##### 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 First Quarter Ended April 20, 2003 |  | Commission File No. 0-19840
|                                           |  |                            
|                                          

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

|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Tennessee                                                      |  | 62-1015641                             
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer
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 June 4, 2003, there were 5,118,278 shares of ShoLodge, Inc. common stock outstanding.





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TABLE OF CONTENTS



|                                |                                                                                                                                 |  |  |  |  |  |  | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                         
|                                | Item 4. Controls and Procedures                                                                                                
|CERTIFICATION                  
|PART II - OTHER INFORMATION    
|                                | Item 1. No material developments occurred during the first quarter ended April 20, 2003 with respect to any pending litigation.
|                                | Item 4. Submission of Matters to a vote of Security Holders                                                                    
|                                | Item 6. Exhibits and Reports on Form 8-K                                                                                       
|SIGNATURES                     
|EX-99.1 CERTIFICATION/CEO & CFO



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets

|                                                       |                                                                              |                                                 |             |             |           |              |             |            |           | 
|------------------------------------------------------ | ---------------------------------------------------------------------------- | ----------------------------------------------- | ----------- | ----------- | --------- | ------------ | ----------- | ---------- | --------- | 
|                                                       |                                                                              |                                                 |             | April 20,   |           |              |             |           
|                                                       |                                                                              |                                                 |             | 2003        |           | December 29,
|                                                       |                                                                              |                                                 |             | (unaudited) |           | 2002(1)     
|                                                       |                                                                              |                                                 |             |             |           |             
|Assets                                                 |                                                                              |                                                 |             |             |           |              |             |           
|Current assets:                                        |                                                                              |                                                 |             |             |           |              |             |           
|                                                       | Cash and cash equivalents                                                    |                                                 | $           | 17,087,478  |           |              | $           | 1,534,942  |          
|                                                       | Restricted cash                                                              |                                                 |             | 100,000     |           |              |             | 100,000    |          
|                                                       | Accounts receivable:                                                         |                                                 |             |             |           |              |             |            |          
|                                                       |                                                                              | Accounts receivable-trade, net                  |             |             | 2,448,453 |              |             |            | 1,944,357 | 
|                                                       |                                                                              | Construction contracts                          |             |             | 107,313   |              |             |            | 136,865   | 
|                                                       |                                                                              | Construction contracts due from related parties |             |             | 3,635,009 |              |             |            | 5,671,892 | 
|                                                       | Income taxes receivable                                                      |                                                 |             | 8,672,061   |           |              |             | 9,900,782  |          
|                                                       | Prepaid expenses                                                             |                                                 |             | 493,465     |           |              |             | 319,595    |          
|                                                       | Notes receivable, net                                                        |                                                 |             | 31,128,993  |           |              |             | 44,823,055 |          
|                                                       | Assets of hotels transferred under contractual
agreements (notes receivable) |                                                 |             | 4,880,000   |           |              |             | 11,571,564 |          
|                                                       | Assets of hotels held for sale                                               |                                                 |             | 11,871,370  |           |              |             | 13,693,554 |          
|                                                       | Other current assets                                                         |                                                 |             | 69,590      |           |              |             | 77,677     |          
|                                                       |                                                                              |                                                 |             |             |           |              |             |            |          
|Total current assets                                   |                                                                              |                                                 | 80,493,732  |             |           |              | 89,774,283  |           
|Notes receivable, net                                  |                                                                              |                                                 | 3,491,495   |             |           |              | 7,065,318   |           
|Property and equipment                                 |                                                                              |                                                 | 61,225,309  |             |           |              | 62,519,339  |           
|Less accumulated depreciation and amortization         |                                                                              |                                                 | (10,297,153 | )           |           |              | (10,498,027 | )         
|                                                       |                                                                              |                                                 |             |             |           |              |             |            |          
|                                                       |                                                                              |                                                 | 50,928,156  |             |           |              | 52,021,312  |           
|Land under development or held for sale                |                                                                              |                                                 | 13,868,117  |             |           |              | 14,114,353  |           
|Deferred charges, net                                  |                                                                              |                                                 | 1,543,505   |             |           |              | 1,790,320   |           
|Goodwill                                               |                                                                              |                                                 | 765,711     |             |           |              | 765,711     |           
|Trademark, franchise costs and reservation rights, net |                                                                              |                                                 | 646,442     |             |           |              | 703,366     |           
|Other assets                                           |                                                                              |                                                 | 1,980,790   |             |           |              | 1,044,495   |           
|                                                       |                                                                              |                                                 |             |             |           |              |             |            |          
|                                                       |                                                                              | $                                               | 153,717,948 |             |           | $            | 167,279,158 |           
|                                                       |                                                                              |                                                 |             |             |           |              |             |            |          

(1)  Derived from fiscal year ended December 29, 2002 audited financial statements.

See accompanying notes.





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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets

|                                                                           |                                                                                                                                                                              |   |             |            |              |   |             |            |  
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ---------- | ------------ | - | ----------- | ---------- | -
|                                                                           |                                                                                                                                                                              |   | April 20,   |            |              |   |            
|                                                                           |                                                                                                                                                                              |   | 2003        |            | December 29,
|                                                                           |                                                                                                                                                                              |   | (unaudited) |            | 2002(1)     
|                                                                           |                                                                                                                                                                              |   |             |            |             
|Liabilities and shareholders equity                                       |                                                                                                                                                                              |   |             |            |              |   |             |           
|Current liabilities:                                                       |                                                                                                                                                                              |   |             |            |              |   |             |           
|                                                                           | Accounts payable and accrued expenses                                                                                                                                        |   | $           | 6,179,310  |              |   | $           | 10,623,527 |  
|                                                                           | Taxes payable other than on income                                                                                                                                           |   |             | 687,341    |              |   |             | 609,259    |  
|                                                                           | Current portion of long-term debt                                                                                                                                            |   |             | 63,691,883 |              |   |             | 67,548,511 |  
|                                                                           |                                                                                                                                                                              |   |             |            |              |   |             |            |  
|Total current liabilities                                                  |                                                                                                                                                                              |   | 70,558,534  |            |              |   | 78,781,297  |           
|Long-term debt, less current portion                                       |                                                                                                                                                                              |   | 20,050,377  |            |              |   | 24,381,276  |           
|Deferred credits                                                           |                                                                                                                                                                              |   | 158,861     |            |              |   | 2,314,922   |           
|Minority interests in equity of consolidated subsidiaries and
partnerships |                                                                                                                                                                              |   | 619,469     |            |              |   | 607,493     |           
|                                                                           |                                                                                                                                                                              |   |             |            |              |   |             |            |  
|Total liabilities                                                          |                                                                                                                                                                              |   | 91,387,241  |            |              |   | 106,084,988 |           
|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 December 29, 2002
and December 30, 2001, respectively) |   |             | 1,000      |              |   |             | 1,000      |  
|                                                                           | Additional paid-in capital                                                                                                                                                   |   |             | 23,579,621 |              |   |             | 23,579,621 |  
|                                                                           | Retained earnings                                                                                                                                                            |   |             | 39,212,965 |              |   |             | 38,753,965 |  
|                                                                           | Notes receivable from officer, net of discount of $130,870 and
$140,833, as of April 20, 2003 and December 29, 2002,
respectively                                            |   |             | (462,879   | )            |   |             | (1,140,416 | )
|                                                                           |                                                                                                                                                                              |   |             |            |              |   |             |            |  
|                                                                           | Total shareholders equity                                                                                                                                                   |   |             | 62,330,707 |              |   |             | 61,194,170 |  
|                                                                           |                                                                                                                                                                              |   |             |            |              |   |             |            |  
|                                                                           |                                                                                                                                                                              | $ | 153,717,948 |            |              | $ | 167,279,158 |           
|                                                                           |                                                                                                                                                                              |   |             |            |              |   |             |            |  

(1)  Derived from fiscal year ended December 29, 2002 audited financial statements.

See accompanying notes.





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##### Table of Contents



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

|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |           |           |       |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | -------- | ----------------------- | ------------------------------------------------------- | --------- | -------------- | ---------- | ---------- | --------- | --------- | ----- | -
|                                                                                      |                                                                                                                               |          |                         |                                                         |           | 16 weeks ended
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |               
|                                                                                      |                                                                                                                               |          |                         |                                                         |           | April 20,      |            | April 21, 
|                                                                                      |                                                                                                                               |          |                         |                                                         |           | 2003           |            | 2002      
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |           
|Revenues:                                                                             |                                                                                                                               |          |                         |                                                         |           |                |            |           
|                                                                                      | Hotel                                                                                                                         |          | $                       | 1,638,253                                               |           |                | $          | 983,378    |          
|                                                                                      | Franchising, reservation and management                                                                                       |          |                         | 2,080,301                                               |           |                |            | 1,685,932  |          
|                                                                                      | Construction and development-related parties                                                                                  |          |                         | 2,944,623                                               |           |                |            | 10,131     |          
|                                                                                      | Construction and development-other                                                                                            |          |                         | 9,151                                                   |           |                |            | 3,521,100  |          
|                                                                                      | Rent income                                                                                                                   |          |                         | 817,482                                                 |           |                |            | 1,047,565  |          
|                                                                                      | Other income                                                                                                                  |          |                         | 17,256                                                  |           |                |            | 39,851     |          
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|                                                                                      |                                                                                                                               |          | Total revenues          |                                                         |           | 7,507,066      |            |            |           | 7,287,957 |      
|Cost and expenses:                                                                    |                                                                                                                               |          |                         |                                                         |           |                |            |           
|                                                                                      | Hotel                                                                                                                         |          |                         | 1,071,512                                               |           |                |            | 682,849    |          
|                                                                                      | Franchising, reservation and management                                                                                       |          |                         | 1,677,618                                               |           |                |            | 1,036,330  |          
|                                                                                      | Construction and development                                                                                                  |          |                         | 3,417,198                                               |           |                |            | 3,522,236  |          
|                                                                                      | Rent expense, net                                                                                                             |          |                         | 144,651                                                 |           |                |            | 153,968    |          
|                                                                                      | General and administrative                                                                                                    |          |                         | 2,028,331                                               |           |                |            | 1,962,515  |          
|                                                                                      | Depreciation and amortization                                                                                                 |          |                         | 773,319                                                 |           |                |            | 698,597    |          
|                                                                                      | Write-off of pre-development costs                                                                                            |          |                         | 5,993                                                   |           |                |            |           |          
|                                                                                      | Write-off of construction contracts receivable                                                                                |          |                         | 16,483                                                  |           |                |            |           |          
|                                                                                      | Write-off of accounts receivable - trade                                                                                      |          |                         | 13,336                                                  |           |                |            |           |          
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|                                                                                      |                                                                                                                               |          | Total cost and expenses |                                                         |           | 9,148,441      |            |            |           | 8,056,495 |      
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|Operating loss                                                                        |                                                                                                                               |          | (1,641,375              | )                                                       |           |                | (768,538   | )         
|                                                                                      | Gain (loss) on sale of property and leasehold interests                                                                       |          |                         | 594,977                                                 |           |                |            | (84,311    | )        
|                                                                                      | Gain on early extinguishments of debt                                                                                         |          |                         | 283,319                                                 |           |                |            | 251,841    |          
|                                                                                      | Interest expense                                                                                                              |          |                         | (2,889,694                                              | )         |                |            | (2,500,713 | )        
|                                                                                      | Interest income                                                                                                               |          |                         | 939,600                                                 |           |                |            | 1,725,980  |          
|                                                                                      | Lease abandonment income                                                                                                      |          |                         | 5,329,504                                               |           |                |            |           |          
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|Earnings (loss) from continuing operations before income
taxes and minority interests |                                                                                                                               |          | 2,616,331               |                                                         |           |                | (1,375,741 | )         
|Income tax (expense) benefit                                                          |                                                                                                                               |          |                        |                                                         |           |                | 403,000    |           
|Minority interests in earnings of consolidated
subsidiaries and partnerships          |                                                                                                                               |          | (11,976                 | )                                                       |           |                | (13,054    | )         
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|Earnings (loss) from continuing operations                                            |                                                                                                                               |          | 2,604,355               |                                                         |           |                | (985,795   | )         
|Discontinued operations:                                                              |                                                                                                                               |          |                         |                                                         |           |                |            |           
|                                                                                      | Operations of hotels disposed of and transferred, net of income
tax benefit of $0 and $18,000 for 2003 and 2002, respectively |          |                         | (376,796                                                | )         |                |            | (29,975    | )        
|                                                                                      | Loss on disposal and transfer of discontinued operations, net of
income tax benefit of $0 for 2003                            |          |                         | (1,768,559                                              | )         |                |            |           |          
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|Net earnings (loss)                                                                   |                                                                                                                               | $        | 459,000                 |                                                         |           | $              | (1,015,770 | )         
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|Net earnings (loss) per common share:                                                 |                                                                                                                               |          |                         |                                                         |           |                |            |           
|                                                                                      |                                                                                                                               | Basic:   |                         |                                                         |           |                |            |            |           |          
|                                                                                      |                                                                                                                               |          |                         | Continuing operations                                   |           | $              | 0.51       |            |           | $         | (0.19 | )
|                                                                                      |                                                                                                                               |          |                         | Discontinued operations:                                |           |                |            |            |           |           |       |  
|                                                                                      |                                                                                                                               |          |                         | Operations of hotels disposed of and transferred        |           |                | (0.07      | )          |           |           | (0.01 | )
|                                                                                      |                                                                                                                               |          |                         | Loss on disposal and transfer of discontined operations |           |                | (0.35      | )          |           |           |      |  
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|                                                                                      |                                                                                                                               |          |                         | Net earnings (loss)                                     |           | $              | 0.09       |            |           | $         | (0.20 | )
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|                                                                                      |                                                                                                                               | Diluted: |                         |                                                         |           |                |            |            |           |          
|                                                                                      |                                                                                                                               |          |                         | Continuing operations                                   |           | $              | 0.51       |            |           | $         | (0.19 | )
|                                                                                      |                                                                                                                               |          |                         | Discontinued operations:                                |           |                |            |            |           |           |       |  
|                                                                                      |                                                                                                                               |          |                         | Operations of hotels disposed of and transferred        |           |                | (0.07      | )          |           |           | (0.01 | )
|                                                                                      |                                                                                                                               |          |                         | Loss on disposal and transfer of discontined operations |           |                | (0.35      | )          |           |           |      |  
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|                                                                                      |                                                                                                                               |          |                         | Net earnings (loss)                                     |           | $              | 0.09       |            |           | $         | (0.20 | )
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|Weighted average common shares outstanding:                                           |                                                                                                                               |          |                         |                                                         |           |                |            |           
|                                                                                      |                                                                                                                               | Basic    |                         |                                                         | 5,118,778 |                |            |            | 5,103,098 |          
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          
|                                                                                      |                                                                                                                               | Diluted  |                         |                                                         | 5,118,778 |                |            |            | 5,103,098 |          
|                                                                                      |                                                                                                                               |          |                         |                                                         |           |                |            |            |          

See accompanying notes.





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##### Table of Contents



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

|                                                                                       |                                                                             |                                                                              |            |                |            |           |            |            |            |  
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ---------- | -------------- | ---------- | --------- | ---------- | ---------- | ---------- | -
|                                                                                       |                                                                             |                                                                              |            | 16 weeks ended
|                                                                                       |                                                                             |                                                                              |            |               
|                                                                                       |                                                                             |                                                                              |            | April 20,      |            | April 21,
|                                                                                       |                                                                             |                                                                              |            | 2003           |            | 2002     
|                                                                                       |                                                                             |                                                                              |            |                |            |          
|Cash flows from operating activities                                                   |                                                                             |                                                                              |            |                |            |           |            |           
|Net earnings (loss)                                                                    |                                                                             | $                                                                            | 459,000    |                |            | $         | (1,015,770 | )         
|Adjustments to reconcile net earnings (loss)
to net cash used in operating activities: |                                                                             |                                                                              |            |                |            |           |            |           
|                                                                                       | Loss from discontinued operations                                           |                                                                              |            | 2,145,355      |            |           |            | 29,975     |           
|                                                                                       | Depreciation and amortization                                               |                                                                              |            | 773,319        |            |           |            | 698,597    |           
|                                                                                       | Write-off of pre-development costs                                          |                                                                              |            | 5,993          |            |           |            |           |           
|                                                                                       | Write-off of construction contracts receivable                              |                                                                              |            | 16,483         |            |           |            |           |           
|                                                                                       | Write-off of accounts receivable - trade                                    |                                                                              |            | 13,336         |            |           |            |           |           
|                                                                                       | Amortization of deferred charges recorded as interest expense               |                                                                              |            | 217,041        |            |           |            | 147,381    |           
|                                                                                       | Accretion of debt recorded as interest expense                              |                                                                              |            | 201,852        |            |           |            |           |           
|                                                                                       | Recognition of previously deferred gains                                    |                                                                              |            | (57,513        | )          |           |            | (71,730    | )         
|                                                                                       | (Gain) loss on sale of property and leasehold interests                     |                                                                              |            | (594,977       | )          |           |            | 84,311     |           
|                                                                                       | Gain on early extinguishments of debt                                       |                                                                              |            | (283,319       | )          |           |            | (251,841   | )         
|                                                                                       | Lease abandonment income                                                    |                                                                              |            | (5,329,504     | )          |           |            |           |           
|                                                                                       | Minority interest in earnings of consolidated subsidiaries
and partnerships |                                                                              |            | 11,976         |            |           |            | 13,054     |           
|                                                                                       | Changes in assets and liabilities:                                          |                                                                              |            |                |            |           |            |            |           
|                                                                                       |                                                                             | Accounts receivables - trade                                                 |            |                | (504,096   | )         |            |            | (502,313   | )
|                                                                                       |                                                                             | Construction contracts receivable                                            |            |                | 29,552     |           |            |            | 988,339    |  
|                                                                                       |                                                                             | Construction contracts receivable due from related parties                   |            |                | 2,036,883  |           |            |            | (11,482    | )
|                                                                                       |                                                                             | Costs and estimated earnings in excess of billings on
construction contracts |            |                |           |           |            |            | (534,067   | )
|                                                                                       |                                                                             | Income and other taxes receivable and payable                                |            |                | 1,306,803  |           |            |            | 923,667    |  
|                                                                                       |                                                                             | Prepaid expenses                                                             |            |                | (173,870   | )         |            |            | (179,628   | )
|                                                                                       |                                                                             | Accounts payable and accrued expenses                                        |            |                | (1,100,861 | )         |            |            | (3,837,754 | )
|                                                                                       |                                                                             | Other                                                                        |            |                | (1,170,256 | )         |            |            | (147,772   | )
|                                                                                       |                                                                             |                                                                              |            |                |            |           |            |           
|Net cash used in operating activities                                                  |                                                                             |                                                                              | (1,996,803 | )              |            |           | (3,667,033 | )         
|Cash flow from investing activities                                                    |                                                                             |                                                                              |            |                |            |           |            |           
|                                                                                       | Restricted cash                                                             |                                                                              |            |               |            |           |            | 1,758,364  |           
|                                                                                       | Payments received (advances made) on notes receivable                       |                                                                              |            | 17,267,885     |            |           |            | (565,091   | )         
|                                                                                       | Capital expenditures                                                        |                                                                              |            | (164,228       | )          |           |            | (4,885,992 | )         
|                                                                                       | Proceeds from sale of land and leasehold interests                          |                                                                              |            | 952,187        |            |           |            | 212,041    |           
|                                                                                       | Proceeds from lease abandonment                                             |                                                                              |            | 415,668        |            |           |            |           |           
|                                                                                       | Proceeds from sale of assets of hotels transferred                          |                                                                              |            | 6,514,110      |            |           |            |           |           
|                                                                                       | Acquistion                                                                  |                                                                              |            | (20,000        | )          |           |            |           |           
|                                                                                       |                                                                             |                                                                              |            |                |            |           |            |           
|Net cash provided by (used in) investing activities                                    |                                                                             |                                                                              | 24,965,622 |                |            |           | (3,480,678 | )         
|Cash flow from financing activities                                                    |                                                                             |                                                                              |            |                |            |           |            |           
|                                                                                       | Repayments of notes receivable from officer                                 |                                                                              |            | 687,500        |            |           |            |           |           
|                                                                                       | Deferred loan costs                                                         |                                                                              |            | (18,763        | )          |           |            | (50,002    | )         
|                                                                                       | Proceeds from long-term debt                                                |                                                                              |            | 6,726,904      |            |           |            | 11,100,000 |           
|                                                                                       | Payments on long-term debt                                                  |                                                                              |            | (14,811,924    | )          |           |            | (6,085,801 | )         
|                                                                                       | Exercise of stock options                                                   |                                                                              |            |               |            |           |            | 208,125    |           
|                                                                                       | Purchase of treasury stock                                                  |                                                                              |            |               |            |           |            | (148,010   | )         
|                                                                                       |                                                                             |                                                                              |            |                |            |           |            |           
|Net cash (used in) provided by financing activities                                    |                                                                             |                                                                              | (7,416,283 | )              |            |           | 5,024,312  |           
|Net increase (decrease) in cash and cash equivalents                                   |                                                                             |                                                                              | 15,552,536 |                |            |           | (2,123,399 | )         
|Cash and cash equivalents - beginning of period                                        |                                                                             |                                                                              | 1,534,942  |                |            |           | 2,704,161  |           
|                                                                                       |                                                                             |                                                                              |            |                |            |           |            |           
|Cash and cash equivalents - end of period                                              |                                                                             | $                                                                            | 17,087,478 |                |            | $         | 580,762    |           
|                                                                                       |                                                                             |                                                                              |            |                |            |           |            |           

See accompanying notes.





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##### Table of Contents



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 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 29, 2002.

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 20, 2003 and April 21, 2002
are not necessarily indicative of the operating results for the entire year.

EXCHANGE 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 landlords 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 exchange option was exercised on both hotels, and the exchanges
were completed in the first quarter of 2002. The exchanges were
accounted for as the acquisitions of businesses, and the hotels
received in the exchanges were recorded at their fair value in the first quarter of 2002.

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

Discontinued operations resulted from the sale of one hotel in the second
quarter of 2002, the sale of one and transfer of five hotels in the fourth
quarter of 2002, and the reclassification of five hotels to assets of hotels
held for sale in the first quarter of 2003.





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##### Table of Contents



The five hotels reclassified to assets of hotels held for sale in the first
quarter of 2003 was based upon the Companys decision to sell the five hotels
to cash purchasers as part of a plan to divest all of the remaining Company-owned
hotels other than its AmeriSuites hotels and one GuestHouse Inn which is
leased. Subsequent to the decision in late January of 2003, contracts for the
sale of all five of the hotels were executed by the end of the Companys first
fiscal quarter and the sales are expected to be consummated by the end of its
second fiscal quarter of 2003. Based upon these sales contracts, three of the
five hotels are expected to sell, net of sales commissions, for $1,768,559 less
than their carrying values. Accordingly, the carrying values of these three
hotels have been written down by this impairment amount in the first quarter of
2003.

The effects of these twelve 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 for the first quarter of
2003 and 2002 in accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The
following table summarizes the results of operations for the twelve properties
sold, transferred, or classified as held for sale (amounts in thousands):

|                                                                                          |                               |                |      |              |       |           |     |       |       | 
|----------------------------------------------------------------------------------------- | ----------------------------- | -------------- | ---- | ------------ | ----- | --------- | --- | ----- | ----- | 
|                                                                                          |                               |                |      | Period ended
|                                                                                          |                               |                |      |             
|                                                                                          |                               |                |      | April 20,    |       | April 21,
|                                                                                          |                               |                |      | 2003         |       | 2002     
|                                                                                          |                               |                |      |              |       |          
|Revenues:                                                                                 |                               |                |      |              |       |           |     |      
|                                                                                          | Hotel                         |                | $    | 1,135        |       |           | $   | 3,443 |      
|                                                                                          |                               |                |      |              |       |           |     |       |      
|                                                                                          |                               | Total revenues |      |              | 1,135 |           |     |       | 3,443 | 
|Costs and expenses:                                                                       |                               |                |      |              |       |           |     |      
|                                                                                          | Hotel                         |                |      | 1,383        |       |           |     | 2,857 |      
|                                                                                          | General and Administrative    |                |      | 29           |       |           |     | 12    |      
|                                                                                          | Depreciation and amortization |                |      | 74           |       |           |     | 600   |      
|                                                                                          |                               |                |      |              |       |           |     |       |      
|                                                                                          |                               | Total expenses |      |              | 1,486 |           |     |       | 3,469 | 
|                                                                                          |                               |                |      |              |       |           |     |       |      
|Operating loss                                                                            |                               |                | (351 | )            |       |           | (26 | )    
|Interest expense                                                                          |                               |                | (26  | )            |       |           | (34 | )    
|Interest income                                                                           |                               |                |     |              |       |           | 12  |      
|                                                                                          |                               |                |      |              |       |           |     |       |      
|Loss before income taxes                                                                  |                               |                | (377 | )            |       |           | (48 | )    
|Income tax benefit                                                                        |                               |                | 143  |              |       |           | 18  |      
|                                                                                          |                               |                |      |              |       |           |     |       |      
|Operations of hotels disposed of, transferred and
held for sale, net of income tax effect |                               | $              | (234 | )            |       | $         | (30 | )    
|                                                                                          |                               |                |      |              |       |           |     |       |      





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##### Table of Contents



The assets and liabilities of the properties transferred and held for sale
presented in the accompanying consolidated balance sheets are as follows
(amounts in thousands):

|                              |                             |              |   |           |       |              |   |        |        | 
|----------------------------- | --------------------------- | ------------ | - | --------- | ----- | ------------ | - | ------ | ------ | 
|                              |                             |              |   | April 20, |       | December 29,
|                              |                             |              |   | 2003      |       | 2002        
|                              |                             |              |   |           |       |             
|Assets of hotels transferred: |                             |              |   |           |       |              |   |       
|                              | Other current assets        |              | $ | 16        |       |              | $ | 43     |       
|                              | Property and equipment, net |              |   | 4,835     |       |              |   | 11,439 |       
|                              | Other assets                |              |   | 29        |       |              |   | 90     |       
|                              |                             |              |   |           |       |              |   |       
|                              |                             | Total assets |   | $         | 4,880 |              |   | $      | 11,572 | 
|                              |                             |              |   |           |       |              |   |       

|                                |                             |              |   |           |        |              |   |        |        | 
|------------------------------- | --------------------------- | ------------ | - | --------- | ------ | ------------ | - | ------ | ------ | 
|                                |                             |              |   | April 20, |        | December 29,
|                                |                             |              |   | 2003      |        | 2002        
|                                |                             |              |   |           |        |             
|Assets of hotels held for sale: |                             |              |   |           |        |              |   |       
|                                | Other current assets        |              | $ | 44        |        |              | $ | 44     |       
|                                | Property and equipment, net |              |   | 11,741    |        |              |   | 13,564 |       
|                                | Other assets                |              |   | 86        |        |              |   | 86     |       
|                                |                             |              |   |           |        |              |   |       
|                                |                             | Total assets |   | $         | 11,871 |              |   | $      | 13,694 | 
|                                |                             |              |   |           |        |              |   |       





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##### Table of Contents



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 ended April 20, 2003, and April 21, 2002:

|                                   |                                                                  |  |                |            |           |  |   |            |  
|---------------------------------- | ---------------------------------------------------------------- |  | -------------- | ---------- | --------- |  | - | ---------- | -
|                                   |                                                                  |  | 16 WEEKS ENDED
|                                   |                                                                  |  |               
|                                   |                                                                  |  | April 20,      |            | April 21,
|                                   |                                                                  |  | 2003           |            | 2002     
|                                   |                                                                  |  |                |            |          
|Basic:                             |                                                                  |  |                |            |           |  |   |           
|                                   | Earnings (loss) from continuing operations                       |  | $              | 2,604,355  |           |  | $ | (985,795   | )
|                                   | Loss from discontinued operations                                |  |                | (2,145,355 | )         |  |   | (29,975    | )
|                                   |                                                                  |  |                |            |           |  |   |            |  
|                                   | Net earnings (loss) applicable to common stock                   |  | $              | 459,000    |           |  | $ | (1,015,770 | )
|                                   |                                                                  |  |                |            |           |  |   |            |  
|Shares:                            |                                                                  |  |                |            |           |  |   |           
|                                   | Weighted average common shares outstanding                       |  |                | 5,118,778  |           |  |   | 5,103,098  |  
|                                   |                                                                  |  |                |            |           |  |   |            |  
|Basic earnings (loss) per share:   |                                                                  |  |                |            |           |  |   |           
|                                   | Continuing operations                                            |  | $              | 0.51       |           |  | $ | (0.19      | )
|                                   | Discontinued operations                                          |  |                | (0.42      | )         |  |   | (0.01      | )
|                                   |                                                                  |  |                |            |           |  |   |            |  
|                                   | Net earnings (loss)                                              |  | $              | 0.09       |           |  | $ | (0.20      | )
|                                   |                                                                  |  |                |            |           |  |   |            |  
|Diluted:                           |                                                                  |  |                |            |           |  |   |           
|                                   | Earnings (loss) from continuing operations                       |  | $              | 2,604,355  |           |  | $ | (985,795   | )
|                                   | Loss from discontinued operations                                |  |                | (2,145,355 | )         |  |   | (29,975    | )
|                                   |                                                                  |  |                |            |           |  |   |            |  
|                                   | Net earnings (loss) applicable to common stock                   |  | $              | 459,000    |           |  | $ | (1,015,770 | )
|                                   | Dilutive effect of 7.5% convertible debentures                   |  |                |           |           |  |   |           |  
|                                   |                                                                  |  |                |            |           |  |   |            |  
|                                   | Numerator for diluted earnings (loss) per share                  |  | $              | 459,000    |           |  | $ | (1,015,770 | )
|                                   |                                                                  |  |                |            |           |  |   |            |  
|Shares:                            |                                                                  |  |                |            |           |  |   |           
|                                   | Weighted average common shares outstanding                       |  |                | 5,118,778  |           |  |   | 5,103,098  |  
|                                   | Effect of dilutive securities (options)                          |  |                |           |           |  |   |           |  
|                                   | Effect of dilutive securities (7.5% convertible debentures)      |  |                |           |           |  |   |           |  
|                                   |                                                                  |  |                |            |           |  |   |            |  
|                                   | Weighted average common and common equivalent
shares outstanding |  |                | 5,118,778  |           |  |   | 5,103,098  |  
|                                   |                                                                  |  |                |            |           |  |   |            |  
|Diluted earnings (loss) per share: |                                                                  |  |                |            |           |  |   |           
|                                   | Continuing operations                                            |  | $              | 0.51       |           |  | $ | (0.19      | )
|                                   | Discontinued operations                                          |  |                | (0.42      | )         |  |   | (0.01      | )
|                                   |                                                                  |  |                |            |           |  |   |            |  
|                                   | Net earnings (loss)                                              |  | $              | 0.09       |           |  | $ | (0.20      | )
|                                   |                                                                  |  |                |            |           |  |   |            |  





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##### Table of Contents



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):

|                               |                                                  |                                     |   |                |        |           |   |        |       |  
|------------------------------ | ------------------------------------------------ | ----------------------------------- | - | -------------- | ------ | --------- | - | ------ | ----- | -
|                               |                                                  |                                     |   | 16 WEEKS ENDED
|                               |                                                  |                                     |   |               
|                               |                                                  |                                     |   | April 20,      |        | April 21,
|                               |                                                  |                                     |   | 2003           |        | 2002     
|                               |                                                  |                                     |   |                |        |          
|Revenues:                      |                                                  |                                     |   |                |        |           |   |       
|                               | Hotel operations                                 |                                     | $ | 2,693          |        |           | $ | 2,331  |      
|                               | Franchising, reservation and management services |                                     |   | 2,294          |        |           |   | 2,065  |      
|                               | Construction and development                     |                                     |   | 3,070          |        |           |   | 5,538  |      
|                               | Elimination of intersegment revenue              |                                     |   | (550           | )      |           |   | (2,646 | )    
|                               |                                                  |                                     |   |                |        |           |   |        |      
|                               |                                                  | Total revenues                      |   | $              | 7,507  |           |   | $      | 7,288 |  
|                               |                                                  |                                     |   |                |        |           |   |        |      
|Operating loss:                |                                                  |                                     |   |                |        |           |   |       
|                               | Hotel operations                                 |                                     | $ | 1,032          |        |           | $ | 1,041  |      
|                               | Franchising, reservation and management services |                                     |   | (2,178         | )      |           |   | (1,812 | )    
|                               | Construction and development                     |                                     |   | (495           | )      |           |   | 2      |      
|                               |                                                  |                                     |   |                |        |           |   |        |      
|                               |                                                  | Total operating loss                |   | $              | (1,641 | )         |   | $      | (769  | )
|                               |                                                  |                                     |   |                |        |           |   |        |      
|Capital expenditures:          |                                                  |                                     |   |                |        |           |   |       
|                               | Hotel operations                                 |                                     | $ | 4              |        |           | $ | 2,757  |      
|                               | Franchising, reservation and management services |                                     |   | 160            |        |           |   | 350    |      
|                               | Construction and development                     |                                     |   |               |        |           |   | 1,779  |      
|                               |                                                  |                                     |   |                |        |           |   |        |      
|                               |                                                  | Total capital expenditures          |   | $              | 164    |           |   | $      | 4,886 |  
|                               |                                                  |                                     |   |                |        |           |   |        |      
|Depreciation and amortization: |                                                  |                                     |   |                |        |           |   |       
|                               | Hotel operations                                 |                                     | $ | 443            |        |           | $ | 453    |      
|                               | Franchising, reservation and management services |                                     |   | 317            |        |           |   | 228    |      
|                               | Construction and development                     |                                     |   | 13             |        |           |   | 18     |      
|                               |                                                  |                                     |   |                |        |           |   |        |      
|                               |                                                  | Total depreciation and amortization |   | $              | 773    |           |   | $      | 699   |  
|                               |                                                  |                                     |   |                |        |           |   |        |      

|              |                                                  |              |   |           |         |              |   |        |         | 
|------------- | ------------------------------------------------ | ------------ | - | --------- | ------- | ------------ | - | ------ | ------- | 
|              |                                                  |              |   | As of     |         | As of       
|              |                                                  |              |   | April 20, |         | December 29,
|              |                                                  |              |   | 2003      |         | 2002        
|              |                                                  |              |   |           |         |             
|Total assets: |                                                  |              |   |           |         |              |   |       
|              | Hotel operations                                 |              | $ | 60,568    |         |              | $ | 89,433 |        
|              | Franchising, reservation and management services |              |   | 87,042    |         |              |   | 69,679 |        
|              | Construction and development                     |              |   | 6,108     |         |              |   | 8,167  |        
|              |                                                  |              |   |           |         |              |   |       
|              |                                                  | Total assets |   | $         | 153,718 |              |   | $      | 167,279 | 
|              |                                                  |              |   |           |         |              |   |       

CURRENT AND LONG-TERM DEBT

The trust indenture applicable to the Series A and Series B senior
subordinated notes contains a financial covenant requiring a minimum
consolidated net worth of $75.0 million. As of April 20, 2003, the
Companys consolidated net worth was less than the required amount.
This covenant violation, as specified in the indenture, allows the
holders of a





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##### Table of Contents



minimum of 25% of the outstanding principal amount of
the notes to declare a default. In the event that a default is
declared, the Company, upon receipt
of written notice by certified mail from the trustee, has 60 days
from receipt of notice to cure the default. A minimum of 51% of the
outstanding principal amount of the notes outstanding may waive any
covenant non-compliance default declared by the 25% or more holders.
The Company is in the process of completing an Exchange Offer and
Consent Solicitation (Exchange Offer), which is expected to be
completed within the 60-day cure period. The terms of the Exchange
Offer contain a modification of the financial covenants reducing the
minimum consolidated net worth, which is expected to cure the
default, if declared, without any further action. However, there
can be no assurance that the Exchange Offer will be completed.
Because of the covenant violation at April 20, 2003, the Company has
classified all of the Series A and Series B senior subordinated
notes as a current liability. Additionally, due to cross-default
provisions in the Companys convertible subordinated debentures and
a loan secured by the Companys aircraft, these debt instruments
have also been classified as current liabilities as of April 20,
2003.

The total amount of debt classified as current liabilities due to
the circumstances discussed above was $63.6 million as of April 20,
2003. Since April 20, 2003, the Company has reduced that amount by
$3.7 million, including $200,000 of the senior subordinated notes.
The Company currently maintains approximately $11.0 million in cash
and is currently expecting to collect cash proceeds of approximately
$40.0 million within the next 60 days from the sale of the
properties serving as collateral under nine notes receivable, and
the sale of five unencumbered properties. Negotiations are
currently in progress relative to the sale of four additional
hotels, with net proceeds of approximately $28.0 million expected.
Additionally, the Company anticipates refunds of approximately $8.5
million of previously paid income taxes by mid-2003, and at least
three parcels of undeveloped land are expected to be sold in 2003
for approximately $5.6 million. The Company expects to cure any
default declared by the senior subordinated note holders within the
60 day cure period, but if not, is confident that it will have
sufficient cash available from the above-listed sources and cash
from other sources to pay its debt in full in 2003.

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.

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.





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##### Table of Contents



The Company has adopted the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based
Compensation-Transition and Disclosure. The Companys pro forma net
earnings (loss) would not be materially different in the first
quarter of 2003 or 2002 under the fair value method.

RELATED PARTY TRANSACTION

The chairman and chief executive officer renewed his non-interest
bearing, unsecured, full-recourse promissory note in the amount of
$937,500 that came due on February 11, 2002 with the Company for one
year at an interest rate of prime plus 250 basis points. He paid
the note and all accrued interest in full in December of 2002 and
January of 2003.

The chairman and chief executive officer is personally involved in
various real estate development activities. He utilizes the
Companys wholly-owned construction and development subsidiary for
this purpose. Revenues earned by the Company from these projects
were $2,944,623 in the first quarter of 2003 and $10,131 in the
first quarter of 2002.





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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 April 20, 2003, the Shoneys Inn lodging system consists of 35 Shoneys
Inns containing 3,491 rooms of which one containing 115 rooms is owned and
operated by the Company. Shoneys Inns are currently located in ten 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 April 20, 2003, consisted of 81 properties
containing 6,057 rooms open and operating in twenty states, including eight
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. As of April 20, 2003, 24 of the
GuestHouse Inns & Suites of the 81 noted above, which contain 2,277 rooms, had
been converted from Shoneys Inns to the GuestHouse brand during the past 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 April 20, 2003 and April 21,
2002 are not necessarily indicative of the operating results for the entire
year.





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##### Table of Contents



Results of Operations

For the Fiscal Quarters Ended April 20, 2003 and April 21, 2002

Total operating revenues for the quarter ended April 20, 2003, were $7.5
million, or 3.0% more than the total operating revenues of $7.3 million
reported for the first quarter of 2002. The net increases were due to increases
in hotel, franchising and reservation revenues, partially offset by decreases
in construction and development revenues and rent income.

Revenues from hotel operations in the first fiscal quarter increased by
$655,000, or 66.6%, to $1.6 million from the $983,000 reported for the same
period last year. For the one hotel opened for all of both quarterly periods,
a decrease of 5.8% in average daily room rates, from $51.32 in the first
quarter of 2002 to $48.33 in the first quarter of 2003, and a decrease in
average occupancy rates on this hotel from 60.7% to 60.6% this year, were the
primary causes of a decrease in same hotel revenues of 6.8% from $347,000 in
the first quarter of 2002 to $323,000 in the first quarter of 2003. The
Company owns and operates five AmeriSuites hotels, two of which were acquired
in the first quarter of 2002 in an exchange transaction, and three of which the
Company began operating in the first quarter of 2003 upon the abandonment of an
operating lease by the lessee. The Company owned and operated a total of six
hotels included in continuing operations at the end of its first fiscal quarter
of 2003 (one GuestHouse Inns & Suites and the five AmeriSuites hotels). RevPAR
(revenue per available room) for all six of these Company-owned hotels
decreased by 2.9% from $36.73 in the first quarter of 2002 to $35.66 in the
first quarter of 2003.

The Company sold one Shoneys Inn in June of 2002, sold a Baymont Inn &
Suites in December of 2002, and transferred two Shoneys Inns and three
GuestHouse Inns & Suites in December of 2002. The revenue effect of these seven
hotels sold in 2002 is reflected in discontinued operations. During the first
quarter of 2003, the Company decided to sell five additional hotels (one
Shoneys Inn and four GuestHouse Inns & Suites). The revenue effects of these
five hotels are also reflected in discontinued operations.

Franchising, reservation and management service revenues increased by
$394,000, or 23.4%, in the first quarter of 2003 from the first quarter of
2002. Initial and termination franchise fees increased by $13,000, royalty
fees increased by $199,000, and reservation fees increased by $182,000 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 20, 2003, a total of 685 lodging
facilities were served by the Companys reservation center.

Revenues from construction and development activities were $3.0 million in
the first quarter of 2003, versus $3.5 million in the first quarter of 2002.
These revenues include $2.9 million in the first quarter of 2003 and $10,000 in
the first quarter of 2002
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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 2003 and 2002.

Rent income in the first quarter of 2003 decreased by $230,000, to
$817,000, from $1.0 million, in the first quarter of 2002. The primary source
of rent income is 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. The decrease in the first quarter rent income was due to the
abandonment of the lease by Prime and the sale of some restaurants to the
lessees.

Operating expenses from hotel operations of the six Company-owned hotels
included in continuing operations for the first quarter of 2003 increased by
$389,000, or 56.9%, from $683,000 in the first quarter of 2002. The operating
expenses as a percentage of operating revenues for this activity decreased from
69.4% in the first quarter of 2002 to 65.4% in the first quarter of 2003,
improving gross operating profit margin from 30.6% in the first quarter of 2002
to 34.6% in the first quarter of 2003. Profit margins are generally greater on
AmeriSuites hotels than on GuestHouse Inns & Suites, and the greatest increases
in revenues from the first quarter of 2002 to the first quarter of 2003 were
from the AmeriSuites hotels.

Franchising, reservation and management service operating expenses
increased by $641,000, or 61.9%, from the first quarter of 2002 to the first
quarter of 2003. 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 2002, and to expenses related to the franchising of GuestHouse Inns
& Suites, the franchising rights of which were not acquired until the second
quarter of 2002.

Construction and development costs in the first quarter of 2003 and 2002
were $3.4 million and $3.5 million, respectively, on construction contracts in
progress during those quarters.

Rent expense decreased by $9,000 in the first quarter of this year from
last years first quarter. The Company leased only one hotel property in both
years.

General and administrative expenses increased by $66,000, or 3.4%, from
the first quarter of 2002. The increases were due primarily to increased legal
fees and insurance costs.
Table of ContentsDepreciation and amortization expense increased by $75,000, or 10.7%, from
the first quarter of 2002, and was due to the increase in the weighted average
number of hotels owned in the first quarter of 2003 over the first quarter of
2002.In the first quarter of 2003, the Company wrote off $6,000 of
pre-development costs and $13,000 of accounts receivable deemed to be of
doubtful collectibility.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. In the first quarter of 2002, the Company repurchased
$900,000 of its 7.50% subordinated debentures at a discount, recognizing a gain
of $252,000. 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 $389,000, or 15.6%, while interest income
decreased by $241,000, or 14.0%, from the first quarter of 2002. The increase
in interest expense was due primarily to higher levels of borrowing on the
Companys bank credit facilities in the first quarter of 2003 than in the first
quarter of 2002. Interest income decreased due to decreases in the interest
rates charged on notes receivable due to the general decline in interest rates
and the interest rate terms of those notes, 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 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 carryforwards that had previously
been fully reserved. TheTable of Contents

effective tax rate in the first quarter of 2002 differs from the federal
and state statutory rates as a result of interest on deferred gains.

Discontinued operations resulted from the sale of one hotel in the second
quarter of 2002, the sale of one and transfer of five hotels in the fourth
quarter of 2002, and the reclassification of five hotels to assets of hotels
held for sale in the first quarter of 2003. The effects 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 $2.0 million in
the first quarter of 2003, compared with $3.7 million used in operating
activities in the first quarter of 2002.

The Companys cash flows provided by investing activities were $25.0
million in the first quarter of 2003, compared with cash flows used in
investing activities of $3.5 million for the comparable period in 2002. 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 $164,000
in the first quarter of 2003 and $4.9 million in the first quarter of 2002.
Proceeds from the sale of property and leasehold interests were $7.5 million in
the first quarter of 2003 versus $212,000 for the comparable period in 2002.
The Company received $17.3 million from the collection of notes receivable in
the first quarter of 2003.

Net cash used in financing activities was $7.4 million in the first
quarter of 2003 compared with $5.0 million provided by financing activities in
the first quarter of 2002. Repayments, net of borrowings, on long-term debt
obligations were $8.1 million in the first quarter of 2003 versus $5.0 million
borrowings in excess of repayments in the first quarter of 2002. The repayments
in the first quarter of 2003 and the first quarter of 2002 include $1.4 million
and $900,000, respectively, of long-term debt repurchased in the open market or
in privately negotiated transactions. In the first quarter 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.

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 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
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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 and of the real property collateral, (c) a multiple of the
trailing twelve months net operating income of the underlying real property
collateral securing the pledged notes and of the real property collateral, or
(d) $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 basis
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 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 April 20, 2003, the
Company had $17.4 million in borrowings outstanding under this credit facility,
consisting of the $10 million term loan and $7.4 million on the revolving line
of credit.

The Company also has a loan secured by its corporate aircraft with a
balance of $5.7 million as of April 20, 2003. 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 $12.5 million mature in May of 2004. Its outstanding Series A
Senior Subordinated Notes in the face amount of $25.5 million mature in
November of 2006 and its Series B Senior Subordinated Notes in the face amount
of $18.8 million mature in September of 2007.

Under the terms of the trust indenture governing the senior subordinated
notes issued in 1996 and 1997, the Company is obligated to redeem at par up to
5% annually of the notes issued under the indenture beginning December 1, 1999.
On December 1, 2002, approximately $3.2 million of these notes were redeemed
under this provision.

The trust indenture applicable to the Series A and Series B senior
subordinated notes contains a financial covenant requiring a minimum
consolidated net worth of $75.0 million. As of April 20, 2003, the Companys
consolidated net worth was less than the required amount. This covenant
violation, as specified in the indenture, allows the holders of a minimum of
25% of the outstanding principal amount of the notes to declare a default. In
the event that a default is declared, the Company, upon receipt of written
notice by certified mail from the trustee, has 60 days from receipt of notice
to cure the default. A minimum of 51% of the outstanding principal amount of
the notes outstanding may waive any covenant non-compliance default declared by
the 25% or more holders. The Company is in the process of completing an
Exchange Offer and Consent
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Solicitation (Exchange Offer), which is expected to be completed within the 60-day
cure period. The terms of the Exchange Offer contain a modification of the
financial covenants reducing the minimum consolidated net worth, which is
expected to cure the default, if declared, without any further action.
However, there can be no assurance that the Exchange Offer will be completed.
Because of the covenant violation at April 20, 2003, the Company has classified
all of the Series A and Series B senior subordinated notes as a current
liability. Additionally, due to cross-default provisions in the Companys
convertible subordinated debentures and a loan secured by the Companys
aircraft, these debt instruments have also been classified as current
liabilities as of April 20, 2003.

The total amount of debt classified as current liabilities due to the
circumstances discussed above was $63.6 million as of April 20, 2003. Since
April 20, 2003, the Company has reduced that amount by $3.7 million, including
$200,000 of the senior subordinated notes. The Company currently maintains
approximately $11.0 million in cash and is currently expecting to collect cash
proceeds of approximately $40.0 million within the next 60 days from the sale
of the properties serving as collateral under nine notes receivable, and the
sale of five unencumbered properties. Negotiations are currently in progress
relative to the sale of four additional hotels, with net proceeds of
approximately $28.0 million expected. Additionally, the Company anticipates
refunds of approximately $8.5 million of previously paid income taxes by
mid-2003, and at least three parcels of undeveloped land are expected to be
sold in 2003 for approximately $5.6 million. The Company expects to cure any
default declared by the senior subordinated note holders within the 60 day cure
period, but if not, is confident that it will have sufficient cash available
from the above-listed sources and cash from other sources to pay its debt in
full in 2003.

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 first fiscal quarter of 2003, 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 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 pending Exchange Offer, 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, proceeds from the sale of
properties, the collection of notes receivable, net cash provided
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by operations, and borrowings under existing credit facilities or mortgage debt,
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 20, 2003.

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) |  | Within the ninety day period prior to the date of this
report, 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 designed and
operation of these disclosure controls and procedures were effective
to timely alert them to any material information relating to 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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##### Table of Contents






CERTIFICATION

I, Leon Moore, certify that:

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

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

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

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

b)     evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c)     presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions);

a)     all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b)     any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could
-1-Table of Contentssignificantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

|                    |  |                                   
|------------------- |  | ----------------------------------
|Dated:
June 4, 2003 |  | /s/ Leon Moore                    
|                    |  |                                   
|                    |  | [signature]                       
|                    |  |                                   
|                    |  | Chairman, Chief Executive Officer,
|                    |  | Principal Executive Officer       

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##### Table of Contents



CERTIFICATION

I, Bob Marlowe, certify that:

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

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

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

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

b)     evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c)     presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions);

a)     all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b)     any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could

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##### Table of Contents



significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

|                    |  |                                             
|------------------- |  | --------------------------------------------
|Dated:
June 4, 2003 |  | /s/ Bob Marlowe                             
|                    |  |                                             
|                    |  | [signature]                                 
|                   
|                    |  | Secretary, Treasurer, Chief Accounting      
|                    |  | Officer, Principal Accounting Officer, Chief
|                    |  | Financial Officer                           

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##### Table of Contents















PART II - OTHER INFORMATION

|        |  |                                                                                                                         |  |                                                                                                                                      
|------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Item 1. |  | No material developments occurred during the first quarter
ended April 20, 2003 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 99.1  Certifications required by Sections 302 and
906 of the Sarbanes-Oxley Act of 2002.                                    
|        |  |                                                                                                                         |  |                                                                                                                                      
|        |  | 6(b) Reports on Form 8-K                                                                                               
|        |  |                                                                                                                         |  |                                                                                                                                      
|        |  |                                                                                                                         |  | A Form 8-K was filed
on February 5, 2003 containing a copy of the Companys press release
announcing fourth quarter estimated losses.




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: June 4, 2003 |  | S/ Leon Moore                               
|                   |  |                                             
|                   |  | Leon Moore                                  
|                   |  | Chief Executive Officer, Principal Executive
|                   |  | Officer, Director                           
|                   |  |                                             
|Date: June 4, 2003 |  | S/ Bob Marlowe                              
|                   |  |                                             
|                   |  | Bob Marlowe                                 
|                   |  | Secretary, Treasurer, Chief Accounting      
|                   |  | Officer, Principal Accounting Officer, Chief
|                   |  | Financial Officer, Director