumner Suites trademark
with the possibility of using it to brand future hotels it might develop
or acquire. In the second quarter of 2000, management made the decision
to abandon the trademark since the use of the name by the Company in the
future is highly unlikely. Consequently, the remaining balance of
$376,000 for the Sumner Suites trademark was written off in the second
quarter. The Company carried intangible assets (deferred charges and
goodwill) related to the acquisition and modifications of the franchising
rights for Shoneys Inns and Shoneys Inns & Suites at $6.4 million. The
Company has been unsuccessful in its efforts to sell new franchises for
at least a year, and existing franchises have exited the Shoneys Inn
system for several years. In the second quarter of 2002, the Company
acquired the exclusive franchising rights for the GuestHouse
International Inns & Suites brand. The Company has decided to convert
all existing Shoneys Inns to the GuestHouse brand and to franchise only
the GuestHouse brand in the future. No more attempts will be made to
franchise the Shoneys Inn brand. As a result, the value of the Shoneys
Inn franchising rights has been determined to be worthless.
Consequently, the balance of $6.4 million was written off in the second
quarter.

The net gain of $48,000 recognized on sale of property in the second
quarter of 2002 totaled a $310,000 gain, primarily from the sale of excess land
in the quarter, partially offset by a loss of $262,000 due to costs incurred on
an exchange of two hotels related to the sale of leasehold interests in 2000.
The net gain recognized on sale of property in the first two quarters of 2002
totaled $147,000, primarily from the sale of excess land, partially offset by
the costs of the hotel exchanged as discussed above. The gain recognized on the
sales of property in the first two quarters of 2001 totaled $3.7 million and
was primarily from the Companys sale of two hotels and three restaurants, a
portion of which the gain was deferred on one of the hotels and two of the
restaurants and which is being recognized on the installment method of
accounting until full accrual accounting is warranted.





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Pursuant to a plan adopted in 1999 to repurchase a portion of the
Companys outstanding subordinated indebtedness in the open market and in
negotiated transactions, the Company repurchased $130,000 of its 7.50%
subordinated debentures in the second quarter of 2002 at a discount,
recognizing a gain of $32,000, and in the first two quarters of 2002, the
Company repurchased $1.0 million of its 7.50% subordinated debentures at a
discount, recognizing a gain of $284,000. In the second quarter of 2001, the
Company repurchased $558,000 of these debentures at a discount, recognizing a
gain of $169,000, and in the first two quarters of 2001, the Company
repurchased $808,000 of its 7.50% subordinated debentures at a discount,
recognizing a gain of $256,000. Additionally, in the second quarter of 2002,
the Company, in a negotiated transaction, exchanged $8.2 million face value of
its previously repurchased senior subordinated notes for $7.5 million of its
outstanding 7.50% subordinated debentures, recognizing a gain of $2.2 million.
The Company adopted Statement of Financial Accounting Standards No. 145 at the
beginning of fiscal 2002. Accordingly, gains and losses from debt
extinguishments are no longer classified in the statement of earnings as
extraordinary items. See further discussion in Liquidity and Capital
Resources below.

Interest expense increased by $338,000, or 18.3%, while interest income
decreased by $362,000, or 22.0%, from the second quarter of 2001. For the first
two quarters of 2002, interest expense increased by $409,000, or 9.5%, while interest
income decreased by $713,000, or 19.1%, from the first two quarters of 2001.
The increase in interest expense was due primarily to higher levels of
borrowing on the Companys bank credit facilities in the first two quarters of
2002 than in the first two quarters of 2001. Interest income increased due to
seller financing of a portion of the sales price of two Shoneys Inns sold to
franchisees in April of 2001, and one Shoneys Inn sold in June of 2002, but
was more than offset by decreases in the interest rates charged on other notes
receivable due to the general decline in interest rates and the interest rate
terms of those notes.

The Company had filed an arbitration claim against Prime Hospitality Corp.
in June of 2001 seeking monetary damages related to the non-use of the
Companys reservation center as agreed. In June of 2002, the Arbitrator ruled
that Primes material breach of contract caused the Company to lose $8.9
million in anticipated profit under the terms of the agreement, and accordingly
awarded the Company its full damages of $8.9 million. Prime paid the award to
the Company on August 1, 2002.

Discontinued operations resulted from the sale of one hotel in the second
quarter of 2002. The effect of this hotels operations and the gain on the
sale of the hotel has been removed from operating earnings and from the gain on
sale of property and leasehold interests in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.





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Liquidity and Capital Resources

The Companys cash flows used in operating activities were $7.5 million in
the first two quarters of 2002, compared with $1.5 million provided by
operating activities in the first two quarters of 2001.

The Companys cash flows used in investing activities were $2.9 million in
the first two quarters of 2002, compared with $241,000 for the comparable
period in 2001. The Companys capital expenditures are principally for the
construction and acquisition of new lodging facilities and the purchase of
equipment and leasehold improvements. Capital expenditures for such purposes
were $6.2 million in the first two quarters of 2002 and $8.6 million in the
first two quarters of 2001. Proceeds from the sale of property and leasehold
interests were $1.9 million in the first two quarters of 2002 versus $2.8
million for the comparable period in 2001.

Net cash provided by financing activities was $8.4 million in the first
two quarters of 2002 compared with $1.3 million used in financing activities in
the first two quarters of 2001. Borrowings, net of repayments, on long-term
debt and capitalized lease obligations were $9.1 million in the first two
quarters of 2002 versus $1.2 million repayments in excess of borrowings in the
first two quarters of 2001. Borrowings in the first two quarters of 2002
include the re-issuance at a discount from face value (in a negotiated
transaction) of $8.2 million of long-term debt previously repurchased in the
open market or in privately negotiated transactions. The repayments in the
first two quarters of 2002 and the first two quarters of 2001 include $8.5
million and $808,000, respectively, of long-term debt repurchased in the open
market or in privately negotiated transactions. In the first two quarters of 2002, the Company repurchased 25,000 shares of its
common stock for $148,000 pursuant to a plan to repurchase up to $23.0 million
of the Companys outstanding common stock; in the first two quarters of 2001,
the Company repurchased 11,000 shares of its common stock for $54,000.

The Company established a three-year credit facility with a financial
institution effective August 27, 1999. An amendment to the credit facility
became effective October 3, 2001, which, among other changes, extended the
maturity to September 30, 2004. The credit facility is for $30 million (a $10
million term loan and a $20 million revolving line of credit), secured by a
pledge of certain promissory notes payable to the Company received in
connection with the sale of 16 of the Companys lodging facilities in the third
quarter of 1998. The borrowing base is the lower of (a) 85% of the outstanding
principal amount of the pledged notes, (b) 65% of the appraised market value of
the underlying real property collateral securing the pledged notes, or (c) $30
million. Effective October 3, 2001, the interest rate on the term loan is at
the lenders base rate plus 100 basis points, and the interest rate on the
revolving line of credit is at the lenders base rate plus 250 points, with a
floor of 7.00% on both portions of the facility. The Company is to pay
commitment fees on the unused portion of the facility at .50% per annum. The
credit facility also contains covenants which limit or prohibit the incurring
of certain additional indebtedness in excess of a specified debt to total
capital ratio, prohibit additional liens on





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the collateral, restrict mergers
and the payment of dividends and restrict the Companys ability to place liens
on unencumbered assets. The credit facility contains financial covenants as to
the Companys minimum net worth. As of July 14, 2002, the Company had $23.5
million in borrowings outstanding under this credit facility, consisting of the
$10 million term loan and $13.5 million on the revolving line of credit.

The Company also maintains a $1 million unsecured line of credit with
another bank, bearing interest at the lenders prime rate, maturing May 31,
2003. As of July 14, 2002, the Company had no borrowings outstanding under
this credit facility.

The Company opened one new hotel in the first two quarters of 2002 and
none in the first two quarters of 2001. As of the end of the second
fiscal quarter of 2002, no Company-owned hotels were under construction.
There are no plans to develop or operate additional Company-owned hotels
in the near term. This decision was based on current market conditions,
rooms supply in certain areas, capital availability, and the sale of
leasehold interests in 2000.

The Companys Board of Directors has previously authorized the use of up
to $23.0 million for the repurchase of shares of the Companys common stock.
The purchases, including block purchases, are to be made from time to time in
the open market at prevailing market prices, or in privately negotiated
transactions at the Companys discretion. No time limit has been placed on the
duration of the stock repurchase plan, and the Company may discontinue the plan
at any time. As of the end of the second fiscal quarter of 2002, approximately
3.6 million shares had been repurchased at a cost of $20.5 million.

The Company is investigating various alternatives to maximize shareholder
value. These alternatives could include, without limitation, the franchising
and operation of additional GuestHouse Inns & Suites, a sale of the remaining
Company-owned Inns, negotiating new credit arrangements, developing hotels for other owners,
the repurchase of additional shares of the Companys common stock or
outstanding debt securities, or any combination of these or other strategies.
On August 27, 2002, the Company filed a registration statement with the
Securities and Exchange Commission an exchange offer and consent solicitation
regarding the senior subordinated notes which, if consummated, would allow the
Company more flexibility in purchasing its outstanding debt and common stock.
The Company believes that a combination of existing cash, the collection of
notes receivable, net cash provided by operations, and borrowings under
existing credit facilities or mortgage debt, will be sufficient to fund its
hotel development, stock repurchase plan, debt repayments and operations for at
least the next twelve months.

Market Risk

There have been no material changes in the Companys exposure to market
risk in the second fiscal quarter ended July 14, 2002.





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##### Table of Contents



Forward-looking Statement Disclaimer

The statements appearing in this report which are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements, including delays in concluding or the inability to conclude
transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, changes in applicable laws and regulation,
in margins, demand fluctuations, access to debt or equity financing, adverse
uninsured determinations in existing or future litigation or regulatory
proceedings and other risks.





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##### Table of Contents






PART II  OTHER INFORMATION

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1. |  | On June 28, 2001 the Company filed an arbitration proceeding against
Prime Hospitality Corporation (Prime) based on Primes failure to
commence use of the Companys reservation services for a fee as agreed by
Prime in an Agreement for Reservation Services dated July 9, 2000. The
Company sought $20 million in monetary damages. The parties selected an
arbitrator, and the arbitration hearing was held during the week of April
15, 2002. The results of the arbitration proceeding were released on June
28, 2002. The Arbitrator ruled that Primes material breach of contract
caused the Company to lose $8.9 million in anticipated profit under the
terms of the Agreement. The Arbitrator accordingly awarded the Company
its full damages of $8.9 million, to be paid within 30 days of the award.
The Company filed a Motion to Confirm the award with the Chancery Court
for Sumner County, Tennessee. Prime paid the award by wire transfer to
an escrow account on August 1, 2002. The escrow agent wired the funds to
the Company, and the Company received the $8.9 million on August 2, 2002.
The Company recorded the $8.9 million in earnings in its second fiscal
quarter. The case is now concluded.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  | No material developments occurred during the second quarter ended
July 14, 2002 with respect to any other pending litigation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Item 4. |  | Submission of Matters to a vote of Security Holders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  | At the Companys Annual Meeting of Shareholders held on May 24, 2002,
5,118,778 shares were outstanding and eligible to vote. The shareholders
considered and voted to reelect the following directors:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                   |  |           |           |  |  |          |  |  |  |  |        | 
|------------------ |  | --------- | --------- |  |  | -------- |  |  |  |  | ------ | 
|                   |  | Vote Cast
|                   |  |          
|Name of Nominee    |  | For       |           |  |  | Withheld
|                   |  |           |           |  |  |          |  | 
|Helen L. Moskovitz |  |           | 5,051,174 |  |  |          |  |  |  |  | 26,848 | 
|Richard L. Johnson |  |           | 5,058,174 |  |  |          |  |  |  |  | 19,848 | 

|        |  |                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  | The names of the directors whose terms of office as directors
continued after the annual meeting of shareholders are: Leon
Moore, Bob Marlowe, Earl H. Sadler and David M. Resha
|        |  |                                                                                                                                                                                 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                                                
|        |  |                                                                                                                                                                                 
|        |  | 6(a) Exhibits -                                                                                                                                                                 



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Exhibit 99.1  Certifications required by Section 906 of
the Sarbanes-Oxley Act of 2002.

| |  |                         
| |  | ------------------------
| |  | 6(b) Reports on Form 8-K



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A Form 8-K was filed on May 17, 2002, relating to the
completion of a transaction on May 2, 2002, involving the
acquisition by the Company of 100% of the common stock of GuestHouse
International Franchise Systems, Inc.





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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                      |  |                                                                                                                            
|--------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|                      |  | ShoLodge, Inc.                                                                                                             
|                     
|Date: August 27, 2002 |  | /S/ Leon Moore                                                                                                             
|                      |  |                                                                                                                            
|                      |  | Leon Moore
President, Chief Executive Officer,
Principal Executive Officer, Director                                       
|                     
|Date: August 27, 2002 |  | /S/ Bob Marlowe                                                                                                            
|                      |  |                                                                                                                            
|                      |  | Bob Marlowe
Secretary, Treasurer, Chief Accounting Officer,
Principal Accounting Officer,
Chief Financial Officer, Director