##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION  Washington, D. C. 20549
 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934  OR (  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 
   SHOLODGE, INC.  Tennessee
    
    62-1015641(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)130 Maple Drive North, Hendersonville, Tennessee
    
    37075(address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code
    
    (615) 264-8000
   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period as the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.  Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2).  Indicate the number of shares outstanding of each of the registrants classes of common stock as
of the latest practicable date. As of November 15, 2004, there were 5,006,611 shares of ShoLodge, Inc. common stock outstanding.




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TABLE OF CONTENTS  Consolidated Balance SheetsConsolidated Statements of EarningsConsolidated Statements of Cash FlowsNOTES TO CONSOLIDATED FINANCIAL STATEMENTSPART IItem 4. Controls and ProceduresPART II - OTHER INFORMATIONItem 1. No material developments occurredItem 6. Exhibits and Reports on Form 8-KSIGNATURESEX-31.1  SECTION 302 CERTIFICATION OF THE CEO & CFOEX-32.1  SECTION 906 CERTIFICATIONS OF THE CEO & CFO    Table of Contents  ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets 
 October 3,2004
    
    December 28,(unaudited)
    
    2003(1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    17,069,843
    
    
    $
    12,491,736Accounts receivable:Accounts receivable-trade, net
    
    
    2,046,496
    
    
    
    2,188,312Construction contracts
    
    
    1,293,007
    
    
    
    837,714Construction contracts due from related parties
    
    
    32,501,349
    
    
    
    22,668,784Costs and estimated earnings in excess of
billings on construction contracts
    
    
    
    
    
    
    39,832Income taxes receivable
    
    
    3,245,266
    
    
    
    3,908,041Prepaid expenses
    
    
    477,472
    
    
    
    314,967Notes receivable, net
    
    
    4,095,622
    
    
    
    6,641,598Assets of hotels transferred under contractual
agreements (notes receivable)
    
    
    2,000,000
    
    
    
    4,352,000Assets of hotels held for sale
    
    
    4,754,900
    
    
    
    32,147,238Other current assets
    
    
    15,890
    
    
    
    25,927Total current assets
    
    
    67,499,845
    
    
    
    85,616,149Notes receivable, net
    
    
    3,043,760
    
    
    
    4,702,058Property and equipment
    
    
    21,530,377
    
    
    
    22,161,627Less accumulated depreciation and amortization
    
    
    (4,675,846
    )
    
    
    (4,600,755
    )16,854,531
    
    
    
    17,560,872Land under development or held for sale
    
    
    6,924,019
    
    
    
    10,644,991Deferred charges, net
    
    
    331,881
    
    
    
    437,353Deferred tax asset
    
    
    1,440,893
    
    
    
    Goodwill, net
    
    
    765,711
    
    
    
    765,711Trademark and franchise rights, net
    
    
    283,783
    
    
    
    473,366Other assets
    
    
    2,294,516
    
    
    
    1,819,627$
    99,438,939
    
    
    $
    122,020,127
  (1)
    
    Derived from fiscal year ended December 28, 2003 audited financial statements.See accompanying notes.




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ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets (continued) October 3,2004
    
    December 28,(unaudited)
    
    2003(1)Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    2,065,332
    
    
    $
    5,450,275Taxes payable other than on income
    
    
    249,004
    
    
    
    344,179Current portion of long-term debt
    
    
    41,976,774
    
    
    
    11,344,902Total current liabilities
    
    
    44,291,110
    
    
    
    17,139,356Long-term debt, less current portion
    
    
    
    
    
    
    41,373,383Deferred income taxes
    
    
    
    
    
    
    783,485Deferred credits
    
    
    145,935
    
    
    
    153,106Minority interests in equity of consolidated subsidiaries and
partnerships
    
    
    98,309
    
    
    
    388,699Commitments and contingenciesTotal liabilities
    
    
    44,535,354
    
    
    
    59,838,029Shareholders equity:Preferred stock (no par value; 1,000,000 shares authorized;
no shares issued)
    
    
    
    
    
    
    Series A redeemable nonparticipating stock
(no par value; 1,000 shares authorized, no
shares issued)
    
    
    
    
    
    
    Common stock (no par value; 20,000,000 shares
authorized, 5,006,611 and 4,993,278 shares issued
and outstanding as of October 3, 2004
and December 28, 2003, respectively)
    
    
    1,000
    
    
    
    1,000Additional paid-in capital
    
    
    23,177,820
    
    
    
    23,127,821Retained earnings
    
    
    31,724,765
    
    
    
    39,053,277Total shareholders equity
    
    
    54,903,585
    
    
    
    62,182,098$
    99,438,939
    
    
    $
    122,020,127
  (1)
    
    Derived from fiscal year ended December 28, 2003 audited financial statements.See accompanying notes.




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ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited) 12 weeks ended
    
    40 weeks endedOctober 3,
    
    October 5,
    
    October 3,
    
    October 5,2004
    
    2003
    
    2004
    
    2003Revenues:Franchising, reservation and management
    
    $
    2,265,778
    
    
    $
    2,098,726
    
    
    $
    6,283,770
    
    
    $
    5,994,187Construction and development-related parties
    
    
    3,970,494
    
    
    
    7,309,758
    
    
    
    17,576,580
    
    
    
    14,660,916Construction and development-other
    
    
    376,948
    
    
    
    628,241
    
    
    
    776,880
    
    
    
    1,622,925Rent income
    
    
    9,675
    
    
    
    27,193
    
    
    
    30,298
    
    
    
    90,323Other income
    
    
    73,698
    
    
    
    23,319
    
    
    
    207,045
    
    
    
    111,319Total revenues
    
    
    6,696,593
    
    
    
    10,087,237
    
    
    
    24,874,573
    
    
    
    22,479,670Cost and expenses:Franchising, reservation and management
    
    
    1,657,088
    
    
    
    1,502,294
    
    
    
    4,984,782
    
    
    
    4,663,455Construction and development
    
    
    3,784,954
    
    
    
    5,743,837
    
    
    
    15,731,244
    
    
    
    14,845,505General and administrative
    
    
    887,005
    
    
    
    1,049,439
    
    
    
    3,968,234
    
    
    
    3,972,236Depreciation and amortization
    
    
    226,362
    
    
    
    248,048
    
    
    
    768,423
    
    
    
    820,079Write-off of pre-development costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,993Write-off of construction contracts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,475Write-off of trade receivables
    
    
    (43,197
    )
    
    
    15,869
    
    
    
    75,986
    
    
    
    191,516Write-down of notes receivable
    
    
    
    
    
    
    880,568
    
    
    
    150,690
    
    
    
    866,543Impairment of real estate
    
    
    207,859
    
    
    
    
    
    
    
    516,172
    
    
    
    Total cost and expenses
    
    
    6,720,071
    
    
    
    9,440,055
    
    
    
    26,195,531
    
    
    
    25,386,802Operating (loss) earnings
    
    
    (23,478
    )
    
    
    647,182
    
    
    
    (1,320,958
    )
    
    
    (2,907,132
    )(Loss) gain on sale of property and leasehold interests
    
    
    (434,325
    )
    
    
    380,407
    
    
    
    (286,551
    )
    
    
    977,786Gain on early extinguishments of debt
    
    
    
    
    
    
    295,785
    
    
    
    
    
    
    
    1,112,205Interest expense
    
    
    (1,187,402
    )
    
    
    (1,611,815
    )
    
    
    (4,270,939
    )
    
    
    (6,360,971
    )Interest income
    
    
    71,659
    
    
    
    296,375
    
    
    
    244,213
    
    
    
    1,587,801Lease abandonment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,329,504(Loss) earnings from continuing operations before income taxes and
minority interests
    
    
    (1,573,546
    )
    
    
    7,934
    
    
    
    (5,634,235
    )
    
    
    (260,807
    )Income tax benefit
    
    
    300,000
    
    
    
    
    
    
    
    1,154,000
    
    
    
    890,000Minority interests in earnings of consolidated
subsidiaries and partnerships
    
    
    (2,928
    )
    
    
    (3,689
    )
    
    
    (9,610
    )
    
    
    (101,368
    )(Loss) earnings from continuing operations
    
    
    (1,276,474
    )
    
    
    4,245
    
    
    
    (4,489,845
    )
    
    
    527,825Discontinued operations:Operations of hotels disposed of and transferred, net of income
taxes
    
    
    (1,578,624
    )
    
    
    172,026
    
    
    
    (1,127,170
    )
    
    
    680,033Loss on disposal and transfer of discontinued operations, net of income taxes
of $725,000 and $441,000 for the 12 weeks and 40 weeks ended October 3,
2004, respectively, and $0 for the 12 weeks and 40 weeks ended October 5,
2003, respectively
    
    
    (3,079,324
    )
    
    
    (462,471
    )
    
    
    (1,711,497
    )
    
    
    (1,841,940
    )Net loss
    
    $
    (5,934,422
    )
    
    $
    (286,200
    )
    
    $
    (7,328,512
    )
    
    $
    (634,082
    )Net (loss) earnings per common share:Basic:Continuing operations
    
    $
    (0.25
    )
    
    $
    0.00
    
    
    $
    (0.90
    )
    
    $
    0.10Discontinued operations:Operations of hotels disposed of and transferred
    
    
    (0.32
    )
    
    
    0.03
    
    
    
    (0.22
    )
    
    
    0.14Loss on disposal and transfer of discontinued operations
    
    
    (0.62
    )
    
    
    (0.09
    )
    
    
    (0.34
    )
    
    
    (0.36
    )Net loss
    
    $
    (1.19
    )
    
    $
    (0.06
    )
    
    $
    (1.46
    )
    
    $
    (0.12
    )Diluted:Continuing operations
    
    $
    (0.25
    )
    
    $
    0.00
    
    
    $
    (0.90
    )
    
    $
    0.10Discontinued operations:Operations of hotels disposed of and transferred
    
    
    (0.32
    )
    
    
    0.03
    
    
    
    (0.22
    )
    
    
    0.14Loss on disposal and transfer of discontined operations
    
    
    (0.62
    )
    
    
    (0.09
    )
    
    
    (0.34
    )
    
    
    (0.36
    )Net loss
    
    $
    (1.19
    )
    
    $
    (0.06
    )
    
    $
    (1.46
    )
    
    $
    (0.12
    )Weighted average common shares outstanding:Basic
    
    
    5,006,611
    
    
    
    5,038,099
    
    
    
    5,006,278
    
    
    
    5,094,574Diluted
    
    
    5,006,611
    
    
    
    5,038,099
    
    
    
    5,006,278
    
    
    
    5,094,574
  See accompanying notes.




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ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) 40 weeks endedOctober 3,
    
    October 5,2004
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (7,328,512
    )
    
    $
    (634,082
    )Adjustments to reconcile net loss
to net cash used in operating activities:Discontinued operations, net of tax
    
    
    2,838,667
    
    
    
    1,161,907Depreciation and amortization
    
    
    768,423
    
    
    
    820,079Write-off of pre-development costs
    
    
    
    
    
    
    5,993Write-off of construction contracts receivable
    
    
    
    
    
    
    21,475Write-off of accounts receivable - trade
    
    
    75,986
    
    
    
    191,516Write-off of notes receivable
    
    
    150,690
    
    
    
    866,543Impairment of real estate
    
    
    516,172
    
    
    
    Amortization of deferred charges recorded as interest expense
    
    
    105,472
    
    
    
    604,782Accretion of debt recorded as interest expense
    
    
    504,630
    
    
    
    504,630Recognition of previously deferred gains
    
    
    (7,171
    )
    
    
    (61,186
    )Loss (gain) on sale of property and leasehold interests
    
    
    286,551
    
    
    
    (977,786
    )Gain on early extinguishments of debt
    
    
    
    
    
    
    (1,112,205
    )Lease abandonment income
    
    
    
    
    
    
    (5,329,504
    )Deferred income tax benefit
    
    
    (1,154,000
    )
    
    
    Minority interest in earnings of consolidated subsidiaries
and partnerships
    
    
    9,610
    
    
    
    101,368Changes in current assets and liabilities:Accounts receivable - trade
    
    
    65,830
    
    
    
    (874,433
    )Construction contracts receivable
    
    
    (455,293
    )
    
    
    (303,069
    )Construction contracts receivable due from related parties
    
    
    (9,832,565
    )
    
    
    (9,679,411
    )Costs and estimated earnings in excess of billings on
construction contracts
    
    
    39,832
    
    
    
    (459,297
    )Income and other taxes receivable and payable
    
    
    229,222
    
    
    
    10,996,469Prepaid expenses
    
    
    (162,505
    )
    
    
    (283,941
    )Accounts payable and accrued expenses
    
    
    (3,352,451
    )
    
    
    (2,252,634
    )Other
    
    
    1,262,026
    
    
    
    145,142Net cash used in operating activities
    
    
    (15,439,386
    )
    
    
    (6,547,644
    )Cash flow from investing activitiesRestricted cash
    
    
    
    
    
    
    100,000Payments received on notes receivable
    
    
    7,078,897
    
    
    
    34,432,844Capital expenditures
    
    
    (272,705
    )
    
    
    (746,804
    )Capital expenditures of discontinued operations
    
    
    (3,473
    )
    
    
    (40,872
    )Purchase of assets of hotel held for sale
    
    
    
    
    
    
    (6,913,475
    )Purchase of other assets
    
    
    (490,000
    )
    
    
    (1,050,000
    )Proceeds from sale of assets of hotels held for sale
    
    
    22,148,426
    
    
    
    12,915,651Proceeds from sale of real estate and property
    
    
    3,052,490
    
    
    
    4,478,393Proceeds from lease abandonment
    
    
    
    
    
    
    415,668Proceeds from sale of assets of hotels
    
    
    
    
    
    
    6,517,798Acquisition
    
    
    
    
    
    
    (20,000
    )Net cash provided by investing activities
    
    
    31,513,635
    
    
    
    50,089,203Cash flow from financing activitiesRepayments of notes receivable from officer
    
    
    
    
    
    
    687,500Deferred loan costs
    
    
    
    
    
    
    (225,623
    )Proceeds from long-term debt
    
    
    
    
    
    
    6,726,904Payments on long-term debt
    
    
    (11,246,141
    )
    
    
    (39,785,735
    )Distributions to minority interest
    
    
    (300,000
    )
    
    
    Exercise of stock options
    
    
    49,999
    
    
    
    (451,800
    )Net cash used in financing activities
    
    
    (11,496,142
    )
    
    
    (33,048,754
    )Net increase in cash and cash equivalents
    
    
    4,578,107
    
    
    
    10,492,805Cash and cash equivalents - beginning of period
    
    
    12,491,736
    
    
    
    1,534,942Cash and cash equivalents - end of period
    
    $
    17,069,843
    
    
    $
    12,027,747
  See accompanying notes.




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SHOLODGE, INC. AND SUBSIDIARIES 
 
 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In Managements opinion, the information and amounts furnished in this report
reflect all adjustments which are necessary for the fair presentation of the
financial position and results of operations for the periods presented. All
adjustments are of a normal and recurring nature. These financial statements
should be read in conjunction with the Companys Annual Report on Form 10-K for
the fiscal year ended December 28, 2003. The fiscal year consists of a 52/53 week year ending the last Sunday of the
year. The Companys fiscal quarters have 16, 12, 12, and 12 weeks in the
first, second, third and fourth quarters, respectively, in each fiscal year.
When the 53rd week occurs in a fiscal year, it is added to the fourth fiscal
quarter, making it 13 weeks in length. The Company has historically reported lower earnings in the first and fourth
quarters of the year due to the seasonality of the Companys business. The
results of operations for the quarters ended October 3, 2004 and October 5,
2003 are not necessarily indicative of the operating results for the entire
year. Certain reclassifications have been made in the third quarter and first three
quarters 2003 consolidated statement of earnings to conform to the
classifications used in 2004. These reclassifications had no impact on net
losses as previously reported. LEASE ABANDONMENT INCOME The Company leased three hotels to Prime Hospitality Corp. (Prime) in July of
2000. In the first quarter of 2003, Prime abandoned the lease of the three
hotels and the Company resumed operations of the hotels on April 5, 2003. Due
to the terms of the lease agreement, the Company had recorded a liability and a
deferred credit in July of 2000. Due to the lease abandonment by Prime in the
first quarter of 2003, the remaining deferred amounts totaling $4,913,836 and
$415,668 in cash received from Prime upon the abandonment, were recognized as
lease abandonment income totaling $5,329,504 in the first quarter of 2003. DISCONTINUED OPERATIONS Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets,requires that long-lived
assets to be disposed of by sale, including those of discontinued operations,
be measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing




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operations or in discontinued operations.
Discontinued operations do not include amounts
for operating losses that have not yet been incurred. Under SFAS No. 144, the
reporting of discontinued operations includes all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The Company reports as discontinued operations assets held for
sale (as defined by SFAS No. 144) and assets sold in the current period. All
results of these discontinued operations are included in a separate component
of income on the consolidated statements of earnings under the heading,
operations of hotels disposed of and transferred, net of income taxes. The following table summarizes the results of operations for five properties
transferred in the fourth quarter of 2002 and fourteen properties sold or
classified as held for sale, from the hotel operations segment for the fiscal
quarters and fiscal year-to-date periods ended October 3, 2004 and October 5,
2003 (amounts in thousands): 12 Weeks Ended
    
    40 Weeks EndedOctober 3,
    
    October 5,
    
    October 3,
    
    October 5,2004
    
    2003
    
    2004
    
    2003Revenues:Hotel
    
    $
    1,091
    
    
    $
    3,280
    
    
    $
    7,037
    
    
    $
    9,217Rent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    783Total revenues
    
    
    1,091
    
    
    
    3,280
    
    
    
    7,037
    
    
    
    10,000Costs and expenses:Hotel
    
    
    1,076
    
    
    
    2,703
    
    
    
    5,865
    
    
    
    7,706Rent
    
    
    37
    
    
    
    131
    
    
    
    316
    
    
    
    412General and Administrative
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    31Depreciation and amortization
    
    
    119
    
    
    
    276
    
    
    
    465
    
    
    
    1,137Impairment of real estate
    
    
    1,809
    
    
    
    
    
    
    
    1,809
    
    
    
    Total expenses
    
    
    3,041
    
    
    
    3,106
    
    
    
    8,455
    
    
    
    9,286Operating (loss) earnings
    
    
    (1,950
    )
    
    
    174
    
    
    
    (1,418
    )
    
    
    714Interest expense
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (25
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 9
    )(Loss) earnings before income taxes
    
    
    (1,950
    )
    
    
    172
    
    
    
    (1,418
    )
    
    
    680Income taxes
    
    
    371
    
    
    
    
    
    
    
    291
    
    
    
    Operations of hotels disposed of, transferred and
held for sale, net of income taxes
    
    $
    (1,579
    )
    
    $
    172
    
    
    $
    (1,127
    )
    
    $
    680
 In addition to the operations of the hotels presented in the preceding table,
in the first three quarters of 2004 and 2003 the Company incurred pretax losses
on the disposal and transfer of hotels included in discontinued operations in
the amounts of $2.2 million and $1.8 million, respectively. The loss in the
first three quarters of 2004 included a loss of $3.7 million on the sale of one
hotel in the third quarter and a gain of $1.7 million on a hotel sold in the
second quarter. The loss in the first three quarters of 2003 included a loss
of $2.2 million on the sale of three hotels during 2003 which have been
re-classified to discontinued operations, and a gain of $342,000 on another
hotel sold in the second quarter of 2003. The assets of the five properties transferred in the fourth quarter of 2002 and
presented in the accompanying consolidated balance sheets as assets of hotels
transferred under




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contractual agreements (notes receivable) are as follows at October 3, 2004
(one property) and December 28, 2003 (two properties) (amounts in thousands): October 3,
    
    December 28,2004
    
    2003AssetsOther current assets
    
    $
    7
    
    
    $
    16Property and equipment, net
    
    
    1,982
    
    
    
    4,307Other assets
    
    
    11
    
    
    
    29Total assets
    
    $
    2,000
    
    
    $
    4,352
 The assets and liabilities of the properties held for sale presented in the
accompanying consolidated balance sheets are as follows (amounts in
thousands): October 3,
    
    December 28,2004
    
    2003AssetsOther current assets
    
    $
    10
    
    
    $
    37Property and equipment, net
    
    
    4,719
    
    
    
    31,966Other assets
    
    
    26
    
    
    
    144Total assets
    
    $
    4,755
    
    
    $
    32,147
 The property held for sale on October 3, 2004, was sold for approximately $4.8
million subsequent to October 3, 2004. An impairment of approximately $1.8
million was recognized and recorded in the third quarter based upon the sales
contract. EARNINGS (LOSS) PER SHARE Earnings (loss) per share was computed by dividing net earnings (loss) by the
weighted average number of common shares outstanding. The following table
reconciles earnings (loss) and weighted average shares used in the earnings
(loss) per share calculations for the fiscal quarters and fiscal year-to-date
periods ended October 3, 2004, and October 5, 2003: 12 Weeks Ended
    
    40 Weeks EndedOctober 3,
    
    October 5,
    
    October 3,
    
    October 5,2004
    
    2003
    
    2004
    
    2003Basic:(Loss) earnings from continuing operations
    
    $
    (1,276,474
    )
    
    $
    4,245
    
    
    $
    (4,489,845
    )
    
    $
    527,825Earnings (loss) from discontinued operations
    
    
    (4,657,948
    )
    
    
    (290,445
    )
    
    
    (2,838,667
    )
    
    
    (1,161,907
    )Net loss applicable to common stock
    
    $
    (5,934,422
    )
    
    $
    (286,200
    )
    
    $
    (7,328,512
    )
    
    $
    (634,082
    )Shares:Weighted average common shares outstanding
    
    
    5,006,611
    
    
    
    5,118,778
    
    
    
    5,006,278
    
    
    
    5,118,778Basic (loss) earnings per share:Continuing operations
    
    $
    (0.25
    )
    
    $
    0.00
    
    
    $
    (0.90
    )
    
    $
    0.10Discontinued operations
    
    
    (0.94
    )
    
    
    (0.06
    )
    
    
    (0.56
    )
    
    
    (0.22
    )Net loss
    
    $
    (1.19
    )
    
    $
    (0.06
    )
    
    $
    (1.46
    )
    
    $
    (0.12
    )




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##### Table of Contents



12 Weeks Ended
    
    40 Weeks EndedOctober 3,
    
    October 5,
    
    October 3,
    
    October 5,2004
    
    2003
    
    2004
    
    2003Diluted:(Loss) earnings from continuing operations
    
    $
    (1,276,474
    )
    
    $
    4,245
    
    
    $
    (4,489,845
    )
    
    $
    527,825Earnings (loss) from discontinued operations
    
    
    (4,657,948
    )
    
    
    (290,445
    )
    
    
    (2,838,667
    )
    
    
    (1,161,907
    )Net loss applicable to common stock
    
    
    (5,934,422
    )
    
    
    (286,200
    )
    
    
    (7,328,512
    )
    
    
    (634,082
    )Dilutive effect of 7.5% convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Numerator for diluted loss per share
    
    $
    (5,934,422
    )
    
    $
    (286,200
    )
    
    $
    (7,328,512
    )
    
    $
    (634,082
    )Shares:Weighted average common shares outstanding
    
    
    5,006,611
    
    
    
    5,038,099
    
    
    
    5,006,278
    
    
    
    5,094,574Effect of dilutive securities (options)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of dilutive securities (7.5% convertible debentures)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common and common equivalent
shares outstanding
    
    
    5,006,611
    
    
    
    5,038,099
    
    
    
    5,006,278
    
    
    
    5,094,574Diluted (loss) earnings per share:Continuing operations
    
    $
    (0.25
    )
    
    $
    0.00
    
    
    $
    (0.90
    )
    
    $
    0.10Discontinued operations
    
    
    (0.94
    )
    
    
    (0.06
    )
    
    
    (0.56
    )
    
    
    (0.22
    )Net loss
    
    $
    (1.19
    )
    
    $
    (0.06
    )
    
    $
    (1.46
    )
    
    $
    (0.12
    )
 OPERATING SEGMENT INFORMATION The Companys significant operating segments are franchising, management and
reservation services, and construction and development. None of the Companys
segments conduct foreign operations. Operating earnings (loss) includes the
operating revenues and expenses directly identifiable with the operating
segment. Identifiable assets are those used directly in the operations of each
segment. A summary of the Companys operations by segment follows (in
thousands of dollars): 12 Weeks Ended
    
    40 Weeks EndedOctober 3,
    
    October 5,
    
    October 3,
    
    October 5,2004
    
    2003
    
    2004
    
    2003Revenues:Franchising, reservation and management services
    
    $
    2,524
    
    
    $
    2,406
    
    
    $
    7,235
    
    
    $
    7,133Construction and development
    
    
    4,385
    
    
    
    7,984
    
    
    
    18,569
    
    
    
    16,474Elimination of intersegment revenue
    
    
    (212
    )
    
    
    (303
    )
    
    
    (929
    )
    
    
    (1,127
    )Total revenues
    
    $
    6,697
    
    
    $
    10,087
    
    
    $
    24,875
    
    
    $
    22,480Operating (loss) earnings:Franchising, reservation and management services
    
    $
    (580
    )
    
    $
    (1,532
    )
    
    $
    (3,512
    )
    
    $
    (4,287
    )Construction and development
    
    
    557
    
    
    
    2,179
    
    
    
    2,191
    
    
    
    1,380Total operating (loss) earnings
    
    $
    (23
    )
    
    $
    647
    
    
    $
    (1,321
    )
    
    $
    (2,907
    )Capital expenditures:Franchising, reservation and management services
    
    $
    68
    
    
    $
    58
    
    
    $
    273
    
    
    $
    747Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total capital expenditures
    
    $
    68
    
    
    $
    58
    
    
    $
    273
    
    
    $
    747Depreciation and amortization:Franchising, reservation and management services
    
    $
    219
    
    
    $
    238
    
    
    $
    746
    
    
    $
    788Construction and development
    
    
    7
    
    
    
    10
    
    
    
    22
    
    
    
    32Total depreciation and amortization
    
    $
    226
    
    
    $
    248
    
    
    $
    768
    
    
    $
    820
 As of
    
    As ofOctober 3,
    
    December 28,2004
    
    2003Total assets:Hotel
    
    $
    11,844
    
    
    $
    45,572Franchising, reservation and management services
    
    
    53,395
    
    
    
    52,522Construction and development
    
    
    34,200
    
    
    
    23,926Total assets
    
    $
    99,439
    
    
    $
    122,020




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CONTINGENCIES The Company is a party to legal proceedings incidental to its business. In the
opinion of management, any ultimate liability with respect to these actions
will not materially affect the consolidated financial position or results of
operations of the Company. The Companys outstanding Series A and Series A-1 Senior Subordinated Notes in
the face amount of $22.2 million mature in November of 2006 and its Series B
and Series B-1 Senior Subordinated Notes in the face amount of $16.4 million
mature in September of 2007. The trust indenture applicable to the Series A, Series A-1, Series B and Series
B-1 senior subordinated notes contains a financial covenant requiring a minimum
consolidated net worth of $60.0 million. As of October 3, 2004, 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. Because of the covenant violation at October 3, 2004,
the Company has classified all of the Series A, Series A-1, Series B and Series
B-1 senior subordinated notes as a current liability. Additionally, due to
cross-default provisions in the Companys loan secured by the Companys
aircraft, these debt instruments have also been classified as current
liabilities as of October 3, 2004. The total amount of debt classified as current liabilities due to the
circumstances discussed above was $42.0 million as of October 3, 2004. As of
November 16, 2004, the Company had approximately $30.0 million in cash and is
currently expecting to collect cash proceeds of approximately $18.0 million
within the next 60 days from the collection of accounts receivable, the sale of
properties, and refunds of previously paid income taxes. The Company expects
to either cure any default declared by the senior subordinated note holders
within the 60 day cure period or expects that it will have sufficient cash
available from the above-listed sources and cash from other sources to pay its
debt in full prior to the declaration of any default or within the cure period. STOCK BASED COMPENSATION The Company uses the intrinsic value method for valuing its awards of stock
options and recording the related compensation expense, if any. This
compensation expense is included in general and administrative expense. The
Company has adopted the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. The Companys pro forma
net earnings (loss) would not be materially different than reported net
earnings (loss) in the first three quarters of 2004 or 2003 under the fair
value method. RELATED PARTY TRANSACTIONS The chairman and chief executive officer is personally involved in various real
estate development activities. The Companys wholly-owned construction and
development




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##### Table of Contents



subsidiary has from time to time provided services in connection
with these activities.
Revenues earned by the Company from these projects were $3,970,494 and
$17,576,580 in the third quarter and first three quarters of 2004,
respectively, and $7,309,758 and $14,660,916 in the third quarter and first
three quarters of 2003, respectively. Construction contracts due from related
parties were $32,501,349 and $22,668,784 at October 3, 2004 and December 28,
2003, respectively. Subsequent to October 3, 2004, the Company collected
$13,000,000 on the construction contracts due from related parties.




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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 Company develops, owns, operates and is the exclusive franchisor of
Shoneys Inns and GuestHouse Inns & Suites. In the second quarter of 2002, the
Company acquired the exclusive franchise rights of the GuestHouse Inns & Suites
hotel brand and announced its plan to convert the name of the Shoneys Inns and
Shoneys Inns & Suites hotel chain to GuestHouse International Inns & Suites as
soon as practical. As of October 3, 2004, the Shoneys Inn/GuestHouse lodging
system consisted of 80 properties containing 5,814 rooms of which none are
owned by the Company. Shoneys Inns and GuestHouse Inns & Suites are currently
located in 21 states. The Companys remaining owned hotel property is held for sale at October
3, 2004. The Companys present strategy does not include the ownership of
additional hotel properties. The Company also franchises and manages Shoneys Inns and GuestHouse Inns
& Suites, earning revenues from royalties, reservation services, and management
services provided to the franchisees, and reservation services provided to
other hotel chains and independent hotel operators. The Company also leases
hotels and restaurants to others, earning rental income from these third party
lessees. No hotels have been leased to others since April of 2003. Shoneys Inns and GuestHouse Inns & Suites operate in the economy
limited-service segment and are designed to appeal to both business and leisure
travelers, with rooms usually priced between $45 and $85 per night. The
typical property includes 60 to 120 rooms and, in most cases, meeting rooms.
Although they do not offer full food service, most offer continental breakfast,
and most of the inns are located adjacent or in close proximity to
free-standing restaurants. Management believes that the location of the inns
in close proximity to free-standing restaurants gives it a competitive
advantage over many other limited-service lodging chains by offering guest
services approximating those of full-service facilities without the additional
capital expenditures, operating costs or higher room rates. A significant portion of the Companys operations have been generated in
recent years by contract revenues from construction and development of hotels
and other real estate projects for related parties and, to a lesser extent,
third parties. Revenues from these activities have varied widely from period to
period, depending upon whether the Companys construction and development
activities were primarily focused on its own facilities or on outside projects.
Construction revenues are generally recognized on the percentage of completion
basis, but construction and development for related parties are generally
performed on a cost-plus basis.




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As of October 3, 2004, the Company owned one hotel property held for sale.
This hotel is scheduled to be sold in the fourth fiscal quarter for
approximately $4.8 million, resulting in a pretax loss of approximately $1.8
million. The carrying value of this hotel property was written down for the
$1.8 million impairment in the third fiscal quarter. Additionally, the Company
sold a hotel in the third quarter at a pretax loss of $3.7 million. The
Company sold another hotel in the second quarter at a pretax gain of $1.7
million. 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 October 3, 2004 and October 5,
2003 are not necessarily indicative of the operating results for the entire
year. Results of Operations For the Fiscal Quarters and Fiscal Year-to-date Periods Ended October 3, 2004
and October 5, 2003 Total operating revenues for the quarter ended October 3, 2004, were $6.7
million, or 33.6% less than the total operating revenues of $10.1 million
reported for the third quarter of 2003. Total operating revenues for the
fiscal year-to-date period ended October 3, 2004, were $24.9 million, or 10.7%
more than the total operating revenues of $22.5 million reported for the first
three fiscal quarters of 2003. The decrease in the third quarter revenues was
due to a decrease in construction and development revenues. The net increases
for the first three quarters were due to increases in franchising and
reservation revenues and construction and development revenues, partially
offset by decreases in rent income. The revenue effects of the hotels transferred, sold and held for sale as
of October 3, 2004 are reflected in discontinued operations. Franchising, reservation and management service revenues increased by
$167,000, or 8.0%, in the third quarter of 2004 from the third quarter of 2003.
Initial and termination franchise fees decreased by $36,000, royalty fees
decreased by $130,000, and reservation fees increased by $333,000 from the
third quarter of last year. Franchising, reservation and management service
revenues increased by $290,000, or 4.8%, in the first three quarters of 2004
from the first three quarters of 2003. Initial and termination franchise fees
decreased by $224,000, royalty fees decreased by $296,000, reservation fees
increased by $818,000 from the first three quarters of 2003. Initial franchise
and termination fee revenue varies from quarter to quarter depending on the
level of franchise sales activities and terminations. As of October 3, 2004, a
total of 972 lodging facilities were served by the Companys reservation center
as compared with 924 lodging facilities at October 5, 2003. The likely
acquisition of one of the reservation centers major clients by another hotel
company later this year, if successful, would likely remove that chains




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##### Table of Contents



reservation business from the Companys client base by the spring or summer of
2005; as
of October 3, 2004, there were 187 lodging facilities served by the Companys
reservation center that were controlled by this client. This could have a
significant negative impact on the Companys reservation service revenues
unless this business is replaced with other lodging facilities being added
prior to that time. Management fees decreased by $8,000 from the first three
quarters of 2003. Revenues from construction and development activities were $4.3 million in
the third quarter of 2004 and $18.4 million in the first three quarters of
2004, versus $7.9 million in the third quarter of 2003 and $16.3 million in the
first three quarters of 2003. These revenues include $4.0 million and $17.6
million in the third quarter of 2004 and in the first three quarters of 2004,
respectively; and $7.3 million and $14.7 million in the third quarter of 2003
and in the first three quarters of 2003, respectively, 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 three quarters of both
2004 and 2003. Rent income in the third quarter of 2004 decreased by $17,000, to $10,000,
from $27,000, in the third quarter of 2003, and in the first three quarters of
2004 decreased by $60,000, to $30,000, from $90,000, in the first three
quarters of 2003. The primary source of rent income was from the lease of three
AmeriSuites hotels which were being operated by Prime Hospitality Corp. until
April of 2003 when Prime abandoned the lease, at which time the Company took
back the operations of these three properties. Two of these three AmeriSuites
hotels were sold in the third fiscal quarter and the third one was held for
sale at the end of the third quarter; rent associated with these three hotels
is included in discontinued operations. The decrease in the first three
quarters rent income was due to the sale of some restaurants to the lessees in
2003. Franchising, reservation and management service operating expenses
increased by $155,000, or 10.3%, from the third quarter of 2003 to the third
quarter of 2004, and by $321,000, or 6.9%, from the first three quarters of
2003 to the first three quarters of 2004. The increases were primarily in
reservation center expenses incurred in order to support the additional
revenues earned from services provided to additional chains and independent
hotel properties since the third quarter of 2003, and to expenses related to
the franchising of GuestHouse Inns & Suites. Construction and development costs in the third quarter of 2004 and 2003
were $3.8 million and $5.7 million, respectively, on construction contracts in
progress during those quarters. Construction and development costs in the
first three quarters of 2004 and 2003 were $15.7 million and $14.8 million,
respectively, on construction contracts in progress during those quarters.




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##### Table of Contents



The Company leased only one hotel property. The lease was terminated in
the third quarter of 2004, and the rent expense for all periods reported is
included in discontinued operations. General and administrative expenses decreased by $162,000, or 15.5%, from
the third quarter of 2003; and for the first three quarters of 2004 decreased
by $4,000, or 0.1%, from the first three quarters of 2003. The decreases were
due primarily to decreases in legal and professional fees and insurance
expense, partially offset by increases in compensation expense. The increase
in compensation expense was due primarily to the reversal of $607,000 of
accrued bonuses in the second quarter of 2003. Depreciation and amortization expense decreased by $22,000, or 8.7%, from
the third quarter of 2003, and for the first three quarters decreased by
$52,000, or 6.3%, from the first three quarters of 2003. In the first three quarters of 2004, the Company wrote off $76,000 of
accounts receivable deemed to be of doubtful collectibility and wrote down a
first mortgage note receivable by $151,000 due to the sale on April 21, 2004,
of the underlying property at less than the carrying value of the note
receivable. In the first three quarters of 2003, the Company wrote off $6,000
of pre-development costs, $21,000 of construction contracts receivable,
$192,000 of accounts receivable deemed to be of doubtful collectibility, and
wrote down $867,000 of notes receivable deemed uncollectible. In the second quarter of 2004, the Company contracted to sell a parcel of
undeveloped land which it owned at a net sales price of $308,000 less than its
carrying value. The sale transaction occurred in the third quarter of 2004 at
the contracted price. Consequently, the Company reported an impairment loss of
$308,000 in the second quarter. In the third quarter of 2004, the Company
contracted to sell two parcels of undeveloped land which it owned at a net
sales price of $208,000 less than their carrying values. The sale transactions
closed or are scheduled to close in the fourth quarter of 2004 at the
contracted prices. Consequently, the Company reported impairment losses of
$208,000 million in the third quarter. The loss on sale of property of $287,000 in the first three quarters of
2004 included a gain of $143,000 on the sale of excess land in the second
quarter, a loss of $437,000 on the sale of excess land in the third quarter,
and a gain of $7,000 on the sale of two restaurants which had been previously
deferred. The gain of $978,000 recognized on sale of property in the first
three quarters of 2003, of which $380,000 was earned in the third quarter, was
primarily from the sale of a restaurant to the lessee in the first quarter, the
sale of excess land in the third quarter, 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.




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Pursuant to a plan adopted in 1999 to repurchase a portion of the
Companys outstanding subordinated indebtedness in the open market and in
negotiated transactions, the Company repurchased $1.6 million of its 7.50%
subordinated debentures in the third quarter of 2003 at a discount, and also
repurchased $321,000 of its outstanding senior subordinated notes at a
discount, recognizing a gain of $472,000 on these transactions in the third
quarter of 2003. Also, in the third quarter of 2003 the Company redeemed all
of its $2.8 million outstanding industrial revenue bonds at face value,
recognizing a loss of $176,000 on the redemption in the third quarter of 2003
due to the write-off of the balance of deferred financing costs related to this
debt. The Company repurchased $5.7 million of its 7.50% subordinated
debentures in the first three quarters of 2003 at a discount, and also
repurchased $1.4 million of its outstanding senior subordinated notes at a
discount, recognizing a gain of $1.3 million on these transactions in the first
three quarters of 2003. See further discussion in Liquidity and Capital
Resources below. Interest expense decreased by $424,000, or 26.3%, while interest income
decreased by $225,000, or 75.8%, from the third quarter of 2003. For the first
three quarters of 2004, interest expense decreased by $2.1 million, or 32.9%,
while interest income decreased by $1.3 million, or 84.6%, from the first three
quarters of 2003. The decrease in interest expense was due primarily to the
termination of the Companys bank credit facilities in 2003 and the payoff of
other indebtedness in 2003, primarily from the proceeds of the sale of hotel
properties. Interest income decreased due to the elimination of first mortgage
notes receivable by taking the underlying hotel properties by deeds in lieu of
foreclosure and selling them for cash, and to the collection of two
seller-financed notes receivable which were refinanced by the borrowers in the
first quarter of 2003. The Company leased three hotels to Prime in July of 2000. In the first
quarter of 2003, Prime abandoned the lease of the three hotels and the Company
resumed operations of the hotels on April 5, 2003. Due to the terms of the
lease agreement, the Company had recorded a liability and a deferred credit in
July of 2000. Due to the lease abandonment 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 three quarters of 2003 is due to
the utilization of net operating loss carry-forwards that had previously been
fully reserved; however, the estimated income tax receivable was increased by
$890,000 by a reduction of the previously provided reserve in the second
quarter of 2003 based upon tax return work completed during the quarter,
resulting in an increase of $890,000 in the estimated refunds due. Discontinued operations resulted from 19 hotels sold, transferred, and/or
reclassified to hotels held for sale in 2002, 2003 and 2004. The effect of
these hotels operations, the gain or loss on the sale and transfer of the
hotels, and the impairment of the hotels classified as held for sale, have been
removed from operating earnings in




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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 $15.4 million
in the first three quarters of 2004, compared with $6.5 million used in
operating activities in the first three quarters of 2003. The Companys cash flows provided by investing activities were $31.5
million in the first three quarters of 2004, compared with $50.1 million for
the comparable period in 2003. The Companys capital expenditures are
principally for the purchase of equipment and leasehold improvements. Capital
expenditures for such purposes were $276,000 in the first three quarters of
2004 and $788,000 in the first three quarters of 2003. In the second quarter
of 2003, the Company purchased the first mortgage on a hotel for $6.9 million,
foreclosed on the mortgage, and acquired the hotel at the foreclosure sale for
the balance of the first mortgage with the intent to locate a buyer and resell
the hotel for cash. The hotel was sold in the second quarter of 2004 for $8.6
million net of selling expenses. An additional $13.5 million of net proceeds
were received in the first three quarters of 2004 from the sale of other hotels
classified as held for sale in 2003 and 2004. In the first three quarters of
2003, proceeds from the sale of hotels held for sale totaled $12.9 million.
Proceeds from the sale of property were $3.1 million in the first three
quarters of 2004 versus $11.0 million for the comparable period in 2003. The
Company received $7.1 million from the collection of notes receivable in the
first three quarters of 2004 and $34.4 million in the first three quarters of
2003. The Company invested $490,000 and $1.1 million in other assets in the
first three quarters of 2004 and 2003, respectively. Net cash used in financing activities was $11.5 million in the first three
quarters of 2004 compared with $33.0 million in the first three quarters of
2003. Repayments, net of borrowings, on long-term debt obligations were $11.2
million in the first three quarters of 2004 versus $33.1 million in the first
three quarters of 2003. The repayments in the first three quarters of 2004
include $10.8 million of the Companys outstanding 7.50% Convertible
Subordinated Debentures that matured on May 1, 2004. The repayments in the
first three quarters of 2003 include $6.9 million of long-term debt repurchased
in the open market or in privately negotiated transactions. Funds for the 2003
debt repayments were provided by the proceeds from the sale of property and the
collection of notes receivable as discussed above. The Company established a three-year credit facility with a financial
institution effective August 27, 1999. An amendment to the credit facility
became effective October 3, 2001, which, among other changes, extended the
maturity to September 30, 2004. A second amendment to the credit facility
became effective November 26, 2002, which, among other changes, added real
property collateral for the purpose of increasing the borrowing base. The
credit facility was for $30 million (a $10 million term loan and a $20 million
revolving line of credit), secured by a pledge of certain promissory notes




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payable
to the Company received in connection with the sale of 16 of the Companys
lodging facilities in the third quarter of 1998 and real property collateral
(one hotel) added in 2002 by the second amendment. The borrowing base was the
lower of (a) 85% of the outstanding principal amount of the pledged notes, (b)
65% of the appraised market value of the underlying real property collateral
securing the pledged notes and of the real property collateral, (c) a multiple
of the trailing twelve months net operating income of the real property
collateral and of the underlying properties securing the pledged notes serving
as collateral, or (d) $30 million. Effective October 3, 2001, the interest
rate on the term loan was at the lenders base rate plus 100 basis points, and
the interest rate on the revolving line of credit was at the lenders base rate
plus 250 points, with a floor of 7.00% on both portions of the facility. The
Company was to pay commitment fees on the unused portion of the facility at
..50% per annum. The credit facility also contained covenants which limited or
prohibited the incurring of certain additional indebtedness in excess of a
specified debt to total capital ratio, prohibited additional liens on the
collateral, restricted mergers and the payment of dividends and restricted the
Companys ability to place liens on unencumbered assets. The credit facility
contained financial covenants as to the Companys minimum net worth. In the
fourth quarter of 2003, the Company decided that the credit facility no longer
served the Companys needs, terminated the facility, and has received all of
its collateral back from the financial institution. On January 6, 2004, the
Company filed a complaint against the financial institution for its breach of
the loan agreement, claiming damages to the Company in excess of $25 million. The Company also maintained a $1.0 million unsecured line of credit with
another bank, bearing interest at the lenders prime rate, maturing May 31,
2003. This line of credit was paid off in the first quarter of 2003 and was not
renewed. The Company also has a loan secured by its corporate aircraft with a
balance of $4.8 million as of October 3, 2004. This loan currently bears
interest at 8.19% per annum and is amortized to its maturity of December 29,
2010. The interest rate was fixed for the first five years ending January 1,
2006, and is adjustable to a new rate for the second five years of the 10-year
term equal to 325 basis points over 5-year Treasury rates. The Companys outstanding 7.50% Convertible Subordinated Debentures in the
face amount of $10.8 million matured on May 1, 2004, and were paid on May 3,
2004. Its outstanding Series A and Series A-1 Senior Subordinated Notes in the
face amount of $22.2 million mature in November of 2006 and its Series B and
Series B-1 Senior Subordinated Notes in the face amount of $16.4 million mature
in September of 2007. The trust indenture applicable to the Series A, Series A-1, Series B and
Series B-1 senior subordinated notes contains a financial covenant requiring a
minimum consolidated net worth of $60.0 million. As of October 3, 2004, 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,




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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. Because of the covenant violation at October 3, 2004, the
Company has classified all of the Series A, Series A-1, Series B and Series B-1
senior subordinated notes as a current liability. Additionally, due to
cross-default provisions in the Companys loan secured by the Companys
aircraft, this debt has also been classified as a current liability as of
October 3, 2004. The total amount of debt classified as current liabilities due to the
circumstances discussed above was $42.0 million as of October 3, 2004. As of
November 16, 2004, the Company had approximately $30.0 million in cash and is
currently expecting to collect cash proceeds of approximately $18.0 million
within the next 60 days from the collection of accounts receivable, the sale of
properties and refunds of previously paid income taxes. The Company expects to
either cure any default declared by the senior subordinated note holders within
the 60 day cure period or expects that it will have sufficient cash available
from the above-listed sources and cash from other sources to pay its debt in
full prior to the declaration of any default or within the cure period. 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 third fiscal quarter of 2004, approximately
3.7 million shares had been repurchased at a cost of $20.9 million. The Company is investigating various alternatives to maximize shareholder
value. These alternatives could include, without limitation, the franchising
and operation of additional GuestHouse Inns & Suites, a sale of the remaining
Company-owned hotels, negotiating new credit arrangements, developing hotels
for other owners, the repurchase of additional shares of the Companys common
stock or outstanding debt securities, or any combination of these or other
strategies. The Company believes that a combination of existing cash, proceeds
from the sale of properties, the collection of notes receivable, and net cash
provided by operations, will be sufficient to fund its capital expenditures,
stock repurchase plan, debt repayments and operations for at least the next
twelve months. Market Risk There have been no material changes in the Companys exposure to market
risk in the third fiscal quarter ended October 3, 2004.




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Forward-looking Statement Disclaimer The statements appearing in this report which are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements, including delays in concluding or the inability to conclude
transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, changes in applicable laws and regulation,
in margins, demand fluctuations, access to debt or equity financing, adverse
uninsured determinations in existing or future litigation or regulatory
proceedings and other risks. 
 PART I 
 Item 4. Controls and Procedures  (a)
    
    As of October 3, 2004, we carried out an evaluation, under
the supervision and with the participation of our management,
including our principal executive officer and our principal
financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934).
Based upon that evaluation, our management, including our principal
executive officer and our principal financial officer, concluded
that the design and operation of these disclosure controls and
procedures were effective as of October 3, 2004, 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 were no material changes in our internal controls or in
other factors that could significantly affect internal controls
during the third quarter of 2004.




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PART II - OTHER INFORMATION 
  Item 1.
    No material developments occurred during the third quarter ended
October 3, 2004 with respect to any pending litigation. 
  Item 6.
    Exhibits and Reports on Form 8-K  6(a) Exhibits -  Exhibit 31.1 - Certifications required by Section 302 of
the Sarbanes-Oxley Act of 2002.  Exhibit 32.1  Certifications required by Section 906 of
the Sarbanes-Oxley Act of 2002.  6(b) Reports on Form 8-K A Form 8-K was filed on August 25, 2004 containing a copy
of the Companys press release announcing the financial
results for the second fiscal quarter ended July 11, 2004. 
 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: November 15, 2004
    
    S/ Leon MooreLeon MooreChief Executive Officer,Principal Executive Officer,DirectorDate: November 15, 2004
    
    S/ Bob MarloweBob MarloweSecretary, Treasurer, Chief AccountingOfficer, Principal Accounting Officer,Chief Financial Officer, Director