##### 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   For the First Quarter Ended April 18, 2004
    
    Commission File No. 0-19840
   SHOLODGE, INC.    Tennessee
    
    62-1015641(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)130 Maple Drive North, Hendersonville, Tennessee
    
    37075(address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code
    
    (615) 264-8000
   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   [  ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes   [  ]   No   [X] Indicate the number of shares outstanding of each of the registrants classes of common stock as
of the latest practicable date. As of May 28, 2004, there were 5,006,611 shares of ShoLodge, Inc. common stock outstanding.




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TABLE OF CONTENTS  Consolidated Balance SheetsConsolidated Statements of EarningsConsolidated Statements of Cash FlowsNOTES TO CONSOLIDATED FINANCIAL STATEMENTSPART IItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. No material developments occurred during the first quarter ended April 18, 2004 with respect to any pending litigationItem 4. Submission of Matters to a vote of Security HoldersItem 6. Exhibits and Reports on Form 8-KSIGNATURESEX-31.1  SECTION 302 CERTIFICATION OF THE CEO&CFOEX-32.1  SECTION 906 CERTIFICATION OF THE CEO&CFO    Table of Contents  
 ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets April 18,2004
    
    December 28,(unaudited)
    
    2003(1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    11,867,996
    
    
    $
    12,491,736Accounts receivable:Accounts receivable-trade, net
    
    
    2,510,335
    
    
    
    2,188,312Construction contracts
    
    
    661,284
    
    
    
    837,714Construction contracts due from related parties
    
    
    27,404,061
    
    
    
    22,668,784Costs and estimated earnings in excess of
billings on construction contracts
    
    
    28,990
    
    
    
    39,832Income taxes receivable
    
    
    3,807,246
    
    
    
    3,908,041Prepaid expenses
    
    
    512,351
    
    
    
    314,967Notes receivable, net
    
    
    4,264,737
    
    
    
    6,641,598Assets of hotels transferred under contractual
agreements (notes receivable)
    
    
    2,000,000
    
    
    
    4,352,000Assets of hotels held for sale
    
    
    16,139,477
    
    
    
    16,139,477Other current assets
    
    
    45,407
    
    
    
    45,352Total current assets
    
    
    69,241,884
    
    
    
    69,627,813Notes receivable, net
    
    
    2,604,583
    
    
    
    4,702,058Property and equipment
    
    
    40,253,476
    
    
    
    40,369,304Less accumulated depreciation and amortization
    
    
    (7,273,507
    )
    
    
    (6,922,065
    )32,979,969
    
    
    
    33,447,239Land under development or held for sale
    
    
    10,653,717
    
    
    
    10,644,991Deferred charges, net
    
    
    392,939
    
    
    
    437,353Goodwill, net
    
    
    765,711
    
    
    
    765,711Trademark and franchise rights, net
    
    
    396,442
    
    
    
    473,366Other assets
    
    
    2,410,599
    
    
    
    1,921,596$
    119,445,844
    
    
    $
    122,020,127
  (1)
    
    Derived from fiscal year ended December 28, 2003 audited financial statements.See accompanying notes.




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ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets (continued) April 18,2004
    
    December 28,(unaudited)
    
    2003(1)Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    4,376,767
    
    
    $
    5,450,275Taxes payable other than on income
    
    
    402,251
    
    
    
    344,179Current portion of long-term debt
    
    
    11,360,703
    
    
    
    11,344,902Total current liabilities
    
    
    16,139,721
    
    
    
    17,139,356Long-term debt, less current portion
    
    
    41,373,639
    
    
    
    41,373,383Deferred income taxes
    
    
    233,485
    
    
    
    783,485Deferred credits
    
    
    150,280
    
    
    
    153,106Minority interests in equity of consolidated subsidiaries and
partnerships
    
    
    391,560
    
    
    
    388,699Total liabilities
    
    
    58,288,685
    
    
    
    59,838,029Shareholders 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, 5,006,611 and 4,993,278 shares issued
and outstanding as of April 18, 2004
and December 28, 2003, respectively)
    
    
    1,000
    
    
    
    1,000Additional paid-in capital
    
    
    23,177,820
    
    
    
    23,127,821Retained earnings
    
    
    37,978,339
    
    
    
    39,053,277Total shareholders equity
    
    
    61,157,159
    
    
    
    62,182,098$
    119,445,844
    
    
    $
    122,020,127
  (1)
    
    Derived from fiscal year ended December 28, 2003 audited financial statements.See accompanying notes.




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ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited) 16 weeks endedApril 18,
    
    April 20,2004
    
    2003Revenues:Hotel
    
    $
    1,356,050
    
    
    $
    786,657Franchising, reservation and management
    
    
    2,177,855
    
    
    
    2,080,301Construction and development-related parties
    
    
    7,741,531
    
    
    
    2,944,623Construction and development-other
    
    
    145,156
    
    
    
    9,151Rent income
    
    
    9,728
    
    
    
    327,178Other income
    
    
    63,481
    
    
    
    17,256Total revenues
    
    
    11,493,801
    
    
    
    6,165,166Cost and expenses:Hotel
    
    
    1,020,105
    
    
    
    565,364Franchising, reservation and management
    
    
    1,718,030
    
    
    
    1,677,618Construction and development
    
    
    6,647,624
    
    
    
    3,417,198Rent expense, net
    
    
    138,623
    
    
    
    144,651General and administrative
    
    
    1,427,882
    
    
    
    2,027,972Depreciation and amortization
    
    
    512,402
    
    
    
    535,921Write-off of pre-development costs
    
    
    
    
    
    
    5,993Write-off of construction contracts receivable
    
    
    
    
    
    
    16,483Write-off of trade receivables
    
    
    83,741
    
    
    
    13,336Write-down of notes receivable
    
    
    148,414
    
    
    
    Total cost and expenses
    
    
    11,696,821
    
    
    
    8,404,536Operating loss
    
    
    (203,020
    )
    
    
    (2,239,370
    )Gain on sale of property and leasehold interests
    
    
    2,926
    
    
    
    594,977Gain on early extinguishments of debt
    
    
    
    
    
    
    283,319Interest expense
    
    
    (1,808,407
    )
    
    
    (2,889,694
    )Interest income
    
    
    57,874
    
    
    
    939,767Lease abandonment income
    
    
    
    
    
    
    5,329,504(Loss) earnings from continuing operations before income taxes and
minority interests
    
    
    (1,950,627
    )
    
    
    2,018,503Income tax benefit
    
    
    661,707
    
    
    
    Minority interests in earnings of consolidated
subsidiaries and partnerships
    
    
    (2,861
    )
    
    
    (11,976
    )(Loss) earnings from continuing operations
    
    
    (1,291,781
    )
    
    
    2,006,527Discontinued operations:Operations of hotels disposed of and transferred, net of income
tax effect of $111,707 in 2004 and $0 in 2003
    
    
    216,843
    
    
    
    221,032Loss on disposal and transfer of discontinued operations, net of income
tax effect
    
    
    
    
    
    
    (1,768,559
    )Net (loss) earnings
    
    $
    (1,074,938
    )
    
    $
    459,000Net (loss) earnings per common share:Basic:Continuing operations
    
    $
    (0.26
    )
    
    $
    0.39Discontinued operations:Operations of hotels disposed of and transferred
    
    $
    0.04
    
    
    
    0.04Loss on
disposal and transfer of discontinued operations
    
    $
    
    
    
    
    (0.34
    )Net (loss) earnings
    
    $
    (0.22
    )
    
    $
    0.09Diluted:Continuing operations
    
    $
    (0.26
    )
    
    $
    0.39Discontinued operations:Operations of hotels disposed of and transferred
    
    
    0.04
    
    
    
    0.04Loss on
disposal and transfer of discontinued operations
    
    
    
    
    
    
    (0.34
    )Net (loss) earnings
    
    $
    (0.22
    )
    
    $
    0.09Weighted average common shares outstanding:Basic
    
    
    5,005,778
    
    
    
    5,118,778Diluted
    
    
    5,005,778
    
    
    
    5,118,778
 See accompanying notes.




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ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) 16 weeks endedApril 18,
    
    April 20,2004
    
    2003Cash flows from operating activitiesNet (loss) earnings
    
    $
    (1,074,938
    )
    
    $
    459,000Adjustments to reconcile net (loss) earnings
to net cash used in operating activities:Discontinued operations, net of tax
    
    
    (216,843
    )
    
    
    1,547,527Depreciation and amortization
    
    
    512,402
    
    
    
    535,921Write-off of pre-development costs
    
    
    
    
    
    
    5,993Write-off of construction contracts receivable
    
    
    
    
    
    
    16,483Write-off of
accounts receivable  trade
    
    
    83,741
    
    
    
    13,336Write-off of notes receivable
    
    
    148,414
    
    
    
    Amortization of deferred charges recorded as interest expense
    
    
    44,414
    
    
    
    217,041Accretion of debt recorded as interest expense
    
    
    201,852
    
    
    
    201,852Recognition of previously deferred gains
    
    
    (2,826
    )
    
    
    (57,513
    )Gain on sale of property and leasehold interests
    
    
    (100
    )
    
    
    (594,977
    )Gain on early extinguishments of debt
    
    
    
    
    
    
    (283,319
    )Lease abandonment income
    
    
    
    
    
    
    (5,329,504
    )Deferred income tax benefit
    
    
    (661,707
    )
    
    
    Minority interest in earnings of consolidated subsidiaries
and partnerships
    
    
    2,861
    
    
    
    11,976Changes in assets and liabilities:Accounts
receivable  trade
    
    
    (405,764
    )
    
    
    (504,096
    )Construction contracts receivable
    
    
    176,430
    
    
    
    29,552Construction contracts receivable due from related parties
    
    
    (4,735,277
    )
    
    
    2,036,883Costs and estimated earnings in excess of billings on
construction contracts
    
    
    10,842
    
    
    
    Income and other taxes receivable and payable
    
    
    487,417
    
    
    
    2,051,914Prepaid expenses
    
    
    (197,384
    )
    
    
    (173,870
    )Accounts payable and accrued expenses
    
    
    (1,073,508
    )
    
    
    (1,100,861
    )Other
    
    
    28,633
    
    
    
    (30,141
    )Net cash used in operating activities
    
    
    (6,671,341
    )
    
    
    (946,803
    )Cash flow from investing activitiesPayments received on notes receivable
    
    
    6,677,922
    
    
    
    17,267,885Capital expenditures
    
    
    (96,207
    )
    
    
    (164,228
    )Purchase of other assets
    
    
    (490,000
    )
    
    
    (1,050,000
    )Proceeds from sale of properties
    
    
    91,682
    
    
    
    7,466,297Proceeds from lease abandonment
    
    
    
    
    
    
    415,668Acquistion
    
    
    
    
    
    
    (20,000
    )Net cash provided by investing activities
    
    
    6,183,397
    
    
    
    23,915,622Cash flow from financing activitiesRepayments of notes receivable from officer
    
    
    
    
    
    
    687,500Deferred loan costs
    
    
    
    
    
    
    (18,763
    )Proceeds from long-term debt
    
    
    
    
    
    
    6,726,904Payments on long-term debt
    
    
    (185,795
    )
    
    
    (14,811,924
    )Exercise of stock options
    
    
    49,999
    
    
    
    Net cash used in financing activities
    
    
    (135,796
    )
    
    
    (7,416,283
    )Net (decrease) increase in cash and cash equivalents
    
    
    (623,740
    )
    
    
    15,552,536Cash and
cash equivalents  beginning of period
    
    
    12,491,736
    
    
    
    1,534,942Cash and
cash equivalents  end of period
    
    $
    11,867,996
    
    
    $
    17,087,478
 See accompanying notes.




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SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States 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 accounting principles generally accepted
in the United States 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 28, 2003. 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 April 18, 2004 and April 20, 2003
are not necessarily indicative of the operating results for the entire year. Certain reclassifications have been made in the first quarter 2003 consolidated
statement of earnings to conform to the classifications used in 2004. These
reclassifications had no impact on net earnings (losses) as previously
reported. LEASE ABANDONMENT INCOME The Company leased three hotels to Prime Hospitality Corp. (Prime) in July of
2000. In the first quarter of 2003, Prime abandoned the lease of the three
hotels and the Company resumed operations of the hotels on April 5, 2003. Due
to the terms of the lease agreement, the Company had recorded a liability and a
deferred credit in July of 2000. Due to the lease abandonment by Prime in the
first quarter of 2003, the remaining deferred amounts totaling $4,913,836 and
$415,668 in cash received from Prime upon the abandonment, were recognized as
lease abandonment income totaling $5,329,504 in the first quarter of 2003. DISCONTINUED OPERATIONS SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
requires that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Discontinued operations do not include amounts for
operating losses that have not yet been incurred.




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Under SFAS No. 144, the reporting of discontinued operations includes all components of an entity with
operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The Company reports as discontinued operations assets held for
sale (as defined by SFAS 144) and assets sold in the current period. All
results of these discontinued operations are included in a separate component
of income on the consolidated statements of earnings under the heading,
operations of hotels disposed of and transferred, net of income taxes. The following table summarizes the results of operations for five properties
transferred in the fourth quarter of 2002 and eleven properties sold or
classified as held for sale, from the hotel operations segment for the quarters
ended April 18, 2004 and April 20, 2003 (amounts in thousands): 16 Weeks EndedApril 18, 2004
    
    April 20, 2003Revenues:Hotel
    
    $
    1,982
    
    
    $
    1,987Rent
    
    
    
    
    
    
    490Total revenues
    
    
    1,982
    
    
    
    2,477Cost and expenses:Hotel
    
    
    1,653
    
    
    
    1,889General and administrative
    
    
    
    
    
    
    29Depreciation and amortization
    
    
    
    
    
    
    312Total expenses
    
    
    1,653
    
    
    
    2,230Interest expense
    
    
    
    
    
    
    (24
    )Interest income
    
    
    
    
    
    
    (2
    )Earnings before income taxes
    
    
    329
    
    
    
    221Income taxes
    
    
    (112
    )
    
    
    Operations of hotels included in
discontinued operations, net of
income tax effect
    
    $
    217
    
    
    $
    221




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The assets of the five properties transferred in the fourth quarter of 2002 and
presented in the accompanying consolidated balance sheets as assets of hotels
transferred under contractual agreements (notes receivable) are as follows at
April 18, 2004 (one property) and December 28, 2003 (two properties) (amounts
in thousands): April 18,
    
    December 28,2004
    
    2003AssetsOther current assets
    
    $
    7
    
    
    $
    16Property and equipment, net
    
    
    1,982
    
    
    
    4,307Other assets
    
    
    11
    
    
    
    29Total assets
    
    $
    2,000
    
    
    $
    4,352
 The assets and liabilities of the properties held for sale presented in the
accompanying consolidated balance sheets are as follows (amounts in thousands): April 18,
    
    December 28,2004
    
    2003AssetsOther current assets
    
    $
    17
    
    
    $
    17Property and equipment, net
    
    
    16,080
    
    
    
    16,080Other assets
    
    
    42
    
    
    
    42Total assets
    
    $
    16,139
    
    
    $
    16,139




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EARNINGS (LOSS) PER SHARE Earnings (loss) per share was computed by dividing net earnings (loss) by the
weighted average number of common shares outstanding. The following table
reconciles earnings (loss) and weighted average shares used in the earnings
(loss) per share calculations for the fiscal quarters ended April 18, 2004, and
April 20, 2003: 16 Weeks EndedApril 18,
    
    April 20,2004
    
    2003Basic:Earnings (loss) from continuing operations
    
    $
    (1,291,781
    )
    
    $
    2,006,527Earnings (loss) from discontinued operations
    
    
    216,843
    
    
    
    (1,547,527
    )Net earnings (loss) applicable to common stock
    
    $
    (1,074,938
    )
    
    $
    459,000Shares:Weighted average common shares outstanding
    
    
    5,005,778
    
    
    
    5,118,778Basic earnings (loss) per share:Continuing operations
    
    $
    (0.26
    )
    
    $
    0.39Discontinued operations
    
    
    0.04
    
    
    
    (0.30
    )Net earnings (loss)
    
    $
    (0.22
    )
    
    $
    0.09Diluted:Earnings (loss) from continuing operations
    
    $
    (1,291,781
    )
    
    $
    2,006,527Earnings (loss) from discontinued operations
    
    
    216,843
    
    
    
    (1,547,527
    )Net earnings (loss) applicable to common stock
    
    
    (1,074,938
    )
    
    
    459,000Dilutive effect of 7.5% convertible debentures
    
    
    
    
    
    
    Numerator for diluted earnings (loss) per share
    
    $
    (1,074,938
    )
    
    $
    459,000Shares:Weighted average common shares outstanding
    
    
    5,005,778
    
    
    
    5,118,778Effect of dilutive securities (options)
    
    
    
    
    
    
    Effect of dilutive securities (7.5% convertible
debentures)
    
    
    
    
    
    
    Weighted average common and common equivalent
shares outstanding
    
    
    5,005,778
    
    
    
    5,118,778Diluted earnings (loss) per share:Continuing operations
    
    $
    (0.26
    )
    
    $
    0.39Discontinued operations
    
    
    0.04
    
    
    
    (0.30
    )Net earnings (loss)
    
    $
    (0.22
    )
    
    $
    0.09




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OPERATING SEGMENT INFORMATION The Companys significant operating segments are hotel operations, franchising,
reservation and management 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): 16 Weeks EndedApril 18,
    
    April 20,2004
    
    2003Revenues:Hotel
    
    $
    1,561
    
    
    $
    1,351Franchising, reservation and management services
    
    
    2,339
    
    
    
    2,294Construction and development
    
    
    7,968
    
    
    
    3,070Elimination of intersegment revenue
    
    
    (374
    )
    
    
    (550
    )Total revenues
    
    $
    11,494
    
    
    $
    6,165Operating loss:Hotel
    
    $
    168
    
    
    $
    400Franchising, reservation and management services
    
    
    (1,498
    )
    
    
    (2,144
    )Construction and development
    
    
    1,127
    
    
    
    (495
    )Total operating loss
    
    $
    (203
    )
    
    $
    (2,239
    )Capital expenditures:Hotel
    
    $
    
    
    
    $
    4Franchising, reservation and management services
    
    
    96
    
    
    
    160Construction and development
    
    
    
    
    
    
    Total capital expenditures
    
    $
    96
    
    
    $
    164Depreciation and amortization:Hotel
    
    $
    202
    
    
    $
    198Franchising, reservation and management services
    
    
    302
    
    
    
    320Construction and development
    
    
    8
    
    
    
    18Total depreciation and amortization
    
    $
    512
    
    
    $
    536
 As ofApril 18,
    
    As ofDecember 28,2004
    
    2003Total assets:Hotel
    
    $
    41,281
    
    
    $
    45,572Franchising, reservation and management services
    
    
    49,787
    
    
    
    52,522Construction and development
    
    
    28,378
    
    
    
    23,926Total assets
    
    $
    119,446
    
    
    $
    122,020
 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.




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##### Table of Contents



STOCK BASED COMPENSATION The Company uses the intrinsic value method for valuing its awards of stock
options and recording the related compensation expense, if any. This
compensation expense is included in general and administrative expense. The
Company has adopted the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation- Transition and Disclosure. The Companys pro forma net (loss) earnings would
not be materially different than reported net (loss) earnings in the sixteen
weeks ended April 18, 2004 and April 20, 2003 under the fair value method. RELATED PARTY TRANSACTIONS The chairman and chief executive officer is personally involved in various real
estate development activities. The Companys wholly-owned construction and
development subsidiary has from time to time provided services in connection
with these activities. Revenues earned by the Company from these projects were
$7,741,531 and $2,944,623 in the sixteen weeks ended April 18, 2004 and April
20, 2003, respectively. Construction contracts due from related parties were
$27,404,061 and $22,668,784 at April 18, 2004 and December 28, 2003,
respectively.




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ShoLodge, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations Overview The Company develops, owns, operates and is the exclusive franchisor
of Shoneys Inns and GuestHouse Inns & Suites. In the second quarter of
2002, the Company acquired the exclusive franchise rights of the
GuestHouse Inns & Suites hotel brand and 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. As of April
18, 2004, the Shoneys Inn/GuestHouse lodging system consisted of 82
properties containing 6,486 rooms of which one containing 98 rooms is
owned by the Company. Shoneys Inns and GuestHouse Inns & Suites are
currently located in 20 states. As of April 18, 2004, the Company also
owned and operated two AmeriSuites hotels. Except for three owned hotel properties which the Company intends to
continue to operate at present, all of the Companys remaining owned
hotel properties are held for sale at April 18, 2004. The Companys
present strategy does not include the ownership of additional hotel
properties. The Company also franchises and manages Shoneys Inns and GuestHouse Inns
& Suites, earning revenues from royalties, reservation services, and
management services provided to the franchisees, and reservation services
provided to other hotel chains and independent hotel operators. The
Company also leases hotels and restaurants to others, earning rental
income from these third party lessees. No hotels have been leased to
others since April of 2003. Shoneys Inns and GuestHouse Inns & Suites operate in the economy
limited-service segment and are designed to appeal to both business and
leisure travelers, with rooms usually priced between $45 and $85 per
night. The typical property includes 60 to 120 rooms and, in most cases,
meeting rooms. Although they do not offer full food service, most offer
continental breakfast, and most of the inns are located adjacent or in
close proximity to free-standing restaurants. Management believes that
the location of the inns in close proximity to free-standing restaurants
gives it a competitive advantage over many other limited-service lodging
chains by offering guest services approximating those of full-service
facilities without the additional capital expenditures, operating costs
or higher room rates. A significant portion of the Companys operations have been
generated in recent years by contract revenues from construction and
development of hotels and other real estate projects for related parties
and, to a lesser extent, 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




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facilities or on outside projects.
Construction revenues are generally recognized on the percentage of
completion basis, but construction and development for related parties
are generally performed on a cost-plus basis. As of April 18, 2004, the Company owned three hotel properties held for
sale. These three hotels are expected to be sold by the end of the second
fiscal quarter. 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 April 18, 2004 and April 20,
2003 are not necessarily indicative of the operating results for the entire
year. Results of Operations For the Fiscal Quarters Ended April 18, 2004 and April 20, 2003 Total operating revenues for the quarter ended April 18, 2004, were $11.5
million, or 86.4% more than the total operating revenues of $6.2 million
reported for the first quarter of 2003. The net increases were due to increases
in hotel, franchising and reservation revenues, and construction and
development revenues, partially offset by decreases in rent income. Revenues from hotel operations in the first fiscal quarter increased by
$569,000, or 72.4%, to $1.4 million from the $787,000 reported for the same
period last year. For the two hotels opened for all of both quarterly periods,
an increase of 2.1% in average daily room rates, from $56.16 in the first
quarter of 2003 to $57.35 in the first quarter of 2004, and an increase in
average occupancy rates on these hotels from 50.3% to 55.8% this year, were the
primary causes of an increase in same hotel revenues of 13.1% from $709,000 in
the first quarter of 2003 to $802,000 in the first quarter of 2004. The
Company owned and operated a total of three hotels included in continuing
operations at the end of its first fiscal quarter of 2003 (one GuestHouse Inns
& Suites and two AmeriSuites hotels). RevPAR (revenue per available room) for
all three of these Company-owned hotels increased by 17.6% from $28.55 in the
first quarter of 2003 to $33.58 in the first quarter of 2004. The revenue effects of the hotels transferred, sold and held for sale as
of April 18, 2004 are reflected in discontinued operations. Franchising, reservation and management service revenues increased by
$98,000, or 4.7%, in the first quarter of 2004 from the first quarter of 2003.
Initial and termination franchise fees decreased by $75,000, royalty fees
decreased by $59,000, and reservation fees increased by $240,000 from the first
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. As of April 18, 2004, a total of 941 lodging facilities




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were
served by the Companys reservation center as compared with 685 lodging
facilities at April 20, 2003. Management fees decreased by $8,000 from the
first quarter of 2003. Revenues from construction and development activities were $7.9 million in
the first quarter of 2004, versus $3.0 million in the first quarter of 2003.
These revenues include $7.7 million in the first quarter of 2004 and $2.9
million in the first quarter of 2003 earned from entities controlled by the
Companys chief executive officer. 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 in the first quarter of both 2004 and 2003. Rent income in the first quarter of 2004 decreased by $317,000, to
$10,000, from $327,000, in the first quarter of 2003. The primary source of
rent income was from the lease of three AmeriSuites hotels which were being
operated by Prime Hospitality Corp. until April of 2003 when Prime abandoned
the lease, at which time the Company took back the operations of these three
properties. Two of these three AmeriSuites hotels are held for sale and the
rent associated with these two hotels is included in discontinued operations.
The decrease in the first quarter rent income was due to Primes abandonment
of the lease of the hotel included in continuing operations and the sale of
some restaurants to the lessees in 2003. Operating expenses from hotel operations of the three Company-owned hotels
included in continuing operations for the first quarter of 2004 increased by
$455,000, or 80.4%, from $565,000 in the first quarter of 2003. The operating
expenses as a percentage of operating revenues for this activity increased from
71.9% in the first quarter of 2003 to 75.2% in the first quarter of 2004,
reducing gross operating profit margin from 28.1% in the first quarter of 2003
to 24.8% in the first quarter of 2004. This was due primarily to increased
insurance and advertising and sales expenses as a percentage of revenues in the
first quarter of 2004 over the first quarter of 2003. Franchising, reservation and management service operating expenses
increased by $40,000, or 2.4%, from the first quarter of 2003 to the first
quarter of 2004. 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 first
quarter of 2003, and to expenses related to the franchising of GuestHouse Inns
& Suites. Construction and development costs in the first quarter of 2004 and 2003
were $6.6 million and $3.4 million, respectively, on construction contracts in
progress during those quarters. Rent expense decreased by $6,000 in the first quarter of this year from
last years first quarter. The Company leased only one hotel property in both
years.




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General and administrative expenses decreased by $600,000, or 29.6%, from
the first quarter of 2003. The decreases were due primarily to decreases in
legal and professional fees and reduced administrative expenses related to the sale
of hotel properties. Depreciation and amortization expense decreased by $24,000, or 4.4%, from
the first quarter of 2003. In the first quarter of 2004, the Company wrote off $84,000 of accounts
receivable deemed to be of doubtful collectibility and wrote down a first
mortgage note receivable by $148,000 due to the sale on April 21, 2004, of the
underlying property at less than the carrying value of the note receivable. In
the first quarter of 2003, the Company wrote off $6,000 of pre-development
costs, $16,000 of construction contracts receivable, and $13,000 of accounts
receivable deemed to be of doubtful collectibility. In the first quarter of 2004, the Company recorded a gain on sale of
property of $3,000 which had been previously deferred. The gain of $595,000
recognized on sale of property in the first quarter of 2003 was primarily from
the sale of a restaurant to the lessee and the recognition of previously
deferred gains on the sale of a hotel and two restaurants. The deferred gain
on a hotel sold in 2002 was recognized in full in the first quarter of 2003 due
to the collection in full of the seller-financed note. 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 $644,000 of its 7.50%
subordinated debentures in the first quarter of 2003 at a discount, and
also repurchased $739,000 of its outstanding senior subordinated notes at
a discount, recognizing a gain of $283,000 on these transactions in the
first quarter of 2003. 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 decreased by $1.1 million, or 37.4%, while interest
income decreased by $882,000, or 93.8%, from the first quarter of 2003. The
decrease in interest expense was due primarily to the termination of the
Companys bank credit facilities in 2003 and the payoff of other indebtedness
in 2003, primarily from the proceeds of the sale of hotel properties. Interest
income decreased due to the elimination of first mortgage notes receivable by
taking the underlying hotel properties by deeds in lieu of foreclosure and
selling them for cash, and to the collection of two seller-financed notes
receivable which were refinanced by the borrowers in the first quarter of 2003. The Company leased three hotels to Prime in July of 2000. In the first
quarter of 2003, Prime abandoned the lease of the three hotels and the Company
resumed operations of the hotels on April 5, 2003. Due to the terms of the
lease agreement, the Company had recorded a liability and a deferred credit in
July of 2000. Due to the lease abandonment




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by Prime in the first quarter of
2003, the remaining deferred amounts totaling $4.9 million, and $416,000 in
cash received from Prime upon the abandonment, were
recognized as lease abandonment income totaling $5.3 million in the first
quarter of 2003. The zero effective tax rate in the first quarter of 2003 is due to the
utilization of net operating loss carry-forwards that had previously been fully
reserved. Discontinued operations resulted from 16 hotels sold, transferred, and/or
reclassified to hotels held for sale in 2002 and 2003. The effect of these
hotels operations, the gain or loss on the sale and transfer of the hotels,
and the impairment of the hotels classified as held for sale, have been removed
from operating earnings in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Liquidity and Capital Resources The Companys cash flows used in operating activities were $6.7 million in
the first quarter of 2004, compared with $947,000 used in operating activities
in the first quarter of 2003. The Companys cash flows provided by investing activities were $6.2
million in the first quarter of 2004, compared with $23.9 million for the
comparable period in 2003. The Companys capital expenditures are principally
for the purchase of equipment and leasehold improvements. Capital expenditures
for such purposes were $96,000 in the first quarter of 2004 and $164,000 in the
first quarter of 2003. Proceeds from the sale of property and leasehold
interests were $92,000 in the first quarter of 2004 versus $7.5 million for the
comparable period in 2003. The Company received $6.7 million from the
collection of notes receivable in the first quarter of 2004 and $17.3 million
in the first quarter of 2003. The Company invested $490,000 and $1.1 million
in other assets in the first quarter of 2004 and 2003, respectively. Net cash used in financing activities was $136,000 in the first quarter of
2004 compared with $7.4 million in the first quarter of 2003. Repayments, net
of borrowings, on long-term debt obligations were $186,000 in the first quarter
of 2004 versus $8.1 million in the first quarter of 2003. The repayments in
the first quarter of 2003 include $1.4 million of long-term debt repurchased in
the open market or in privately negotiated transactions. 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. A second amendment to the credit facility
became effective November 26, 2002, which, among other changes, added real
property collateral for the purpose of increasing the borrowing base. The
credit facility was 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




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Company received in connection with the sale of 16 of the
Companys lodging facilities in the third quarter of 1998 and real property
collateral (one hotel) added in 2002 by the second amendment. The borrowing
base was 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 and of the
real property collateral, (c) a multiple of the trailing twelve months net
operating income of the real property collateral and of the underlying
properties securing the pledged notes serving as collateral, or (d) $30
million. Effective October 3, 2001, the interest rate on the term loan was at
the lenders base rate plus 100 basis points, and the interest rate on the
revolving line of credit was at the lenders base rate plus 250 points, with a
floor of 7.00% on both portions of the facility. The Company was to pay
commitment fees on the unused portion of the facility at .50% per annum. The
credit facility also contained covenants which limited or prohibited the
incurring of certain additional indebtedness in excess of a specified debt to
total capital ratio, prohibited additional liens on the collateral, restricted
mergers and the payment of dividends and restricted the Companys ability to
place liens on unencumbered assets. The credit facility contained financial
covenants as to the Companys minimum net worth. In the fourth quarter of
2003, the Company decided that the credit facility no longer served the
Companys needs, terminated the facility, and has received all of its
collateral back from the financial institution. On January 6, 2004, the
Company filed a complaint against the financial institution for its breach of
the loan agreement, claiming damages to the Company in excess of $25 million The Company also maintained a $1.0 million unsecured line of credit with
another bank, bearing interest at the lenders prime rate, maturing May 31,
2003. This line of credit was paid off in the first quarter of 2003 and was not
renewed. The Company also has a loan secured by its corporate aircraft with a
balance of $5.1 million as of April 18, 2004. This loan currently bears
interest at 8.19% per annum and is amortized to its maturity of December 29,
2010. The interest rate was fixed for the first five years ending January 1,
2006, and is adjustable to a new rate for the second five years of the 10-year
term equal to 325 basis points over 5-year Treasury rates. The Companys outstanding 7.50% Convertible Subordinated Debentures in
the face amount of $10.8 million matured and were paid on May 3, 2004,
subsequent to the end of the Companys first fiscal quarter. Its
outstanding Series A and Series A-1 Senior Subordinated Notes in the face
amount of $22.2 million mature in November of 2006 and its Series B and
Series B-1 Senior Subordinated Notes in the face amount of $16.4 million
mature in September of 2007. 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




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the first fiscal quarter of 2004, approximately
3.7 million shares had been repurchased at a cost of $20.9 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 hotels, 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. The Company believes that a combination of existing cash, proceeds
from the sale of properties, the collection of notes receivable, and net cash
provided by operations, will be sufficient to fund its capital expenditures,
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 first fiscal quarter ended April 18, 2004. 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. 
 PART I 
 Item 4. Controls and Procedures  (a)
    
    As of April 18, 2004, we carried out an evaluation, under the
supervision and with the participation of our management, including
our principal executive officer and our principal financial officer,
of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934). Based upon that
evaluation, our management, including our principal executive
officer and our principal financial officer, concluded that the
design and operation of these disclosure controls and procedures
were effective to timely alert them to any material information
relating to




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the company (including its consolidated subsidiaries)
that must be included in our periodic SEC filings.(b)
    
    There have been no significant changes in our internal
controls or in other factors that could significantly affect
internal controls subsequent to the date we carried out this
evaluation.




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PART II  OTHER INFORMATION 
 Item 1. No material developments occurred during the first quarter ended April 18, 2004 with respect to any pending litigation. 
 Item 4. Submission of Matters to a vote of Security Holders Not applicable 
 Item 6. Exhibits and Reports on Form 8-K 6(a) Exhibits - Exhibit 31.1  Certifications required by Section 302 of
the Sarbanes-Oxley Act of 2002. Exhibit 32.1  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 April 13, 2004 containing a copy of the
Companys press release announcing the financial results for the
fourth quarter and fiscal year ended December 28, 2003 
 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: May 28, 2004
    
    /S/ Leon MooreLeon MooreChief Executive Officer,
Principal Executive Officer,
DirectorDate: May 28, 2004
    
    /S/ Bob MarloweBob MarloweSecretary, Treasurer, Chief
Accounting Officer, Principal
Accounting Officer, Chief
Financial Officer, Director