##### 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  Commission File No. 0-19840 SHOLODGE, INC.  Tennessee
(State or other jurisdiction
of incorporation or organization)
    
    62-1015641
(I.R.S. Employer
Identification Number)130 Maple Drive North, Hendersonville, Tennessee
(address of principal executive offices)
    
    37075
(Zip Code)Registrants telephone number, including area code
    
    (615) 264-8000
   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). 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 August 20, 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 Earnings (unaudited)Consolidated Statements of Cash Flows (unaudited)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSPART IItem 4. Controls and ProceduresPART II - OTHER INFORMATIONItem 1. No material developments occurred during the second quarter ended July 11, 2004 with respect to any pending litigationItem 4. Submission of Matters to a vote of Security HoldersItem 6. Exhibits and Reports on Form 8-KSIGNATURESEX-31.1  SECTION 302 CERTIFICATIONSEX-32.1  SECTION 906 CERTIFICATIONS    Table of Contents  ShoLodge, Inc. and Subsidiaries 
 Consolidated Balance Sheets
 July 11,2004
    
    December 28,(unaudited)
    
    2003(1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,246,292
    
    
    $
    12,491,736Accounts receivable:Accounts receivable-trade, net
    
    
    2,057,367
    
    
    
    2,188,312Construction contracts
    
    
    916,059
    
    
    
    837,714Construction contracts due from related parties
    
    
    31,335,018
    
    
    
    22,668,784Costs and estimated earnings in excess of
billings on construction contracts
    
    
    
    
    
    
    39,832Income taxes receivable
    
    
    3,210,101
    
    
    
    3,908,041Prepaid expenses
    
    
    514,473
    
    
    
    314,967Notes receivable, net
    
    
    3,416,974
    
    
    
    6,641,598Assets of hotels transferred under contractual
agreements (notes receivable)
    
    
    2,000,000
    
    
    
    4,352,000Assets of hotels held for sale
    
    
    9,160,543
    
    
    
    16,139,477Other current assets
    
    
    42,665
    
    
    
    45,352Total current assets
    
    
    56,899,492
    
    
    
    69,627,813Notes receivable, net
    
    
    3,090,559
    
    
    
    4,702,058Property and equipment
    
    
    39,991,473
    
    
    
    40,369,304Less accumulated depreciation and amortization
    
    
    (7,347,575
    )
    
    
    (6,922,065
    )32,643,898
    
    
    
    33,447,239Land under development or held for sale
    
    
    10,253,846
    
    
    
    10,644,991Deferred charges, net
    
    
    362,410
    
    
    
    437,353Goodwill, net
    
    
    765,711
    
    
    
    765,711Trademark and franchise rights, net
    
    
    340,974
    
    
    
    473,366Other assets
    
    
    2,409,018
    
    
    
    1,921,596$
    106,765,908
    
    
    $
    122,020,127
  (1)
    
    Derived from fiscal year ended December 28, 2003 audited financial statements.See accompanying notes.




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets (continued) July 11,2004
    
    December 28,(unaudited)
    
    2003(1)Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    2,969,734
    
    
    $
    5,450,275Taxes payable other than on income
    
    
    429,526
    
    
    
    344,179Current portion of long-term debt
    
    
    600,839
    
    
    
    11,344,902Total current liabilities
    
    
    4,000,099
    
    
    
    17,139,356Long-term debt, less current portion
    
    
    41,370,190
    
    

    
    41,373,383Deferred income taxes
    
    
    14,107
    
    
    
    783,485Deferred credits
    
    
    148,124
    
    
    
    153,106Minority interests in equity of consolidated subsidiaries and
partnerships
    
    
    395,381
    
    
    
    388,699Commitments and contingenciesTotal liabilities
    
    
    45,927,901
    
    
    
    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 July 11, 2004
and December 28, 2003, respectively)
    
    
    1,000
    
    
    
    1,000Additional paid-in capital
    
    
    23,177,820
    
    
    
    23,127,821Retained earnings
    
    
    37,659,187
    
    
    
    39,053,277Total shareholders equity
    
    
    60,838,007
    
    
    
    62,182,098$
    106,765,908
    
    
    $
    122,020,127
  (1)
    
    Derived from fiscal year ended December 28, 2003 audited financial statements.See accompanying notes.




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##### Table of Contents



ShoLodge, Inc. and Subsidiaries 
 Consolidated Statements of Earnings (unaudited)
 12 weeks ended
    
    28 weeks endedJuly 11,
    
    July 13,
    
    July 11,
    
    July 13,2004
    
    2003
    
    2004
    
    2003Revenues:Hotel
    
    $
    1,214,491
    
    
    $
    1,020,461
    
    
    $
    2,570,541
    
    
    $
    1,807,118Franchising, reservation and management
    
    
    1,840,137
    
    
    
    1,815,160
    
    
    
    4,017,992
    
    
    
    3,895,461Construction and development-related parties
    
    
    5,864,555
    
    
    
    4,406,535
    
    
    
    13,606,086
    
    
    
    7,351,158Construction and development-other
    
    
    254,776
    
    
    
    985,533
    
    
    
    399,932
    
    
    
    994,684Rent income
    
    
    10,895
    
    
    
    28,190
    
    
    
    20,623
    
    
    
    355,368Other income
    
    
    69,866
    
    
    
    70,744
    
    
    
    133,347
    
    
    
    88,000Total revenues
    
    
    9,254,720
    
    
    
    8,326,623
    
    
    
    20,748,521
    
    
    
    14,491,789Cost and expenses:Hotel
    
    
    928,407
    
    
    
    817,457
    
    
    
    1,948,512
    
    
    
    1,382,821Franchising, reservation and management
    
    
    1,609,664
    
    
    
    1,483,543
    
    
    
    3,327,694
    
    
    
    3,161,161Construction and development
    
    
    5,298,666
    
    
    
    5,684,470
    
    
    
    11,946,290
    
    
    
    9,101,668Rent expense, net
    
    
    140,300
    
    
    
    136,593
    
    
    
    278,923
    
    
    
    281,244General and administrative
    
    
    1,653,347
    
    
    
    895,762
    
    
    
    3,081,229
    
    
    
    2,923,734Depreciation and amortization
    
    
    376,646
    
    
    
    397,524
    
    
    
    889,048
    
    
    
    933,445Write-off of pre-development costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,993Write-off of construction contracts receivable
    
    
    
    
    
    
    4,992
    
    
    
    
    
    
    
    21,475Write-off of trade receivables
    
    
    35,442
    
    
    
    162,311
    
    
    
    119,183
    
    
    
    175,647Write-down (recovery) of notes receivable
    
    
    2,276
    
    
    
    (14,025
    )
    
    
    150,690
    
    
    
    (14,025
    )Impairment of real estate
    
    
    308,313
    
    
    
    
    
    
    
    308,313
    
    
    
    Total cost and expenses
    
    
    10,353,061
    
    
    
    9,568,627
    
    
    
    22,049,882
    
    
    
    17,973,163Operating loss
    
    
    (1,098,341
    )
    
    
    (1,242,004
    )
    
    
    (1,301,361
    )
    
    
    (3,481,374
    )Gain on sale of property and leasehold interests
    
    
    144,848
    
    
    
    2,402
    
    
    
    147,774
    
    
    
    597,379Gain on early extinguishments of debt
    
    
    
    
    
    
    533,101
    
    
    
    
    
    
    
    816,420Interest expense
    
    
    (1,275,224
    )
    
    
    (1,859,461
    )
    
    
    (3,083,631
    )
    
    
    (4,749,155
    )Interest income
    
    
    114,376
    
    
    
    351,841
    
    
    
    172,250
    
    
    
    1,291,608Lease abandonment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,329,504Loss from continuing operations before income taxes and
minority interests
    
    
    (2,114,341
    )
    
    
    (2,214,121
    )
    
    
    (4,064,968
    )
    
    
    (195,618
    )Income tax benefit
    
    
    848,928
    
    
    
    890,000
    
    
    
    1,510,635
    
    
    
    890,000Minority interests in earnings of consolidated
subsidiaries and partnerships
    
    
    (3,821
    )
    
    
    (85,703
    )
    
    
    (6,682
    )
    
    
    (97,679
    )(Loss) earnings from continuing operations
    
    
    (1,269,234
    )
    
    
    (1,409,824
    )
    
    
    (2,561,015
    )
    
    
    596,703Discontinued operations:Operations of hotels disposed of and transferred, net of income
taxes
    
    
    87,316
    
    
    
    213,853
    
    
    
    304,159
    
    
    
    434,885Gain (loss) on disposal and transfer of discontinued operations,
net of income taxes of $789,061 and $0 for the 12 weeks and 28
weeks ended July 11, 2004 and July 13, 2003, respectively
    
    
    862,766
    
    
    
    389,090
    
    
    
    862,766
    
    
    
    (1,379,469
    )Net loss
    
    $
    (319,152
    )
    
    $
    (806,881
    )
    
    $
    (1,394,090
    )
    
    $
    (347,881
    )Net (loss) earnings per common share:Basic:Continuing operations
    
    $
    (0.25
    )
    
    $
    (0.28
    )
    
    $
    (0.51
    )
    
    $
    0.12Discontinued operations:Operations of hotels disposed of and transferred
    
    
    0.02
    
    
    
    0.04
    
    
    
    0.06
    
    
    
    0.08Gain
(loss) on disposal and transfer of discontinued operations
    
    
    0.17
    
    
    
    0.08
    
    
    
    0.17
    
    
    
    (0.27
    )Net loss
    
    $
    (0.06
    )
    
    $
    (0.16
    )
    
    $
    (0.28
    )
    
    $
    (0.07
    )Diluted:Continuing operations
    
    $
    (0.25
    )
    
    $
    (0.28
    )
    
    $
    (0.51
    )
    
    $
    0.12Discontinued operations:Operations of hotels disposed of and transferred
    
    
    0.02
    
    
    
    0.04
    
    
    
    0.06
    
    
    
    0.08Gain
(loss) on disposal and transfer of discontinued operations
    
    
    0.17
    
    
    
    0.08
    
    
    
    0.17
    
    
    
    (0.27
    )Net loss
    
    $
    (0.06
    )
    
    $
    (0.16
    )
    
    $
    (0.28
    )
    
    $
    (0.07
    )Weighted average common shares outstanding:Basic
    
    
    5,006,611
    
    
    
    5,118,778
    
    
    
    5,006,135
    
    
    
    5,118,778Diluted
    
    
    5,006,611
    
    
    
    5,118,778
    
    
    
    5,006,135
    
    
    
    5,118,778
 See accompanying notes.




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ShoLodge, Inc. and Subsidiaries 
 Consolidated
Statements of Cash Flows (unaudited)
 28 weeks endedJuly 11,
    
    July 13,2004
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (1,394,090
    )
    
    $
    (347,882
    )Adjustments to reconcile net loss
to net cash used in operating activities:Discontinued operations, net of tax
    
    
    (1,166,925
    )
    
    
    944,584Depreciation and amortization
    
    
    889,048
    
    
    
    933,445Write-off of pre-development costs
    
    
    
    
    
    
    5,993Write-off of construction contracts receivable
    
    
    
    
    
    
    21,475Write-off of
accounts receivable - trade
    
    
    119,183
    
    
    
    175,647Write-off (recovery) of notes receivable
    
    
    150,690
    
    
    
    (14,025
    )Impairment of real estate
    
    
    308,313
    
    
    
    Amortization of deferred charges recorded as interest expense
    
    
    74,943
    
    
    
    409,593Accretion of debt recorded as interest expense
    
    
    353,241
    
    
    
    353,241Recognition of previously deferred gains
    
    
    (4,982
    )
    
    
    (59,815
    )Gain on sale of property and leasehold interests
    
    
    (142,792
    )
    
    
    (597,379
    )Gain on early extinguishments of debt
    
    
    
    
    
    
    (816,420
    )Lease abandonment income
    
    
    
    
    
    
    (5,329,504
    )Deferred income tax benefit
    
    
    (1,510,635
    )
    
    
    Minority interest in earnings of consolidated subsidiaries
and partnerships
    
    
    6,682
    
    
    
    97,679Changes in current assets and liabilities:Accounts
receivable - trade
    
    
    11,762
    
    
    
    (922,092
    )Construction contracts receivable
    
    
    (78,345
    )
    
    
    (62,465
    )Construction contracts receivable due from related parties
    
    
    (8,666,234
    )
    
    
    (2,369,653
    )Costs and estimated earnings in excess of billings on
construction contracts
    
    
    39,832
    
    
    
    (671,849
    )Income and other taxes receivable and payable
    
    
    503,909
    
    
    
    739,290Prepaid expenses
    
    
    (199,506
    )
    
    
    (225,942
    )Accounts payable and accrued expenses
    
    
    (2,480,541
    )
    
    
    (2,338,732
    )Other
    
    
    682,519
    
    
    
    1,301,186Net cash used in operating activities
    
    
    (12,503,928
    )
    
    
    (8,773,625
    )Cash flow from investing activitiesPayments received on notes receivable
    
    
    7,037,433
    
    
    
    34,462,966Capital expenditures
    
    
    (208,262
    )
    
    
    (717,686
    )Purchase of assets of hotel held for sale
    
    
    
    
    
    
    (6,846,054
    )Proceeds from sale of assets of hotels held for sale
    
    
    8,608,910
    
    
    
    9,529,055Purchase of other assets
    
    
    (490,000
    )
    
    
    (1,050,000
    )Proceeds from sale of real estate and property
    
    
    360,901
    
    
    
    952,289Proceeds from lease abandonment
    
    
    
    
    
    
    415,668Proceeds from sale of assets of hotels
    
    
    
    
    
    
    6,517,798Acquisition
    
    
    
    
    
    
    (20,000
    )Net cash provided by investing activities
    
    
    15,308,982
    
    
    
    43,244,036Cash 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
    
    
    (11,100,497
    )
    
    
    (35,429,071
    )Exercise of stock options
    
    
    49,999
    
    
    
    Net cash used in financing activities
    
    
    (11,050,498
    )
    
    
    (28,240,290
    )Net (decrease) increase in cash and cash equivalents
    
    
    (8,245,444
    )
    
    
    6,230,121Cash and
cash equivalents - beginning of period
    
    
    12,491,736
    
    
    
    1,534,942Cash and
cash equivalents - end of period
    
    $
    4,246,292
    
    
    $
    7,765,063
 See accompanying notes.




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##### Table of Contents



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 July 11, 2004 and July 13, 2003
are not necessarily indicative of the operating results for the entire year. Certain reclassifications have been made in the first quarter 2003 consolidated
statement of earnings to conform to the classifications used in 2004. These
reclassifications had no impact on net 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 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




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##### Table of Contents



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 eleven properties sold or
classified as held for sale, from the hotel operations segment for the fiscal
quarters and fiscal year-to-date periods ended July 11, 2004 and July 13, 2003
(amounts in thousands): 12 Weeks Ended
    
    28 Weeks EndedJuly 11,
    
    July 13,
    
    July 11,
    
    July 13,2004
    
    2003
    
    2004
    
    2003Revenues:Hotel
    
    $
    1,394
    
    
    $
    2,143
    
    
    $
    3,376
    
    
    $
    4,130Rent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    490Total revenues
    
    
    1,394
    
    
    
    2,143
    
    
    
    3,376
    
    
    
    4,620Costs and expenses:Hotel
    
    
    1,187
    
    
    
    1,731
    
    
    
    2,840
    
    
    
    3,620General and Administrative
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    34Depreciation and amortization
    
    
    
    
    
    
    187
    
    
    
    
    
    
    
    499Total expenses
    
    
    1,187
    
    
    
    1,923
    
    
    
    2,840
    
    
    
    4,153Operating income
    
    
    207
    
    
    
    220
    
    
    
    536
    
    
    
    467Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )Interest income
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    ( 8
    )Earnings before income taxes
    
    
    207
    
    
    
    214
    
    
    
    536
    
    
    
    435Income taxes
    
    
    (120
    )
    
    
    
    
    
    
    (232
    )
    
    
    Operations of hotels disposed of, transferred and
held for sale, net of income taxes
    
    $
    87
    
    
    $
    214
    
    
    $
    304
    
    
    $
    435
 The assets of the five properties transferred in the fourth quarter of 2002 and
presented in the accompanying consolidated balance sheets as assets of hotels
transferred under contractual agreements (notes receivable) are as follows at
July 11, 2004 (one property) and December 28, 2003 (two properties) (amounts in
thousands): July 11,
    
    December 28,2004
    
    2003AssetsOther current assets
    
    $
    7
    
    
    $
    16Property and equipment, net
    
    
    1,982
    
    
    
    4,307Other assets
    
    
    11
    
    
    
    29Total assets
    
    $
    2,000
    
    
    $
    4,352




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##### Table of Contents



The assets and liabilities of the properties held for sale presented in the
accompanying consolidated balance sheets are as follows (amounts in
thousands): July 11,
    
    December 28,2004
    
    2003AssetsOther current assets
    
    $
    18
    
    
    $
    17Property and equipment, net
    
    
    9,101
    
    
    
    16,080Other assets
    
    
    42
    
    
    
    42Total assets
    
    $
    9,161
    
    
    $
    16,139
 The remaining two properties held for sale were sold for approximately $9.2
million subsequent to July 11, 2004, resulting in a pretax gain of
approximately $130,000 that will be recorded in the third quarter. 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 July 11, 2004, and July 13, 2003: 12 Weeks Ended
    
    28 Weeks EndedJuly 11,
    
    July 13,
    
    July 11,
    
    July 13,2004
    
    2003
    
    2004
    
    2003Basic:(Loss) earnings from continuing operations
    
    $
    (1,269,234
    )
    
    $
    (1,409,824
    )
    
    $
    (2,561,015
    )
    
    $
    596,703Earnings (loss) from discontinued operations
    
    
    950,082
    
    
    
    602,943
    
    
    
    1,166,925
    
    
    
    (944,584
    )Net loss applicable to common stock
    
    $
    ( 319,152
    )
    
    $
    (806,881
    )
    
    $
    (1,394,090
    )
    
    $
    (347,881
    )Shares:Weighted average common shares outstanding
    
    
    5,006,611
    
    
    
    5,118,778
    
    
    
    5,006,135
    
    
    
    5,118,778Basic (loss) earnings per share:Continuing operations
    
    $
    (0.25
    )
    
    $
    (0.28
    )
    
    $
    (0.51
    )
    
    $
    0.12Discontinued operations
    
    
    0.19
    
    
    
    0.12
    
    
    
    0.23
    
    
    
    (0.19
    )Net loss
    
    $
    (0.06
    )
    
    $
    (0.16
    )
    
    $
    (0.28
    )
    
    $
    (0.07
    )Diluted:(Loss) earnings from continuing operations
    
    $
    (1,269,234
    )
    
    $
    (1,409,824
    )
    
    $
    (2,561,015
    )
    
    $
    596,703Earnings (loss) from discontinued operations
    
    
    950,082
    
    
    
    602,943
    
    
    
    1,166,925
    
    
    
    (944,584
    )Net loss applicable to common stock
    
    
    ( 319,152
    )
    
    
    (806,881
    )
    
    
    (1,394,090
    )
    
    
    (347,881
    )Dilutive effect of 7.5% convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Numerator for diluted loss per share
    
    $
    (319,152
    )
    
    $
    (806,881
    )
    
    $
    (1,394,090
    )
    
    $
    (347,881
    )Shares:Weighted average common shares outstanding
    
    
    5,006,611
    
    
    
    5,118,778
    
    
    
    5,006,135
    
    
    
    5,118,778Effect of dilutive securities (options)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of dilutive securities (7.5% convertible debentures)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common and common equivalent
shares outstanding
    
    
    5,006,611
    
    
    
    5,118,778
    
    
    
    5,006,135
    
    
    
    5,118,778




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12 Weeks Ended
    
    28 Weeks EndedJuly 11,
    
    July 13,
    
    July 11,
    
    July 13,2004
    
    2003
    
    2004
    
    2003Diluted (loss) earnings per share:Continuing operations
    
    $
    (0.25
    )
    
    $
    (0.28
    )
    
    $
    (0.51
    )
    
    $
    0.12Discontinued operations
    
    
    0.19
    
    
    
    0.12
    
    
    
    0.23
    
    
    
    (0.19
    )Net loss
    
    $
    (0.06
    )
    
    $
    (0.16
    )
    
    $
    (0.28
    )
    
    $
    (0.07
    )
 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 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
    
    28 Weeks EndedJuly 11,
    
    July 13,
    
    July 11,
    
    July 13,2004
    
    2003
    
    2004
    
    2003Revenues:Hotel operations
    
    $
    1,412
    
    
    $
    1,180
    
    
    $
    2,973
    
    
    $
    2,531Franchising, reservation and management services
    
    
    1,970
    
    
    
    2,001
    
    
    
    4,309
    
    
    
    4,295Construction and development
    
    
    6,216
    
    
    
    5,420
    
    
    
    14,183
    
    
    
    8,490Elimination of intersegment revenue
    
    
    (343
    )
    
    
    (274
    )
    
    
    (716
    )
    
    
    (824
    )Total revenues
    
    $
    9,255
    
    
    $
    8,327
    
    
    $
    20,749
    
    
    $
    14,492Operating earnings (loss):Hotel operations
    
    $
    165
    
    
    $
    (620
    )
    
    $
    333
    
    
    $
    (220
    )Franchising, reservation and management services
    
    
    (1,770
    )
    
    
    (319
    )
    
    
    (3,268
    )
    
    
    (2,463
    )Construction and development
    
    
    507
    
    
    
    (303
    )
    
    
    1,634
    
    
    
    (798
    )Total operating loss
    
    $
    (1,098
    )
    
    $
    (1,242
    )
    
    $
    (1,301
    )
    
    $
    (3,481
    )Capital expenditures:Hotel operations
    
    $
    3
    
    
    $
    25
    
    
    $
    3
    
    
    $
    30Franchising, reservation and management services
    
    
    109
    
    
    
    528
    
    
    
    205
    
    
    
    688Construction and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total capital expenditures
    
    $
    112
    
    
    $
    553
    
    
    $
    208
    
    
    $
    718Depreciation and amortization:Hotel operations
    
    $
    145
    
    
    $
    163
    
    
    $
    347
    
    
    $
    361Franchising, reservation and management services
    
    
    225
    
    
    
    230
    
    
    
    526
    
    
    
    549Construction and development
    
    
    7
    
    
    
    5
    
    
    
    16
    
    
    
    23Total depreciation and amortization
    
    $
    377
    
    
    $
    398
    
    
    $
    889
    
    
    $
    933
 As of
    
    As ofJuly 11,
    
    December 28,2004
    
    2003Total assets:Hotel operations
    
    $
    33,953
    
    
    $
    45,572Franchising, reservation and management services
    
    
    40,691
    
    
    
    52,522Construction and development
    
    
    32,122
    
    
    
    23,926Total assets
    
    $
    106,766
    
    
    $
    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. 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 two 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 subsidiary has from time to time provided services in connection
with these activities. Revenues earned by the Company from these projects were
$5,864,555 and $13,606,086 in the second quarter and first two quarters of
2004, respectively, and $4,406,535 and $7,351,158 in the second quarter and
first two quarters of 2003, respectively. Construction contracts due from
related parties were $31,335,018 and $22,668,784 at July 11, 2004 and December
28, 2003, respectively.




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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 July 11, 2004, the Shoneys Inn/GuestHouse lodging
system consisted of 83 properties containing 6,314 rooms of which one
containing 98 rooms is owned by the Company. Shoneys Inns and GuestHouse Inns
& Suites are currently located in 21 states. As of July 11, 2004, the Company
also owned and operated two AmeriSuites hotels. Except for three owned hotel properties which the Company intends to
continue to operate at present, all of the Companys remaining owned hotel
properties are held for sale at July 11, 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




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percentage of completion basis, but construction and development for
related parties are generally performed on a cost-plus basis. As of July 11, 2004, the Company owned two hotel properties held for sale.
These two hotels were sold in the third fiscal quarter for approximately $9.2
million, resulting in a pretax gain of approximately $130,000 that will be
recorded in the third quarter. One hotel property previously held for sale was
sold in the second quarter of this year. The Company has historically reported lower earnings in the first and
fourth quarters of the year due to the seasonality of the Companys business.
The results of operations for the quarters ended July 11, 2004 and July 13,
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 July 11, 2004 and
July 13, 2003 Total operating revenues for the quarter ended July 11, 2004, were $9.3
million, or 11.1% more than the total operating revenues of $8.3 million
reported for the second quarter of 2003. Total operating revenues for the
fiscal year-to-date period ended July 11, 2004, were $20.7 million, or 43.2%
more than the total operating revenues of $14.5 million reported for the first
two fiscal quarters of 2003. The net increases were due to increases in hotel,
franchising and reservation revenues, and construction and development
revenues, partially offset by decreases in rent income. Revenues from hotel operations in the second fiscal quarter increased by
$194,000, or 19.0%, to $1.2 million from the $1.0 million reported for the same
period last year. For the three hotels opened for all of both quarterly
periods, an increase of 1.9% in average daily room rates, from $55.96 in the
second quarter of 2003 to $57.01 in the second quarter of 2004, and an increase
in average occupancy rates on these hotels from 60.1% to 70.3% this year, were
the primary causes of an increase in same hotel revenues of 19.0% from $1.0
million in the second quarter of 2003 to $1.2 million in the second quarter of
2004. The Company owned and operated a total of three hotels included in
continuing operations at the end of its second fiscal quarter of 2004 (one
GuestHouse Inns & Suites and two AmeriSuites hotels). RevPAR (revenue per
available room) for all three of these Company-owned hotels increased by 19.2%
from $33.61 in the second quarter of 2003 to $40.07 in the second quarter of
2004. Revenues from hotel operations in the first two fiscal quarters increased
by $763,000, or 29.7%, to $2.6 million from the $1.8 million reported for the
same period last year. For the two hotels opened for all of both year-to-date
periods, an increase of 4.2% in average daily room rates, from $56.68 in the
first two fiscal quarters of 2003 to $59.05 in the first two fiscal quarters of
2004, and an increase in average occupancy rates




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on these hotels from 52.8% to 58.9% this year, were the primary causes of
an increase in same hotel revenues of 15.7% from $1.3 million in the first two
fiscal quarters of 2003 to $1.5 million in the first two fiscal quarters of
2004. For the Companys three hotels included in continuing operations at the
end of its second fiscal quarter of 2004 (one GuestHouse Inns & Suites and two
AmeriSuites hotels), RevPAR increased by 16.5% from $31.20 in the first two
quarters of 2003 to $36.36 in the first two quarters of 2004. The revenue effects of the hotels transferred, sold and held for sale as
of July 11, 2004 are reflected in discontinued operations. Franchising, reservation and management service revenues increased by
$25,000, or 1.4%, in the second quarter of 2004 from the second quarter of
2003. Initial and termination franchise fees decreased by $114,000, royalty
fees decreased by $106,000, and reservation fees increased by $245,000 from the
second quarter of last year. Franchising, reservation and management service
revenues increased by $123,000, or 3.1%, in the first two quarters of 2004 from
the first two quarters of 2003. Initial and termination franchise fees
decreased by $188,000, royalty fees decreased by $166,000, and reservation fees
increased by $486,000 from the first two 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 July 11, 2004, a
total of 961 lodging facilities were served by the Companys reservation center
as compared with 819 lodging facilities at July 13, 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
reservation business from the Companys client base by the spring or summer of
2005; as of July 11, 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 $9,000 from the first
two quarters of 2003. Revenues from construction and development activities were $6.1 million in
the second quarter of 2004 and $14.0 million in the first two quarters of 2004,
versus $5.4 million in the second quarter of 2003 and $8.3 million in the first
two quarters of 2003. These revenues include $5.9 million and $13.6 million in
the second quarter of 2004 and in the first two quarters of 2004, respectively;
and $4.4 million and $7.4 million in the second quarter of 2003 and in the
first two 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 two quarters of both
2004 and 2003. Rent income in the second quarter of 2004 decreased by $17,000, to
$11,000, from $28,000, in the second quarter of 2003, and in the first two
quarters of 2004 decreased by $335,000, to $20,000, from $355,000, in the first
two quarters of 2003. The




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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 held for sale at the end of the second fiscal quarter and the rent
associated with these two hotels is included in discontinued operations. The
decrease in the first two quarters rent income was due to Primes abandonment
of the lease of the hotel included in continuing operations and the sale of
some restaurants to the lessees in 2003. Operating expenses from hotel operations of the three Company-owned hotels
included in continuing operations for the second quarter of 2004 increased by
$111,000, or 13.6%, from $817,000 in the second quarter of 2003. The operating
expenses as a percentage of operating revenues for this activity decreased from
80.1% in the second quarter of 2003 to 76.4% in the second quarter of 2004,
increasing gross operating profit margin from 19.9% in the second quarter of
2003 to 23.6% in the second quarter of 2004. Operating expenses from hotel
operations of the three Company-owned hotels included in continuing operations
for the first two quarters of 2004 increased by $566,000, or 40.9%, from $1.4
million in the first two quarters of 2003. The operating expenses as a
percentage of operating revenues for this activity decreased from 76.5% in the
first two quarters of 2003 to 75.8% in the first two quarters of 2004,
increasing gross operating profit margin from 23.5% in the first two quarters
of 2003 to 24.2% in the first two quarters of 2004. This was due primarily to
lower hotel operating expenses on the two AmeriSuites hotels as a percentage of
revenues than on the one GuestHouse hotel due to their higher revenue per
available room and their greater number of rooms per property, partially offset
by increased insurance and advertising and sales expenses as a percentage of
revenues in the first two quarters of 2004 over the first two quarters of 2003.
One of the AmeriSuites hotels was not included in hotel operations until
April of 2003. Franchising, reservation and management service operating expenses
increased by $126,000, or 8.5%, from the second quarter of 2003 to the second
quarter of 2004, and by $167,000, or 5.3%, from the first two quarters of 2003
to the first two 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 second quarter of 2003, and to expenses related to the franchising of
GuestHouse Inns & Suites. Construction and development costs in the second quarter of 2004 and 2003
were $5.3 million and $5.7 million, respectively, on construction contracts in
progress during those quarters. Construction and development costs in the
first two quarters of 2004 and 2003 were $11.9 million and $9.1 million,
respectively, on construction contracts in progress during those quarters. Rent expense increased by $4,000 in the second quarter of this year from
last years second quarter, and decreased by $2,000 in the first two quarters
of this year from last years first two quarters. The Company leased only one
hotel property in both years.




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General and administrative expenses increased by $758,000, or 84.6%, from
the second quarter of 2003; and for the first two quarters of 2004 increased by
$157,000, or 5.4%, from the first two quarters of 2003. The increases were due
primarily to increases in compensation expense, partially offset by decreases
in legal and professional fees. 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 $21,000, or 5.3%, from
the second quarter of 2003, and for the first two quarters decreased by
$44,000, or 4.8%, from the first two quarters of 2003. In the first two quarters of 2004, the Company wrote off $119,000 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 two quarters of 2003, the Company wrote off $6,000 of
pre-development costs, $21,000 of construction contracts receivable, and
$176,000 of accounts receivable deemed to be of doubtful collectibility, but
recovered $14,000 on notes receivable written down in the fourth quarter of
2002. 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. The gain on sale of property of $148,000 in the first two quarters of 2004
included a gain of $143,000 on the sale of excess land in the second quarter,
and $5,000 on the sale of two restaurants which had been previously deferred.
The gain of $597,000 recognized on sale of property in the first two quarters
of 2003, of which $2,000 was earned in the second quarter, 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 $3.4 million of its 7.50%
subordinated debentures in the second quarter of 2003 at a discount, and also
repurchased $200,000 of its outstanding senior subordinated notes at a
discount, recognizing a gain of $533,000 on these transactions in the second
quarter of 2003. The Company repurchased $4.1 million of its 7.50%
subordinated debentures in the first two quarters of 2003 at a discount, and
also repurchased $200,000 of its outstanding senior subordinated notes at a
discount, recognizing a gain of $816,000 on these transactions in the first two
quarters of 2003. See further discussion in Liquidity and Capital Resources
below.




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Interest expense decreased by $584,000, or 31.4%, while interest income
decreased by $237,000, or 67.5%, from the second quarter of 2003. For the
first two quarters of 2004, interest expense decreased by $1.7 million, or
35.1%, while interest income decreased by $1.1 million, or 86.7%, from the
first two 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 two 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 16 hotels sold, transferred, and/or
reclassified to hotels held for sale in 2002 and 2003. The effect of these
hotels operations, the gain or loss on the sale and transfer of the hotels,
and the impairment of the hotels classified as held for sale, have been removed
from operating earnings in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Liquidity and Capital Resources The Companys cash flows used in operating activities were $12.5 million
in the first two quarters of 2004, compared with $8.8 million used in operating
activities in the first two quarters of 2003. The Companys cash flows provided by investing activities were $15.3
million in the first two quarters of 2004, compared with $43.2 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 $208,000 in the first two quarters of 2004 and $718,000
in the first two quarters of 2003. In the




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second quarter of 2003, the Company purchased the first mortgage on a hotel for
$6.8 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. In the first two
quarters of 2003, proceeds from the sale of hotels held for sale totaled $9.5
million. Proceeds from the sale of property and leasehold interests were
$361,000 in the first two quarters of 2004 versus $7.5 million for the
comparable period in 2003. The Company received $7.0 million from the
collection of notes receivable in the first two quarters of 2004 and $34.5
million in the first two quarters of 2003. The Company invested $490,000 and
$1.1 million in other assets in the first two quarters of 2004 and 2003,
respectively. Net cash used in financing activities was $11.1 million in the first two
quarters of 2004 compared with $28.2 million in the first two quarters of 2003.
Repayments, net of borrowings, on long-term debt obligations were $11.1
million in the first two quarters of 2004 versus $28.7 million in the first two
quarters of 2003. The repayments in the first two 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 two
quarters of 2003 include $5.0 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
leasehold interests, and the collection of notes receivable, 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
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




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ability to place liens on unencumbered assets. The credit facility
contained financial covenants as to the Companys minimum net worth. In the
fourth quarter of 2003, the Company decided that the credit facility no longer
served the Companys needs, terminated the facility, and has received all of
its collateral back from the financial institution. On January 6, 2004, the
Company filed a complaint against the financial institution for its breach of
the loan agreement, claiming damages to the Company in excess of $25 million. The Company also maintained a $1.0 million unsecured line of credit with
another bank, bearing interest at the lenders prime rate, maturing May 31,
2003. This line of credit was paid off in the first quarter of 2003 and was not
renewed. The Company also has a loan secured by its corporate aircraft with a
balance of $5.0 million as of July 11, 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 Companys Board of Directors has previously authorized the use of up
to $23.0 million for the repurchase of shares of the Companys common stock.
The purchases, including block purchases, are to be made from time to time in
the open market at prevailing market prices, or in privately negotiated
transactions at the Companys discretion. No time limit has been placed on the
duration of the stock repurchase plan, and the Company may discontinue the plan
at any time. As of the end of the second fiscal quarter of 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.




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Market Risk There have been no material changes in the Companys exposure to market
risk in the second fiscal quarter ended July 11, 2004. Forward-looking Statement Disclaimer The statements appearing in this report which are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements, including delays in concluding or the inability to conclude
transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, changes in applicable laws and regulation,
in margins, demand fluctuations, access to debt or equity financing, adverse
uninsured determinations in existing or future litigation or regulatory
proceedings and other risks. 
 PART I 
 Item 4. Controls and Procedures  (a)
    
    As of July 11, 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 July 11, 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 second quarter of 2004.




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PART II - OTHER INFORMATION 
 Item 1. No material developments occurred during the second quarter ended July 11, 2004 with
respect to any pending litigation. 
 Item 4. Submission of Matters to a vote of Security Holders At the Companys Annual Meeting of Shareholders held on May 26, 2004,
5,006,611 shares were outstanding and eligible to vote. The shareholders
considered and voted to reelect the following directors: Vote CastName of Nominee
    
    For
    
    WithheldEarl Sadler
    
    
    4,956,331
    
    
    
    20,933Bob Marlowe
    
    
    4,898,204
    
    
    
    79,060
 The names of the directors whose terms of office as directors
continued after the annual meeting of shareholders are: Helen L.
Moskovitz, David M. Resha, Leon Moore and Richard L. Johnson. 
 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 June 2, 2004 containing a copy of
the Companys press release announcing the financial
results for the first fiscal quarter ended April 18, 2004.




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized. ShoLodge, Inc.Date: August 20, 2004
    
    S/ Leon MooreLeon MooreChief Executive Officer,
Principal Executive Officer, DirectorDate: August 20, 2004
    
    S/ Bob MarloweBob MarloweSecretary, Treasurer, Chief Accounting
Officer, Principal Accounting Officer,
Chief Financial Officer, Director